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Implementation of Bill C-18 Framework in India

Leave a Comment / Competition Law, Contemporary Issues /

[By Ashutosh Chandra] The author is a student at the Jindal Global Law School. Introduction: Recently the Canadian Parliament introduced the Bill C-18. The law aims to bring about fairness in the Canadian digital news ecosystem and make sure that the system can support itself. This is done by regulating commercial interactions between digital intermediaries and news outlets. If the bill is implemented, digital intermediaries will be forced to pay a certain amount for ‘making available’ news content produced by outlets on their platforms. When the law is analyzed in the context of India, there is a pending case before the Competition Commission of India (“CCI”) against Google concerning its position of dominance in the news market by the Indian Newspapers Society (“INS”). It is contended that creators of news broadcasted in the digital space are not being provided fair value for their efforts and it is Google, the entity controlling the ad-tech value chain due to its dominant position. Noting the pending case and the Canadian law, the paper would try to understand what the law enacted by the Canadian Parliament would reap if a similar law were enacted in the Indian legislation. Additionally, the paper would also analyze if there were mechanisms that the CCI can use to frame guidelines for the operation of such law. Bill C-18 and other similar laws – purpose and impact: As per Section 2(a) of the Bill, news content or any portion of it is made available when it is reproduced. Even if access to the same is facilitated by “any means”, then the news content is made available. And if this is done in the space of a digital intermediary, then the intermediary must provide compensation to the producer of the news. Again, the purpose behind this is to increase “fairness” in the Canadian digital news market. However, at the stage of the pronouncement of the bill, it is unclear how this will be achieved. Even though “fairness” is proposed, it is firstly contended that compensation to the producer would not automatically guarantee fairness. If anything, the paper argues the same would lead to unfairness between the producers through the depletion of opportunities for the new news business and a decrease in net neutrality. Quantum for Payments It is to be noted that the quantum of payment to the news producers is very low. The intermediary does not even need to publish the news on its platform to provide compensation. Merely, providing access through the method of hyperlinking would do. The “any means” part of the bill ensures the same. Going by the consideration of the provision, intermediaries would need to remove complete access to not pay. Before the implementation of the bill, the news producers produced and posted news through their handles on platforms operated by intermediaries. If the same is considered, the parliament’s purpose of payment for news content with consent serves no purpose. In any case, these news outlets provide their consent for their items to be hyperlinked on intermediary platforms like Facebook, as also denoted through the privacy policy of Facebook. Basis for Compensation Further, the blanket of compensation can be interpreted to extend toward all news producers as per the section. It has no qualitative or quantitative basis on which it is decided whether a news producer is to be paid or not. While there may be contracts that the intermediaries and news outlets enter, the problematic portion is that there are no supervising guidelines for the formation of these contracts. The only requirement is that compensation must be necessarily paid. In such a case, the intermediaries may be forced to use their metrics and then decide the compensation amount as a general practice, provided that the intermediary decides to contract with multiple business outlets. This would open another set of problems – which includes the intermediaries to news outlets that do not generate revenue or serve no purpose, and only enter contractual relationships with news outlets. This would then lead to the elimination of those discarded outlets from mainstream social media. Therefore, the proposed bill is silent on these implications of the provisions and would thin out the competition in news in the online sector. Standard of Journalism The other implication is the standard of journalism. Due to compensation being provided regardless of the quality of news published, a news operator may not be motivated to provide high-quality content. This would result in an overall depletion standard of journalism in online news media. Since online platforms are paramount for news outlets in this age and day, it only follows that newer outlets would not be able to find their footing in the industry, as the intermediaries are not motivated to pay everyone and use everyone’s sources. Therefore, there is a clear detriment to competition. Advertising of News Platforms Then there is the question of digital advertising on operators’ platforms. The model suggested would bring about an end to digital advertising on news, as now the operators will have to pay businesses instead for the news produced, as opposed to them taking money from news businesses to spread reach. This model is structured in such a manner that it would lead to a loss of profits for digital intermediaries. Even so, the news intermediaries have other sources for digital advertising. The model is not going to financially cripple the digital intermediaries, even though it may affect them negatively. However, the larger problem also appears harmful to upcoming and less-known news platforms. Now, news outlets may not partake in the process of digital advertising, as now the intermediaries will have to pay for news. And digital intermediaries cannot be expected to advertise for a news business without getting compensation for it. Therefore, the source for them to grow their business through digital advertising and make people aware of the network no longer works for them. Position in India: In the case pending with the CCI, the relief asked is for a just payment system for news creators on

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Determining the Applicable Law: Case of Non-Signatory to Arbitration Agreement

Leave a Comment / Contemporary Issues /

[By Tanish Gupta and Shubham Gandhi] The authors are students at the National Law University, Jabalpur. In an intriguing case of Lifestyle Equities CV v Hornby Streets (MCR) Ltd., the English Court of Appeal, in addition to other issues, was called upon to decide the applicable law in determining the binding effect of the arbitration agreement on a non-signatory, arising out of a trademark assignment,  viz. the law governing the arbitration agreement or the law governing the assignment of the trademark. While the majority ruled in favour of the former, Snowden LJ, in his dissent, found the latter to be the applicable law since the contractual consensus of the parties to the agreement does not answer the issue raised. In this article, the authors aim to elucidate the controversy, the cogent dissent of Snowden LJ, and the inadequate analysis provided in the majority opinion. Facts of the Case The present suit has been instituted against the alleged infringement of the registered trademark by Santa Barbara Polo & Racquet Club (“Respondent”). Lifestyle Equities C.V. (“First Appellant”) and Lifestyle Licensing B.V. (“Second Appellant”) is the registered proprietor and licensee, respectively, of the concerned trademarks, which include the figurative mark – the “Beverly Hills Logo” and a wordmark – “Beverly Hills Polo Club” in the UK and the EU. The above-stated trademarks were originally owned by a California-based company, BHPC Marketing Inc. After many assignments in 2007 and 2008, the concerned trademarks were ultimately assigned to the first appellant in 2009. The respondent owns and uses the “Santa Barbara Logo,” similar to the appellants. Given the similarity between the two logos, a dispute arose between the original owner and the respondent in 1997, and to resolve the same, both parties entered into a co-existence agreement. The agreement, in its Clause 7, provided for an arbitration clause and laid out the Californian law as the governing law: “Any controversy, dispute or claim with regard to, arising out of, or relating to this Agreement, including but not limited to its scope or meaning, breach, or the existence of a curable breach, shall be resolved by arbitration in Los Angeles, California, in accordance with the rules of the American Arbitration Association. Any judgment upon an arbitration award may be entered in any court having jurisdiction over the parties.” In 2015, the first appellant obtained a consent letter from the respondent to register the concerned trademarks in Mexico. The Reasoning of Lower Court The Appellants, earlier reached the courts of the United Kingdom and the European Union, praying for relief for infringement of their trademarks by the respondents. The arguments advanced by the appellants in support of their claim were that they were not parties to the 1997 Agreement, that they were not aware of its existence at the time of undertaking assignments of trademarks, and that they were not bound by the arbitration agreement by virtue of Article 27(1) of Regulation 2017/1001 on the EU Trade Mark, and Section 25(3)(a) of the Trade Marks Act 1994. The provisions state that until the agreement is registered, it would remain “ineffective as against a person acquiring a conflicting interest in or under the registered trademark in ignorance of it.” On the other hand, the respondent presented an application for a stay and referred the matter to arbitration, pursuant to Section 9 of the Arbitration Act, 1996. The respondent, while relying on Californian law and the doctrine of equitable estoppel in regard to the 1997 Agreement to obtain the consent letter in 2015, contended that the 1997 Agreement bound the appellants as assignees of the trademarks. In light of the arguments of both parties, Hacon J, who delivered the Lower Court’s judgment, decided to stay the claim and reasoned that under English law, the appellants had become parties to the 1997 agreement by virtue of having dealt with the respondent in 2015. Alternatively, with the application of the governing law, i.e., the Californian law, the parties were bound by the 1997 agreement as it was a burden attached to the trademark assignment and thus passed with it. Lastly, the doctrine of equitable estoppel precluded the appellants from disputing the binding effect of the 1997 Agreement on them. The Judgment of the Court of Appeal The three-judge Bench, though while granting a stay, disapproved of the reasoning of Hacon J. with regard to the first issue. The Bench affirmed that since neither party had argued on the matter of the appellants being parties to the 1997 Agreement under English law, the Judge should not have decided on the same. On the issue of equitable estoppel, the Bench agreed that reliance on the doctrine was misplaced since the appellants did not rely on the 1997 agreement but rather on the consent letter, and their conduct was not “inextricably intertwined with the obligations imposed by” the 1997 Agreement. The second issue pertained to whether the parties were bound by the 1997 Agreement on account of the applicability of Californian law. It is at this point that the Bench had divergent opinions. Though the Bench agreed that the issue was not of ‘interpretation’ of the arbitration agreement, the majority characterized the issue of whether a non-signatory is bound by the arbitration agreement “as an aspect of the scope of the agreement.” Referring to Kabab-Ji SAL v Kout Food Group (“Kabab-Ji”), wherein the U.S Supreme Court held that the governing law of arbitration agreement also governs the question of who are parties to the agreement, the majority opined that the logical corollary would be that the question of who is bound by the arbitration agreement is governed by the governing law as well. The Compelling Dissent of Snowden LJ Snowden LJ’s dissent is premised on the distinction between the issues, namely, who is a party to an arbitration agreement and who is bound by it. The questions pertaining to ‘interpretation’ and ‘scope’, which deal with matters covered under the arbitration agreement, are to be resolved based on consensus between the parties to the agreement. The parties’

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Whether Resolution Professional has Adjudicatory Power in the CIRP Process?

Leave a Comment / Insolvency Law /

[By Vinay Sachdev] The author is a student at the Unitedworld School of Law, Karnavati University. Background  In the Corporate Insolvency Resolution Process (“CIRP”) initiated under the Insolvency & Bankruptcy Code 2016, the claim is the most important factor to be taken in the Resolution Plan for the Corporate Debtor. The provisions of the Code strive to protect the interest of creditors of a company that is under CIRP while completing the insolvency resolution process in a time-bound manner. The duties of an Interim Resolution Professional (“IRP”) and a Resolution Professional (RP) have been laid down in Sections 18 and 25 of the Code. According to, Section 18,  the duties of an IRP include, inter alia, receiving and collating “all claims submitted by creditors to him, after the public announcement made by him”. In the same manner, an IRP under section 25(2)(e) has to maintain an updated list of all the claims of the creditors. Additionally, Regulation 13 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process of Corporate Persons) Regulations, 2016 (IRPCP Regulations) provides for verification of the claims and maintenance of a list of creditors by an IRP or RP, as the case may be. It is to be noted that neither Section 18 nor Section 25 of the Code expressly imposes a duty upon the IRP/RP to verify, admit or reject claims. The duty to verify the claims by the IRP or RP has been provided under Regulation 13 of the CIRP Regulations. Adjudicatory Power of RP/ IRP Apart from these sections and rules related to the powers and duties of the IRP and RP help sum up the mandate of an RP or IRP including receiving, collating, and verifying the claims received by him during CIRP. Moreover, as often observed in practice, on verification, an IRP either accepts or rejects the claims of the creditors. Due to this, in a number of cases that have come before the Tribunal, an issue pertaining to the power of the IRP/RP has arisen. In the case of Grasim Industries Limited and Edelweiss Asset Reconstruction Company Limited Vs. Tecpro Systems Limited, the  NCLT, Principal Bench, New Delhi has observed that “a perusal of Regulation 13 of the CIRP Regulation, which makes it clear that IRP is under a statutory duty to verify each and every claim and maintain the list of creditors containing their names and amount claimed by them and the amount of their claim admitted.” In the said case the IRP had rejected the claim given by the applicant as the claim amount was the subject matter of the arbitration before the Arbitral Tribunal and thus the Tribunal upheld the decision taken by the IRP. Further, in the combined appeal filed before the Appellate Tribunal in the matter of M/s. Prasad Gempex vs. Star Agro Marine Exports Pvt. Ltd. & Ors. and SREI Infrastructure Finance Ltd. vs. Kannan Tiruvengandam, the issue arises for consideration is whether the ‘RP’ has the power to adjudicate the claim of creditors of the company. In the landmark case of Swiss Ribbons Pvt. Ltd. v. Union of India, clarifies the above issue. The Supreme Court conclusively stated that the RP has no adjudicatory powers under the Code. To establish the judgment, the bench compared the powers and duties of an RP to a liquidator and stated that a liquidator has the power to determine the valuation of claims under section 40 of the Code and that such determination is “quasi-judicial in nature”.  After establishing this, the Court stated that an RP, unlike a liquidator, cannot act without the approval of the committee of creditors (COC), and can be replaced by, COC. IRP merely acts as “a facilitator in the CIRP whose administrative functions are overseen by the COC and by the NCLT”. However, the court completely missed the point that COC approval is required only in certain matters that are mentioned under section 28 of the IBC. IRP doesn’t need approval when verifying a claim or making a “precise estimate of the amount of the claim” of imprecise claims under the CIRP Regulations. These functions, referred to as administrative because they are overseen by the Committee of Creditors and Tribunal, unavoidably require the use of discretion (during investigation, inquiries, and verification of claims) by the IRP. The other important argument on which the Court relied was that an RP can be replaced by COC. The fact that an RP will be replaced by the COC is only if the COC would have an interest when an RP or IRP accepts and verifies the claims. It would go against the interest of the Committee when an RP accepts more claims or increases the existing claims. Therefore, the contention that the COC has oversight over RP does not help in maintaining a check on whether it accepts or rejects genuine claims of the creditors. Power of NCLT to adjudicate claims The Hon’ble NCLAT in the case of M/s. Prasad Gempex noted that with respect to the claims, an application or suit can be initiated against the Corporate Debtor, in terms of provisions of Section 60 of the Code. The relevant portion of Section 60 is cited below: (5) Notwithstanding anything to the contrary contained in any other law for the time being in force, the National Company Law Tribunal shall have jurisdiction to entertain or dispose of— (a) any application or proceeding by or against the corporate debtor or corporate person; (b) any claim made by or against the corporate debtor or corporate person, including claims by or against any of its subsidiaries situated in India; and (c) any question of priorities or any question of law or facts, arising out of or in relation to the insolvency resolution or liquidation proceedings of the corporate debtor or corporate person under this Code. From the above provision, it is evident that notwithstanding the order passed under Section 31 of the IBC, it is open to a person to initiate a suit or an application against the Corporate

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‘Rainbow Papers’- A Jolt to the IBC

Leave a Comment / Insolvency Law /

[By Shalin Ghosh] The author is a student at the Maharashtra National Law University (MNLU), Mumbai. Introduction The Insolvency and Bankruptcy Code, 2016 (“IBC”) has been a watershed reform for the Indian economy, being one of the most comprehensive laws governing insolvency and credit recovery matters in the country. The interplay between tax law and IBC has increasingly been gaining traction, throwing up questions that have a great bearing on the future of India’s insolvency regime. A pertinent example is a critical issue that has, over the years, emerged up for consideration before various tribunals and the Supreme Court (“SC”) regarding the classification of tax authorities as secured or unsecured creditors. A recent decision of the SC in State Tax Officer v. Rainbow Papers Limited (“Rainbow Papers”) has significantly upended the evolved legal position on the issue by declaring tax authorities to be ‘secured creditors’ under the IBC, adding that they have a statutory first charge over the property of the corporate debtor. This article analyses the judgment, pointing out the inconsistencies in the SC’s rationale while discussing the scheme of the relevant provisions and the evolved jurisprudence on the matter. Facts The corporate debtor, Rainbow Papers Limited (“respondent”) went insolvent in July 2016 and was burdened with an outstanding tax liability amounting to nearly Rs 47 crore under the Gujarat Value Added Tax Act, 2003 (“GVAT”). Consequently, the State Government’s tax department (“appellant”) filed claims to recover the pending tax dues. However, the concerned Resolution Professional (“RP”) waived off the entire quantum demanded by the appellant contending that the sales tax office is considered to be an ‘operational creditor’ under the IBC and therefore, would not enjoy a first charge over the corporate debtor’s property. The National Company Law Tribunal (“NCLT”) ruled in the respondent’s favour, validating the contentions of the RP. Upon appeal, the National Company Law Appellate Tribunal (“NCLAT”) reaffirmed the NCLT’s decision, rejecting the appellant’s claims of enjoying a first charge over the respondent’s assets reasoning that Section 48 of the GVAT, which provides for a first charge on an individual’s property with respect to any outstanding claims will not prevail over Section 53 of the IBC. Eventually, as the matter reached the SC, a different conclusion followed, with the Court holding that the appellant’s claim is within the ambit of ‘security interest’, making it a ‘secured creditor’ under the IBC. Resultantly, the Court ruled that the appellants would have a first charge over the respondent’s property, reiterating that Section 48 of the GVAT is not inconsistent with Section 53 of the IBC. Analysis Tax dues as secured debt? The legislative scheme and construct of the IBC seem to imply that any outstanding dues payable to the government should not be classified as secured debt. Section 5(21) defines ‘operational debt’ as “a claim in respect of the provision of goods or services including employment or a debt in respect of the payment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority.” The list of items included in the aforementioned definition seems to suggest that outstanding dues like pending tax liabilities fall squarely within the scope of ‘operational debt’. The Court in its landmark Swiss Ribbons judgment clearly enunciated the difference between financial debts and operational debts under the IBC, noting that only the former enjoys a ‘secured’ status as opposed to the latter, which is unsecured. There is another point that merits comment. In the present case, the SC observed that merely because Section 48 of the GVAT creates a statutory first charge on an individual’s property, the appellant’s claims fall within the scope of ‘security interest’ under Section 3 (31). Therefore, the appellant, by extension, becomes a ‘secured creditor’ as defined under Section 3 (30). The Court, agreeing with the appellant’s argument, ruled that the term ‘secured creditor’ is not narrow or restrictive and can be interpreted expansively to include all types of security interests within its meaning. This observation is erroneous on a few grounds. Under the IBC, having a ‘security interest’ is a pre-requisite for being a ’secured creditor’. Section 3 (31) defines ‘security interest’ to mean “a title, right, claim or interest to property created as a result of a transaction which secures payment of performance of an obligation.” This clause appears to assume the existence of a contract between two parties, and not a particular legal provision, to give rise to a ‘security interest’. Furthermore, any transaction that leads to the creation of a security interest must be consensual and voluntary and not vitiated by coercion or force, for it to be considered valid. In this light, it is difficult to consider that the non-voluntary and coercive act of tax authorities attaching assets like property leads to the creation of a ‘security interest’ under Section 3 (31) of the IBC. Deviates from established precedents Courts across the country have, in the past, adjudicated on the priority of secured creditors, albeit in the context of claims made under the Customs Act, Income Tax Act, and so on. Recently the SC, in Sundaresh Bhatt v. Central Board of Indirect Taxes and Customs, ruled that IBC will prevail over the Customs Act. Incidentally, even the Customs Act contains a provision that gives rise to a statutory first charge to the customs officials over the corporate debtor’s assets. In another case, PR Commissioner of Income Tax v. Monnet Ispat and Energy Limited, the Court categorically observed that under the scheme of the IBC, income tax dues cannot be accorded a higher priority than secured creditors. A similar conclusion was also reached in a recent decision of the Rajasthan High Court where the court refused to accord a greater priority to government dues over those payable to secured creditors. Incidentally, even in the aforementioned case, the state tax department contended that it enjoys a statutory first charge on the property of the entity undergoing liquidation on the basis of a specific

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Analysing The Conundrum Vis-à-Vis Shareholder’s Right to EGM

Leave a Comment / Company Law /

[By Yagn Purohit and Vishesh Gupta] The authors are students at the Institute of Law, Nirma University. Introduction In India, the directors are bound to call and convene an EGM on requisition made by shareholders under section 100 of the Companies Act, 2013 (hereinafter CA, 2013) if such requisition is compliant with procedural requirements u/s 100.  However, Zee v. Invesco saga has reignited the debate on corporate democracy and has disturbed the already settled legal position laid down by the Hon’ble Supreme Court concerning the validity of requisition made u/s 100 of CA, 2013. Invesco (shareholder of Zee) had filed a requisition for calling an EGM u/s 100 of CA, 2013. The requisition was fulfilling the criteria of 10% as given u/s 100. Zee filed for an injunction against the requisition before the Bombay HC which was granted by the Single Judge (hereinafter SJ). Section 100 of CA, 2013 promotes corporate democracy by establishing the right of shareholders to regulate the working of the company by calling Extraordinary General Meeting (hereinafter EGM) by submitting a valid requisition. The question then is whether there exists a test to determine the validity of a requisition and whether the directors are empowered to refuse such a requisition? In the case of Zee v. Invesco SJ and Division Bench (hereinafter DB) adopted contrasting approaches. This article analyses both the positions to determine their alignment with the existing legal framework in India. Ruling by Single Judge The SJ held that the requisition made by shareholders must be valid from a procedural perspective and the objective of the requisition should be capable of being carried out legally. If the objective of the meeting cannot be carried out lawfully, then such a requisition is invalid and the board has the right to reject it. The court observed that if under Section 100, only procedure, i.e., the numerical threshold of shareholders is considered to deem it to be a valid requisition and mandate the board to convene an EGM of the company, then it would mean that a group of qualified shareholders can propose any sort of resolution, regardless of its legality, and force this to be considered by the general body at an EGM. The court explained this with an example of online gambling. It took a scenario where a group of qualified shareholders could propose that the company take up the business of online gambling. The court applied null hypothesis testing which says that an argument must be tested for falsification or failure, just like any other hypothesis in philosophy. Therefore, SJ granted an injunction restraining the shareholders to hold the EGM. Ruling by Division Bench  The DB overturned the judgment of SJ and held that shareholders cannot be restrained from holding EGM. Court placed reliance on two judgments: LIC v. Escorts and Cricket Club of India v. Madhav Apte to hold that (i) validity means procedural and numerical compliance with the conditions mentioned in Section 100 and not the substance of the requisition (ii) BOD has no discretion to sit in judgment over resolutions proposed by requisitionists, (iii) reason for resolutions are not subject to judicial review and (iv) If requisition complies with the procedure and numerical requirement u/s 100, the board is mandated to call the EGM. The court further noted that Section 100 aids corporate democracy and protects shareholder rights and this intent of the legislature must be taken into consideration for interpreting section 100. Therefore, DB did not grant an injunction as it would have hampered corporate democracy. Analysis  The SJ heavily relied on foreign judgments for interpreting the power of the Board to refuse the requisition made by shareholders. In the author’s opinion, DB was correct in not relying on such judgments. There are two reasons for the same: Firstly, there exists a binding precedent of the supreme court of India, i.e. LIC v. Escorts according to which, directors are bound to call EGM on the receipt of a requisition which is only subject to the numerical requirements provided u/s 100. Whereas, the DB has rectified this by taking a procedure-centric definition of a valid requisition which is in consonance with LIC v. Escorts. DB correctly noted that the purpose-centric definition propounded by the SJ will lead to a string of appeals, opening floodgate of litigation and rendering the corporate democracy nugatory. Secondly, UK Companies Act, 2006 is not pari materia with the Indian CA, 2013 with respect to law on shareholder requisitioned meeting. Section 303(5) of the UK Companies Act, 2006 provides for a ground that if the resolution proposed by the shareholder is ineffective, if passed, then the board has the ground for not moving such resolution in the meeting. Whereas in the Indian CA, 2013, this ground doesn’t exist for repudiating a resolution. To stop a resolution proposed by shareholders, the board must apply to the regional director u/s 111(3) of CA, 2013. Such application can only be filed on the ground that the requisition is for needless publicity for defamation. If valid is interpreted according to the reasoning of the SJ, it would lead to adding words to Section 111 of the CA, 2013. Therefore, foreign laws and judgments should not be preferred over LIC v. Escorts to interpret the validity of a requisition for EGM in India. Further, The SJ has contradicted his observations in the judgment. SJ noted that the requisitionists have been bestowed with the power of the EGM themselves if the board refuses or fails to call an EGM. This power is taken away the moment SJ granted an injunction to Zee restraining Invesco and other requisitionists from calling an EGM of the company. As a result of this injunction, the shareholders have no remedy left, and their statutory right to call an EGM is taken away. The court recognized the shareholder rights with one hand but snatched them away with the other. However, it is important to note that the SJ raised an important issue by taking a purpose-centric approach to a valid requisition.

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RBI Guidelines on Digital lending – A boon to the digital borrowers?

Leave a Comment / Banking Law, Contemporary Issues /

[By Sahana R] The author is a student at the School of Law, Christ University, Bangalore. Introduction The process of providing loans on an online platform is termed to be digital lending. The distinction between digital lending and traditional lending methods would be using digital technologies regarding loan approval, repayment, and service. According to a study, there has been a significant rise in the number of apps in the Indian Digital Lending Market where the value of the market has increased from USD 33 Billion in FY15 to USD 150 Billion in FY20.[i]  The need for credit and the hassle-free approval of loans are the catalysts behind the growth of digital lending platforms on the internet as well as mobile phone apps. However, on the other hand, there exist certain banes with these platforms mainly because they were not regulated by the RBI or any other regulatory body and they would charge a very high rate of interest to the consumers. Therefore, there was a need for regulation of such lending service providers. This article provides an overview of the current digital lending situation and how the RBI has made an effort to regulate this online market. Why was this regulation the need of the hour? During the COVID-19 pandemic as people required money instantly, they resorted to using these mobile apps where instant loans were provided without verification of various documents. However, the downside to such loans was that the interest rates were very high and it was for a very short period. Additionally, other charges such as service charges, processing fees, etc. are levied on the consumers. In the case of Dharanidhar Karimoji v Union of India[ii], the petitioner filed a Public Interest Litigation requesting for the appropriate authority which is the RBI to regulate these mobile apps. The petitioner stated that there are more than 300 such apps on the play store and they charge about 35-45% of the loan money as processing fees. If the payment is not done within the time-period of the loan, then the agent will call the contacts of the borrower as the borrower would have provided various permissions including permission to access the contact list. Thus, there was a requirement for regulation. Working group on digital lending The RBI in January 2021 set up a working group on digital lending[iii] under the chairmanship of Shri Jayant Kumar Dash to assess the consumer issues and lending business of the platforms due to the outburst of many digital lending platforms. The report mainly focuses on protecting consumers from exorbitant interest rates and, at the same time, encouraging innovation in the digital lending sphere. The key takeaways from this report were as follows: The group suggested that an independent body named Digital India Trust Agency (DIGITA) must be set up. The lenders are allowed to deploy only those apps verified by DIGITA. A Self-Regulatory Organization (SRO) is to be set up which would include all the Regulated Entities, Digital Lending Apps, and Lending Service Providers. The working group has also suggested a separate enactment to prevent illegal digital lending. The very important suggestion of the group was that the data can only be collected only after prior and informed consent of the users, and these data can be stored only by Indian servers. Lastly, the SRO, in consultation with the Reserve Bank of India, must come up with a Code of conduct for these apps.[iv] Analysis of the RBI Guidelines on digital lending The RBI has provided guidelines on consumer protection and conduct requirements, Technology, and data requirements, and the regulatory framework.[v] In this regard the RBI defines three parties namely, Regulated Entities (RE), Digital Lending Apps/Platforms (DLAs), and Lending Service Provider (LSP). The RE’s include all Commercial, cooperative banks as well as Non-Banking Financial Institutions. The LSP on behalf of the RE carry out functions of the lender such as customer acquisition, monitoring, recovery, etc. The DLAs are websites or mobile applications that provide loans to their users and this will include the applications owned by the RE as well as LSP for the credit facility. The RBI stated that the lenders will directly disburse the loan to the borrower’s account, and no third party will be involved in the transaction. The Lending platform must create a Key Fact Statement which must include all necessary information, details of grievance redressal, and any charges. If the charges or fees are not mentioned, they cannot be levied on the borrower. Every regulated entity of the RBI will have to appoint a nodal grievance redressal officer, which must be prominently displayed on the website and available to consumers. The jurisprudence of consumer law began with the Consumer bill of rights in the United States, which the Supreme Court widely accepts. US President John Kennedy in 1962, introduced the ‘Consumer Bill of Rights’ which emphasized on various rights of the customers such as right to safety, right to be informed, right to education, right to be heard, and so on. Additionally, Section 2(9) of the Consumer Protection Act, 2019 recognizes the various consumer rights and includes the right to be informed, right to be protected, right to be assured, right to be heard, right to redressal and consumer awareness. Therefore, Every consumer has the right to information an about the service or the product, and he also has the right to seek redressal in case of any grievance. Thus, the guidelines by the RBI satisfy the requirements of Consumer protection law. The RBI has stated that borrowers’ data must be taken only if needed and with consent. It has been made clear that lending platforms cannot access mobile data such as contact lists, calls, etc. The platforms can store only minimal data, such as the name and address of the borrower. The registered entities must prescribe a policy to the lending platforms concerning data storage and create a comprehensive privacy policy. This adheres to the principle of data minimization as laid down in the Puttaswamy case[vi], which states

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RBI’s Shield for Borrowers against Digital Lending

Leave a Comment / Contemporary Issues /

[By Rajeev Dadhich] The author is a student at the Institute of Law, Nirma University. The Digital Lending route has acquired prominence, which raised Reserve Bank of India’s  (“RBI”) concerns over the unbridled engagement of third parties, mis-selling, breach of data privacy, unfair business conduct, charging of exorbitant interest rates, and unethical recovery practices. To curb these concerns, on November 18, 2021, RBI released the Report of the ‘Working Group on digital lending including lending through online platforms and mobile apps’ (“the Report”), which targets the enhancement of customer protection and making the digital lending ecosystem safe and sound while encouraging innovation. Moving a step forward, on August 10, 2022, RBI issued a Press Release ‘Recommendations of the Working group on Digital Lending’ (“the Press Release”), which targets implementing the recommendations the Working Group gave. Against the backdrop, this article provides the scope of the Press Release and analyze the recommendations. Further, this article provides a detailed discussion on key factors of the Press Release like the cooling-off period, data privacy, reporting mechanism, and framework on FLDG. Lastly, the article provides concluding remarks and suggestions. Scope of the guideline issued The guideline comprises three Annexures which broadly illustrate three types of entities included in the digital lending process: Annexures I: Entities regulated by the RBI and permitted to carry out lending business; Annexures II: Entities authorized to carry out a lending as per other statutory/regulatory provisions but not regulated by RBI; and Annexures III: Entities lending outside the purview of any statutory/ regulatory provisions. First, the recommendation envisaged under Annexure I is implemented with immediate effect. This guideline will regulate not only Regulated entities (“REs”) but also the Lending Service Providers (“LSPs”)/ Digital Lending Apps (“DLAs”) engaged by REs to extend various permissible credit facilitation services. The entities included in the ambit of REs have been defined under Regulation 3 of KYC Direction, 2016. Second, in furtherance of Annexure II, the respective regulator/ controlling authority still requires some deliberations before implementing them. The non-regulated entities are defined in question 4 of FAQ published by RBI as stock exchange, and housing finance companies. Third, with respect to Annexure III, the Working Group has suggested specific legislative and institutional interventions for consideration by the Central Government. Recommendations implemented with immediate effect Operational Conduct and Customer Protection The disbursement of the loan, repayment of loan, etc. shall directly take place between REs and borrowers, and there shall be no intervention of any third party viz LSPs in transferring the loan or repayment amount. LSPs will operate as an agent of RE and will carry out functions like customer acquisition, underwriting support, pricing support, etc. RE shall monitor the activities of LSPs and be accountable for the same. Further, REs shall be liable to pay any fees applicable to LSPs, and no fees can be directly charged on borrowers by LSPs. Annual Percentage Rate (“APR”): The APR is required to be disclosed to the borrowers. The APR means all-inclusive cost and margin including the cost of funds, processing fee, maintenance charges, etc., except contingent charges like penal charges, late payment charges, etc. The borrowers should be provided with a cooling-off/ look-up period, which means an exit opportunity without the levy of any penalty for a certain period by just paying the principal and APR amount. A Grievance Redressal Officer (“GRO”) should be appointed who will be dealing with borrowers’ complaints regarding FinTech and digital lending. The details of the GRO shall be published on the website of the RE, its LSPs, and on DLAs. The responsibility of engaging GRO lies on REs. Key Facts Statement (“KFS”) is required to be disclosed. KFS includes a recovery mechanism, cooling-off/ look-up period, details of grievance redressal, and APR. Further, the consent of the borrower is required to increase the credit limits. Data Protection of the borrowers DLAs should obtain absolute consent from the borrowers before collecting any data with an option to accept or deny the consent and a right to be forgotten. LSPs are prohibited from storing any personal data of borrowers except the primary data viz name, address, contact details of the customer, etc. REs will be held accountable for data privacy and security of the customer’s personal data. Regulatory framework In cases where REs is extending credits through new digital products such as ‘Buy Now Pay Later’ (“BNPL”) need to report to CIC and adhere to outsourcing guidelines issued by individual Banks. Analysis This guideline is just the first installment in a three-series process. Till further instructions, the present Press Release will be the operative guideline for Res, LSPs, and DLAs. Cooling-off/look-up period As stated above, the Press Release provides the borrower with the option of a cooling-off/ look-up period. However, it does not specify the timeframe allowed to borrowers under this period, and the same has been left on the deliberation of the board approval policy. It is noted that a cooling-off period is a right of the borrowers to save them from paying the entire interest for the facility period, and the same should be reasonable. Inference can be drawn from Master Direction – Reserve Bank of India (Transfer of Loan Exposures) Directions, 2021, which state that a cooling period shall not be less than 12 months from the date of such transfer. Therefore, a similar timeframe should be allowed for the borrowers in the present digital lending regime. Data Privacy The Report highlights an exponential increase in complaints regarding the operations of DLAs. The Report explained DLAs as mobile and web-based applications with an interface that facilitate borrowing by a financial consumer from a digital lender. Subsequently, on December 23, 2020, RBI through Press Release cautioned borrowers regarding illegal players, excessive interest rates, hidden charges, breach of data privacy, and regressive recovery process by DLAs. Moreover, DLAs largely being mobile application poses a potential threat to data stored in mobiles viz sensitive personal data, etc. For instance, the recent data breach of CashMama leaked the personal information of thousands of people bearing

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A Case for Regulatory Sandboxes for Cryptocurrencies: Regulatory Theory and Lessons from Foreign Jurisdictions

Leave a Comment / Contemporary Issues /

[By Sarthak Virdi] The author is a student at the National Law School of India University, Bangalore. Introduction Regulatory Sandboxes (RS) are artificial environments used to test innovations and have been relied on in the fintech sector. The RBI defines them to be testing environments with regulatory relaxations, the purpose of which is to gauge the viability of products by estimating benefits and risks. The benefits of RS have generally been that first, they help in foreseeing the risks of emergent technologies and the appropriate legal strategies to contain them; second, they are cost-efficient methods of testing products before a market roll-out and third, they enable financial inclusion and help regulators maintain control. The current literature on RS analyses their viability from two perspectives – first, the role of regulators as promoters of innovation or ‘opportunity-based regulation’[1] and second, the shift towards a principles-based regulation instead of a rules-based regulation.[2] However, there is a dearth of literature addressing RS in the Indian fintech market, especially in the context of cryptocurrencies. This paper fills this gap by arguing for RS for cryptocurrencies by first, taking the two perspectives to show that RBI is already operating with an opportunity-based and a principle-based regulatory approach. Second, it shows that across the RS models employed worldwide, the legalization of cryptocurrencies is not a prerequisite to promoting innovation in cryptocurrencies through RS, while protecting consumers. India by not allowing RS for cryptocurrencies and conflating the question of legalisation with experimentation can miss out on a big opportunity in the fintech market. Regulatory Approaches Opportunity-Based Regulation & Experimental Legal Regimes The role of regulators is generally understood to not be one that engages in active promotion of innovation and supporting entrepreneurs, but rather one that controls market disruption.[3] RS problematize this conception by making them active participants in the creation and promotion of market disrupters.[4] The benefits of RS however make it worthwhile for regulators to engage with them. They activate and increase the inflow of venture capital while simultaneously reducing the regulatory uncertainty and risk that can arise as a result of disruptive technology. The success of RS in kickstarting innovation has been well-documented, especially in the context of the UK, where RS have increased average venture investment amounts by 6.6 times.[5] The RBI has already made a shift towards opportunity-based regulation by promoting competition in Payments and Settlement Systems in India through sandboxes. It recognized the role sandboxes can play in promoting innovation while avoiding systemic risks. In the absence of any principled opposition to such an approach to regulation, the justification for not excluding cryptocurrencies from RS lies in a mistrust of the technology in itself. However, the question of the legality of cryptocurrency as a form of legal tender needs to be separated from the promotion of blockchain technology, for as Imelda Maher argues, competition has entered regulatory domains and the role of regulators has shifted to that of ‘steering’ from that of ‘rowing’[6] and the RBI must not miss the opportunity of experimentation. Rules-Based Approach v. Principles-Based Approach Strict, rule-based regimes post compliance costs that act as barriers to entry and thus discourage innovation, which is highly disadvantageous because fintech can drive growth in other industries while simultaneously addressing concerns like financial inclusion.  Principle-based regulation, which implies adherence to broader principles instead of hard rules, provides regulatory flexibility which reduces compliance costs while creating a collaborative relationship between regulators and private firms. RS employ the principle-based approach, for regulators exempt them from adherence to legislation while agreeing on principles they must comply with. Principle-based regulation helps contain the disruptive effects of unanticipated innovations for it provides regulators sufficient exposure to the technology to develop a legal framework to respond to it, instead of completely distancing themselves from emerging technologies. Further, given that innovations in fintech are fast-paced, RS create temporary regulatory frameworks that can help contain disruptive effects, instead of disincentivizing innovation. In the context of RS, the principles regulators generally require adherence to include consumer protection, market competition, and investor protection.[7] The table below summarizes the approach worldwide to show a move towards opportunity-based regulation, with regulators involved in promoting disruptive technologies, even cryptocurrencies. Further, the principle-based approach employed in RS does not lead to ignorance of consumer interests, for as shown, all jurisdictions build strong measures to protect consumer interests. Jurisdiction Conditions to Apply for Inclusion in a Regulatory Sandbox Is the regulator promoting disruptive technologies? Is Cryptocurrency a part of the RS Program? Legal status of cryptocurrency Protection of Consumer Interests Hong Kong Innovative technologies need to be utilized along with an increase in the range and quality of products. Yes Yes No law to regulate cryptocurrency; not accepted as legal tender. Compensation for financial losses and the option to exit the trail lies wits consumers.[8] United Kingdom The product must support businesses in the financial services market or any regulated activity, it must significantly differ from existing products and must produce consumer benefits.[9] Yes Yes Cryptocurrency exchanges are legal. Compensation for losses and the business must prove adequacy of capital to cover the losses. Australia The product must be new in itself or an adaptation or an improvement of an existing service or product. Applies the Net Public Benefit Test and the Innovation Test. Yes Yes Cryptocurrency exchanges are legal. Consumers are to be compensated for losses.[10] Singapore The financial service should include a new or emerging technology or use the present technology in an innovative way while bringing some benefits to consumers. Yes Yes Not accepted as legal tender, but can be legally exchanged. Boundary conditions are to be clearly defined in order to protect consumer interests. Arizona, United States of America The product must be innovative and should be based on an emerging technology or be a reimagination of existing technology. Yes Yes Not accepted as legal tender, but can be legally exchanged. Arizona consumer protection laws remain applicable and laws relating to consumer lending are incorporated within the RS.[11] Lessons From Foreign Jurisdictions This

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Recovery of Indirect Taxes and Duties Post Imposition of Moratorium: Resolving the Legal Quagmire

Leave a Comment / Insolvency Law, Taxation Law /

[By KV Kailash Ramanathan] The author is a student at the National University of Advanced Legal Studies, Kochi. Introduction In recent years, the legal fraternity has witnessed a befuddling tug-of-war between tax authorities on one hand and the Corporate Insolvency Resolution Process on the other. The battle runs for the recovery of taxes and dues payable by the corporate debtor. Taxation statutes like The Customs Act. 1962 provide for a recovery mechanism under the very legislation. Whereas under the Insolvency and Bankruptcy Code, 2016 ( “IBC” or “the Code”) once a moratorium is imposed, all other proceedings are suspended and recovery of debt can be done only by filing a claim with the resolution professional after which the process under the code will commence ending in liquidation or approval of the resolution plan. Through its recent ruling in Sundaresh Bhatt, Liquidator ABG Shipyard vs Central Board of Indirect Taxes and Customs, the Supreme Court decisively upheld the precedence of the IBC over The Customs Act in the recovery of dues post imposition of moratorium. The ruling although made in the context of customs duty is likely to have a similar effect in its application to other tax statutes and pari materia provisions. In this piece, the author seeks to analyse the ruling, and legislative intent behind the scope provided to the moratorium and explore the implications it is likely to have on the collection of taxes. The scope and extent of authority that shall henceforth be available to tax authorities post imposition of the moratorium shall also be discussed. Factual Matrix ABG Shipyard (“Corporate Debtor”) was a shipbuilding company prior to the initiation of the Corporate Insolvency Resolution Process (CIRP). As a part of its operations, the company imported goods that were used in the construction of ships to be exported. The corporate debtor stored some of these goods in the container freight stations in Maharashtra and custom-bonded warehouses in Gujarat. At the appropriate time, bills of entry for warehousing were submitted. The Corporate Debtor additionally benefited from an Export Promotion Capital Commodities Program (EPCG Scheme) and received an EPCG License for the aforementioned warehoused goods under the said scheme. Later, the National Company Law Tribunal (“NCLT”) accepted a petition for initiation of CIRP against the corporate debtor and imposed a moratorium under Section 14 of the IBC. The Appellant was appointed as the Interim Resolution Professional. The Appellant then wrote to the respondents seeking custody of the corporate debtor’s goods in their warehouse asking them not to dispose of it. Upon receiving such communication from the Appellant, the Respondents sent notices to the Corporate Debtor for the first time regarding the non-fulfillment of export obligations in terms of the EPCG license and demanding customs duty of Rs. 17,13,989/- with interest. Later, the NCLT passed an order commencing liquidation against the Corporate Debtor under Section 33(2) of the IBC. A fresh direction was also passed under Section 33(5) of the IBC prohibiting the institution of any suit or legal proceeding against the Corporate Debtor. Further, the NCLT also appointed the Appellant as the liquidator vide the same order. The liquidator filed an application under Section 60(5) of the IBC seeking direction to the respondents to release the warehoused goods. The key question of law that is dealt with in this piece failed to receive the NCLAT’s consideration Issues The following issues were framed by the Court after considering the factual scenario of the case- Whether the provisions of the IBC would prevail over the Customs Act, and if so, to what extent? Whether the Respondent could claim title over the goods and issue notice to sell the goods in terms of the Customs Act when the liquidation process has been initiated? Ruling and Analysis The court pored through the provisions of both the Customs Act and IBC to determine which one would prevail over the other. The fundamental question involved here was that whether the charge over the goods for non-payment of customs duty, could be claimed and realized in accordance with the Customs Act, when a moratorium is in effect and order for liquidation under the code has already been made. The scheme of the IBC provides that once an order for liquidation is made, all creditors are required to realize their claims only as per the waterfall mechanism envisaged under Section 53 of the code. The mechanism explicitly provides for the order of priority in which different classes of creditors are repaid. In case of insufficient liquidation proceeds, repayment occurs to the complete exclusion of a lower-ranking class of creditors until the higher-ranking creditors’ claims are fully settled.  Some of the aspects considered by the court are discussed below. Proceedings under Customs Act precluded post-imposition of moratorium While the Customs Act under Section 72 provides for a recovery mechanism, it is critical to note that the department had issued notice to the corporate debtor only after the imposition of moratorium under Section 14. Further, the moratorium continues as per Section 33(5) after the order for liquidation is made. The Court held that initiating such proceedings is in gross violation of the moratorium imposed. When such a conflict exists the non-obstante clause under Section 238 of the IBC being the later provision applies and gives the code primacy over any other legislation. Harmony between Section 142A of the Customs Act and the IBC’s Non-obstante clause The overriding effect of the IBC over the customs act has been provided in the customs act itself. Section 142A of The Customs Act clearly notes that The Custom Authorities would have the first charge on an assessee’s assets under the Customs Act, with the exception of circumstances covered under, inter alia the IBC 2016. The NCLAT sidestepped Section 142A of the Customs Act and Section 238 of the Code by referring to the Calcutta High Court’s judgment in Collector of Customs v. Dytron (India) Ltd., which laid down that customs duty carry the first charge even during the insolvency process under Section 529

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