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Defending RBI’s MD-PPI On Buy-Now-Pay-Later Lending: A Case For Regulatory-Proportionality

Leave a Comment / Contemporary Issues /

[By Sukarm Sharma] The author is a student at the National Law School of India University, Bengaluru. Introduction Buy-Now-Pay-later (“BNPL”), as the name indicates, is a point-of-sale credit mechanism, where consumers can purchase a product immediately, and pay it off in various installments. This is enabled by a third-party fintech firm. The fintech firm pays for the product to the merchant (like Amazon, Zomato, etc.) through a pre-paid instrument (“PPI”) and gets repaid by the consumer in installments. Although generally no interest is levied on the credit, the profit for the fintech BNPL firm is primarily through consumer default fees and merchant fees. BNPL is one of the fastest growing fintech industries in India, overtaking UPI with a growth of 637% in 2021, reaching a market size of 6.3 Billion USD. Through a notification on 20 July 2022,[i] the Reserve Bank of India (“RBI”) clarified that non-bank entities would not be allowed to ‘load credit lines’ as per the Master Directions on Pre-Paid Instruments (“MD-PPI”). This caused major BNPL fintech credit providers like Lazypay, EarlySalaryetc. to halt their service since post-notification it was clear that the MD-PPI did not permit them to issue credit through PPIs. Consequently, the MD-PPI was criticized to be disproportionate, since it disallowed BNPL firms from issuing credit, even when tied to banks/Non-Banking Financial Companys (“NBFC”). Questions were also raised as to whether this regulation was a “flex move” by the banks in to reduce competition in the lucrative credit card market. Moreover, this degree of regulation was considered to be disproportionate to the risks posed by BNPL since they engage in micro-lending and enhance financial inclusion. The MD-PPI is therefore under question on the grounds that it restricts financial innovation and places a disproportionate burden on fintech payment platforms by preventing them from loading their PPIs. Although this has not been hitherto applied to Indian fintech regulation, the traditional model to assess proportionality in fintech regulation as per current literature involves gauging whether the necessity for regulation is commensurate to the stringency of regulation[ii] with regards to the three core objectives of regulation: (I) fair competition, (II) market integrity and (III) financial stability.[iii] This article argues that the MD-PPI provision which prevents BNPL fintech firms from issuing PPIs is proportionate in meeting the aforementioned core objectives. The original contribution of this article is that it introduces the concept of regulatory-proportionality in Indian fintech regulation using the example of BNPL and the MD-PPI by engaging Amstad, Restoy, and Lehmann on fintech regulatory theory. To this end, three arguments are made. First, the MD-PPI promotes fair competition by highlighting that since they engage in veiled balance-sheet lending without the license to lend rather than as payment systems, the MD-PPI is not unfair in restricting BNPLs from issuing credit. Second, relying on regulatory theory to argue that the information asymmetry and other market integrity concerns extant in the BNPL credit market justify the relatively stricter regulation as per the MD-PPI. Third, that fintech balance-sheet lending in BNPL poses a sufficient threat to financial stability, meriting regulatory intervention proportionate to the MD-PPI. Regulatory Fairness, Protecting Competition, and the ‘Duck’ Principle Simply put, the ‘Duck’ principle dictates fintech institutions performing the same functions must be regulated in the same way.  The Duck principle rests on regulatory fairness, i.e., in so far as institutions entail similar risks and activities, they shall be regulated with proportional stringency, as to not unfairly advantage one fintech domain over the other.[iv] It is based on the principle of activity-based regulation vis-à-vis entity-based regulation. This means the legal nature of the entity (for example, whether it is a payment gateway or a bank) is less important than the actual activity it engages in.[v] This is pertinent in the context of BNPL service providers. The MD-PPI targets only those who engage in credit lending under the fig leaf of acting as payment gateways. This is because the exposure for the loans is on the BNPL provider and not the banks/NBFC they are partnered with. For example, the fintech firms Slice and Uni are partnered with the State Bank of Mauritius and the RBL bank respectively for a ‘first loss default guarantee’ scheme. Here, the third-party bank acts to mitigate risks in cases of default but does not itself lend. This association proves useful to the fintech BNPL firms since banks/NBFCs are authorized under the PPI-MD to pre-fund the PPIs. However, as noted by the RBI’s Working Group on Digital Lending, (para. 5.3.1.5) the risk of issuing credit is not borne by the banks/NBFCs since they don’t issue credit in PPIs. The lending and concomitant exposure are instead from the balance sheets of the unregulated fintech firms rather than by the licensed and regulated partner banks. Consequently, even though the fintech firms are payment gateway entities on paper, their activity is that of lending (even if masked through ‘rented’ NBFCs/Banks). The risks of fintech balance-sheet (FBS) lending without regulation and licensing have been acknowledged as a risk to financial stability and market integrity.[vi] Since the fintech BNPL firms do not possess the license and the concomitant regulation of credit issuing, their debarment from loading credit lines is proportional to the risk entailed, and in line with the objectives of Duck-type regulation. Market Integrity, Information Asymmetry, and Consumer Safety: Justifying Tighter Regulatory Scrutiny on BNPLs Another essential element of proportionate regulation is that the stringency of regulation should be correlated to the threats to the market integrity of the domain being regulated.[vii] A greater risk to consumers would permit proportionately closer scrutiny by the regulators. This is rooted in an understanding of regulation theory, that regulation functions for the public interest, which requires the elimination of information asymmetries since they lead to market inefficiencies and consumer detriment.[viii] The potential counter-argument to the MD-PPI being proportionate is that BNPL is a convenient, user-friendly, and quick way to access credit typically at 0% interest rates. In that light, questions arise as to why BNPL firms should comply with similar restrictions as credit-card

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Poison that Indian Corporates Need: About Time to Bring ‘Poison-Pill’ in India?

Leave a Comment / Contemporary Issues /

[By Shaurya Singh and Sanya Goel] The authors are students at the Jindal Global Law School, Sonipat. The shareholder rights plan, commonly known as the ‘Poison-pill’ is a strategy used to defend against a hostile takeover by issuing new shares at discount to the existing shareholders other than the acquirer. This dilutes the shareholding of the acquirer while providing an opportunity to the other shareholders to raise their holdings at a discounted price. Therefore, the cost of acquisition significantly rises which would make the target company less attractive to the acquirer considering its higher price. Hence, deterring the hostile acquirer to complete the acquisition and pull out of the deal. This defense strategy has proven its mantle by breaking the jaws of some of the biggest corporate sharks over the years in the US. However, a series of regulations make the poison pill illegal in India. This article stresses the need for importing the poison pill to safeguard Indian companies and points out the fault in the current regulations which freely facilitate hostile takeovers. The Paramount of Defence: There have been several instances where this strategy has proved its effectiveness by saving well-known companies from non-consensual takeovers. Yahoo, acquired the poison pill in 2001 to save itself from being acquired by Microsoft. Along the same lines, Netflix, the current largest streaming service used the strategy as a defence against Carl Icahn’s takeover. Hence, the viability of the Poison Pill is very evident but especially when being used as the only defence strategy it might not guarantee complete safety from the takeover. Swallowing the pill: Poison-pill on paper makes up for a very robust strategy, however, there might be some cases where the acquirer has enough resources to complete the deal regardless, especially when the acquisition is happening without keeping profitability at the centre. In such cases, the acquirer would not care if the profitability of the venture is being compromised or not. Hence, the higher cost of acquisition is less likely to create a deterrence making the poison pill useless. For instance, Elon Musk’s bid for Twitter was not motivated by profits but was rather being done to save the freedom of speech of individuals on the internet. According to Musk, Twitter being one of the most influential social media platforms, was not fully allowing individuals to express free speech and he wished to acquire it to allow free expression. He pitched an offer of 43 billion dollars which was more than entire the market capitalisation of Twitter (37 billion USD). Here, Twitter did initially deploy the poison pill to avoid acquisition but the board later did accept the Musk’s Bid considering the value of the offer. The offer was withdrawn later, but the pill would not have saved Twitter given the amount of money Musk was ready to spend on the deal. A key take away from the said case is that if the acquirer has enough resources, is willing to pay the high cost of acquisition, and can directly or indirectly influence the board of the company, then the target company would not be able to defend itself only by relying on the pill. However, the case of Twitter itself is an exceptional scenario as a majority of the hostile takeovers are motivated by profitability. Therefore, a higher cost of acquisition due to the poison pill can save the target company in most cases. Additionally, the presence of a staggered board of directors comprised of firm individuals adds to the effectiveness of the pill. The Staggered Aegis: The provision for a staggered board of directors has been introduced in India through the Companies Act, 2013. While Section 169 of the Companies Act, 2013 allows for the removal of a director from the company before their period in office expires given that they are given a fair chance to be heard, exceptions to the same are provided in Section 242 and Section 163. A director appointed by the NCLT under Section 242 is not subject to the provisions of Section 169. Similarly, the provisions of Section 169 do not apply in a situation where the company has availed the option to appoint two-thirds of the total number of directors in compliance with the principle of proportional representation of Section 163 which basically translates to the existence of a staggered board. The staggered board complements the pill and these two together make a very viable defence. Theoretically, the acquirer could fire the entire current board and exert control over the newly elected board, thereby dismantling the pill. The staggered board prevents that. Therefore even in the presence of multiple resisting shareholders, the acquirer would not gain control over the board for a long time. The introduction of the staggered board is indeed a positive step but to fully utilize its defensive aspect poison pill is needed, which is restricted by a series of regulations framed by SEBI. The Fault in Our Codes Considering the regulations that regulate takeovers, it is safe to claim that India is a takeover-friendly country. This may not necessarily be a negative thing, given that the legislation has also been flexible enough to permit M&A transactions with minimum intrusion. But that does not mean that the law should freely allow hostile takeovers. The SEBI (Substantial Acquisitions of Shares and Takeovers) Regulations, 2011 or the ‘Takeover Code’ mandates the acquirer to make a public announcement once it obtains 25% of the shares and this is the only major obligation for the acquirer to undertake a takeover. On the other hand, 26(c) of the takeover code prohibits poison pills, as it states that the target company can not issue any securities which entitle the holder to voting rights. Also,26(d) refrains the target company to “implement any buy-back of shares or effect any other change to the capital structure”. Additionally paragraph 13.1.2 chapter 13 SEBI (Disclosure and Investor Protection) Guidelines, also restricted a company from deploying the poison pill as it did not allow for discount warrants less than the

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Mandatory Nature of Pre-show Cause Notice- A Silver lining For Tax Reforms?

Leave a Comment / Taxation Law /

[By Priyanshi Jain] The author is a student at the Institute of Law, Nirma University. Introduction A show-cause notice consists of a prima facie opinion by the tax department with respect to the offence made out against a taxable person. The aim of pre-show cause notice is to reduce the burden of unnecessary litigation before issuing the final show-cause notice. The need for the same was initially highlighted in the First Report of the Tax Administration Reforms Commission, wherein it was held that a vertical dispute mechanism for pre-show cause consultation should be set up; this shall ensure that preventable and unwanted disputes do not take much time of the tax department. Following these recommendations, through a circular published on December 21, 2015[i], the Central Board of Excise & Customs (‘CBIC’) made the “Pre-notice Consultation” mandatory in all cases comprising a demand of Rs. 50 lakhs or more. Recently, in the case of Gulati Enterprise vs Central Board of Indirect Taxes and Customs & Ors[ii], the Delhi High Court emphasized the mandatory nature of the pre-show cause consultation notice. It negated the substitution of this statutory notice with a voluntary statement. Section 74(1) of the Central Goods and Service Tax Act, 2017, read with rule 142(1)(a) of the Central Goods and Service Tax Rule, aims to establish the above-said principle by offering an opportunity to the assessee on a pre-show cause notice stage. The blog puts weight on the High Court decision by reiterating the necessity of a ‘pre-show cause consultation notice’ to eliminate the unnecessary burden of litigation by promoting voluntary compliance. The blog also aims to highlight the existing face-off between the department and the taxpayer in accordance with pre-show-cause consultation. Unnecessary Burden of Litigation The First Report of the Tax Administration Reform Commission (‘TARC’)[iii] advised the department to avoid disputes in cases where a collaborative effort can render an effective solution. The present Indian Tax Regime is filled with procedural complexities, ultimately leading to unreasonable delays and hefty expenses. Prolonged litigation in matters related to taxation and the overall hassle of reaching an amicable solution has created a perception that the current tax system is unfavorable to taxpayers. This issue is placed on the centre stage when a substantial amount of revenue is blocked in disputes, which could benefit the Indian economy if the dispute is settled amicably. Hence, in such a scenario, it becomes imperative to introduce a system by which the head-to-head approach can be rationalized in three precise steps first, effective case management; second, preventing procedural formalities and third, providing multiple opportunities for settlement and alternative dispute resolution. In order to implement the above-said system into practice, through a circular published on December 21, 2015, the CBIC made the “Pre-notice Consultation” mandatory in all cases comprising a demand of Rs. 50 lakhs or more. Such an administrative mechanism may be instituted to resolve tax disputes prior to the notice stage by creating a forum for open dialogue between the taxpayer and the department. The forum promotes a bilateral discussion to articulate and scrutinize their positions on the present matter. The possibility of an amicable resolution increases when both parties resolve the dispute through a consensus. The Delhi High Court in Amadeus India Pvt. Ltd. vs Pr. Commissioner, C.Ex, ST & CT (2019)[iv], while reiterating the mandatory nature of pre-show cause consultation notice, highlighted that if the process of such notice is followed in a proper spirit, it shall reduce a significant number of disputes. However, it should be noted that the process is not indefectible since it is subject to failure in case a mutual agreement is not reached. The Tax Administration Reform Commission (‘TARC’) further recommended that tax officers should not be permitted to fall back on coercive methods for facilitating recovery during the pre-consultation process. The report advises three essential guidelines for the department to follow for promoting the above-said forum for discussion and open communication: first, only the officer competent to issue a notice shall be allowed to take part in such consultation; second, the tax officer shall adopt a receptive and open vantage point; third, the tax officer shall provide full consideration to the views of the taxpayer before reaching to a conclusion. The above-mentioned guidelines aim to narrow down the contentions made by any party if a legal action arises thereof. The contentions on which an agreement has been reached shall not be contested further by either party. Therefore, the pre-show-cause consultation mechanism aims to achieve a more effective and efficient dispute resolution system. This, in turn, reduces the unwanted burden of litigation in the Indian indirect tax regime. Tax Payer vs The Department  It is imperative to note that the process of pre-show-cause consultation is not a statutory procedure but rather a procedure meted out by the Central Board with the objective of increasing compliance and decreasing the need to issue show-cause notices. The overall conclusion is that any procedure developed by the CBIC to balance the interests of the assessee and the revenue should be given due consideration. Unfortunately, the department, in several instances, has failed its obligation to grant an adequate opportunity for consultation to the taxpayer, completely disregarding the instructions provided by the CBIC through their circulars. It was observed in the case of M/s Dharamshil Agencies vs Union of India (Gujarat High Court) Special Civil Application No. 8255 of 2019[v] that it was the department’s responsibility to issue a pre-show cause consultation notice immediately after the final audit report was published. The court held that an ‘illusionary’ pre-show cause notice, in its essence, is arbitrary and against the very object and purpose of the Master Circular. The Central Board’s circulars bind the department, and it cannot simply disregard the numerous circulars issued by the CBIC regarding the said consultation or issue show cause notices on its own. In a situation where we accept that the department has issued the pre-show-cause notice in accordance with the circular published by the CBIC, the taxpayer cannot be completely

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Supreme Court Settles Jurisdictional Conundrum for Appeals from ITAT Orders

Leave a Comment / Contemporary Issues, Taxation Law /

[By Harshit Joshi] The author is a student at the Vivekananda Institute of Professional Studies. An appeal was brought before the Supreme Court in which both the Delhi High Court and the Punjab & Haryana High Court refused to have territorial jurisdiction over the dispute due to a difference of opinion and dismissed appeals filed before them. The Supreme Court solved the conundrum concerning appellate jurisdiction of the High Courts under Section 260A of the Income Tax Act, 1961 (‘Act’) in its judgment dated 18 August 2022 in the case of Pr. Commissioner of Income Tax-I, Chandigarh v. M/s. ABC Papers Limited. Another question that the Supreme court resolved is the jurisdiction of the High Court consequent upon an administrative decision transferring a “case” under Section 127 of the Act from one Assessing Officer to another Assessing Officer (‘AO’) located in a different State. The court ruled that the jurisdiction of the High Court stands on its own foundation and cannot be susceptible to the executive power of transferring a matter. The Apex Court also overturned the finding rendered by the High Court of Delhi in CIT v. Sahara India Financial Corporation Ltd. and CIT v. Aar Bee Industries Ltd. holding they do not lay down the correct law. In this post, we shall dissect and analyze the judgment of the Supreme Court. Factual Background The Appellant M/s. ABC Papers Ltd. (‘Assessee’) is a company engaged in the manufacture of writing and printing paper and filed its income tax returns before AO, New Delhi in 2008. The Deputy Commissioner of Income Tax (‘DCIT’), New Delhi, issued a notice of assessment under Section 143 (2) of the Act and followed it up with an order dated 30.12.2010. Aggrieved by that order, the Assessee preferred an appeal to the Commissioner of Income Tax (‘CIT’) (Appeals) – IV, New Delhi who by order dated 16.02.2012, allowed the appeal. Against this appellate order of CIT, the Revenue carried the matter to Income Tax Appellate Tribunal (‘ITAT’), New Delhi. The ITAT, New Delhi, by its order dated 11.05.2017, upheld the order of the CIT (Appeals) – IV, New Delhi, and dismissed the appeal filed by the Revenue. Meanwhile, by an order of transfer dated 26.06.2013 passed under Section 127 of the Act, the CIT (Central), Ludhiana, centralized the cases of the Assessee and transferred the same to Ghaziabad. The DCIT, Ghaziabad, passed another assessment order on 31.03.2015. Aggrieved by that order, the Assessee filed an appeal which came to be allowed by the CIT (Appeals) – IV, Kanpur, on 20.12.2016. Against this appellate order, the Revenue preferred an appeal to ITAT, New Delhi which was also dismissed by its order dated 01.09.2017. The cases of the Assessee were re-transferred under Section 127 of the Act to the DCIT, Chandigarh, w.e.f. 13.07.2017. Revenue decided to file appeals, being ITA No. 517 of 2017 (against the order of the ITAT dated 11.05.2017) and ITA No. 130 of 2018 (against the order of the ITAT dated 01.09.2017) before the High Court of Punjab & Haryana. The High Court of Punjab & Haryana by its judgment dated 07.02.2019, disposed of both the appeals by holding that, notwithstanding the order under Section 127 of the Act which transferred the cases of the Assessee to Chandigarh, the High Court of Punjab & Haryana would not have jurisdiction as the AO who passed the initial assessment order is situated outside the jurisdiction of the High Court. The Revenue also filed an appeal, ITA No. 515 of 2019 before the High Court of Delhi. The High Court of Delhi had taken a view that when an order of transfer under Section 127 of the Act is passed, the jurisdiction gets transferred to the High Court within whose jurisdiction the situs of the transferee officer is located and dismissed the appeal. The question came up before the Supreme court to resolve the issue as to which High Court would have the jurisdiction to entertain an appeal against a decision of a Bench of the ITAT exercising jurisdiction over more than one state. Analysis of legal provisions Given that each state has its own High Court and that ITATs are designed to exercise jurisdiction over multiple states, the question of which High Court is the appropriate court for filing appeals under Section 260A emerged. The question arose because Section 260A is open-textual and does not specify the High Court before which an appeal would lie in cases where Tribunals operated for a plurality of States. The structure established in Article 1 of the Constitution is not followed by the jurisdiction the ITAT Benches exercise. Benches are sometimes constituted in a way that their jurisdiction encompasses territories of more than one state. The Allahabad Bench, for example, comprises areas of Uttarakhand. The Amritsar Bench has jurisdiction over the entire state of Jammu and Kashmir. An AO is given the authority and jurisdiction over anyone conducting business or exercising a profession in any area that has been assigned to them by virtue of Section 124. A “case” may be transferred from one AO to another AO under Section 127 at the discretion of a higher authority. These clauses are all located in Chapter XIII of the Act and exclusively relate to the executive or administrative authority of the Income Tax Authorities. The issue regarding the appropriate High Court for filing an appeal is well settled since when it fell for consideration before a Division Bench of the High Court of Delhi way back in 1978 in the case of Seth Banarsi Dass Gupta v. Commissioner of Income Tax. It was held that the “most appropriate” High Court for filing an appeal would be the one where the AO is located. This was held so that the authorities would be bound to follow the decision of the concerned High Court and has been followed and abided in subsequent judgments of the High Court of Delhi. However, the question in the instant case is in the context of an order

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Are Pre-closing Covenants Anti-Competitive?: Separating Gun Jumping from Pre-closing Covenants

Leave a Comment / Competition Law /

[By Pranay Agarwal] The author is a student at the Gujarat National Law University. Introduction The process of merger and acquisition is not consolidated in India and still remains a practical aspect influenced more by the business practices and the consensus between the entities. One of the important aspects of this process is the Share Purchase Agreements (SPAs) where the shares of the seller are legally transferred to the buyer to give effective control to the buyer over the target. Though the practice of drafting an SPA before any takeover is common in the country, the threat of gun jumping always prevails due to the exercise of control over the target before the transaction is complete. The threat of gun jumping becomes even larger from the inclusion of pre-closing covenants in the SPAs in which the buyer entity has decisive control over the various aspects of the operations of the target entity in the ordinary course of business before the merger transaction is completed. However,  at the same time, such pre-closing covenants ensure fair competition in the market balancing the rights of both the target and the buyer. In this article, the pre-closing covenants are given a legal explanation in light of the existing competition laws of the country and it is tried to separate them from the gun jumping and necessitates the need to understand the fine line between them to safeguard the interests of the entities and ensure healthy competition in the market. What are Pre-closing Covenants? Pre-closing covenants are signed during the time period ranging from the execution of the SPA to the actual transfer of the shares or closing of the takeover transaction in order to confer some control to the buyer over the actions and conduct of the target entity. In other words, the pre-closing covenants set out those actions which the seller entity is permitted to carry out in the ordinary course of business. The ordinary course of business, in this case, should be ascertained from the commercial perspective and not from a general perspective. Therefore, it is pertinent to look into the objects clause of the Memorandum of Association of the entity to get a clear picture of the activities conducted by the entity in the ordinary course of business. However, the Memorandum of Association should not only be the criteria to decide such activities and the term should be given a purposive construction depending on the policy or transactions of the entity with related parties. Nevertheless, due to the prevailing business practices on the pre-closing covenants, buyers are given rights on fixing the actions which can be freely carried on by the target entity, and such control is even extended to capping the monetary value of the transactions of the target. While this may seem to be giving effective control to the buyer over the conduct of the target before the actual takeover, the pre-closing covenants are included with the sole purpose of ensuring the position or image of the target entity in the market in the interim period does not differ from that at the time of the agreement in order to prevent unjust losses to the buyer due to conduct of the target meanwhile. Decisive influence in Pre-closing covenants The apprehension of gun jumping due to the pre-closing covenants is majorly influenced by the excessive control that it gives to the buyer over the conduct of the target. If seen from one perspective, the pre-closing covenants through conferring extensive control to the buyer over the target, at times transcend its boundaries to significantly influence the actions of the target entity before the closing of a merger or takeover transaction. ‘Decisive influence’ in this context has to be construed in the light of the gun jumping laws of the country. The test of ‘decisive influence’ was given in Hindustan Colas v. CCI, where the Competition Commission of India (CCI) held that the decisive influence by the buyer over the target constitutes the implementation of the combination, violative of section 43A of the Competition Act, 2002 (the Act). While the decisive influence test as was also reiterated in the Etihad Airways case properly defines the practice of gun jumping, the test has to be seen more from the perspective of ‘effective control’ than the decisive influence to practically fulfill the test. The term has been given a proper definition from the mergers and acquisitions perspective in Regulation 2(1)(c) of the SEBI Regulations, 1997 where the control has been given a broad definition of not only relating to the voting of the directors but also management or policy decisions of the entity. The definition though gives an enlarged view of the control of the company, it is possible that the pre-closing covenants are misused under the guise of preservation of the value of the target to exercise excessive control and thus, decisively influence the actions of the target; thus effecting the combination before the completion of stipulated time and procedure. Nonetheless, such presumption may do more harm than good by damaging the sacrosanct line between gun jumping and pre-closing covenants, making it necessary to clearly distinguish between them. The Dissonance between Gun Jumping and Pre-closing Covenants Gun jumping has been a major concern during the merger process. While the term has got its origins in the European competition laws, the CCI in Ultratech Cement case tried to give an indigenous view on the same. The important factor which has to be taken into account is the conduct of the parties to the combination which results in the consummation of the combination before the orders of CCI under section 31 of the Act or when the standstill obligation is still in force. The pre-closing covenants inherently confer powers to the buyer to exercise some control over the seller’s conduct, thus hinting toward the high chances of gun jumping in such agreements. However, the incidences of gun jumping have to be recognized in matters of pre-closing covenants on a case-to-case basis by the Indian watchdog in order

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‘Vidarbha Industries’- A Problematic Interpretation

Leave a Comment / Contemporary Issues, Insolvency Law /

[By Shalin Ghosh] The author is a student at the Maharashtra National Law University, Mumbai. Introduction The Insolvency and Bankruptcy Code, 2016 (“IBC”) contemplates the initiation of insolvency proceedings only by financial and operational creditors under Section 7 and Section 9 respectively. Section 7 (5) (a), in particular, triggers the insolvency process for financial creditors, once the Adjudicating Authority (“AA”) decides the existence of debt and default. The Supreme Court’s (“SC”) recent judgement, in Vidarbha Industries Power Ltd. v. Axis Bank Ltd (“Vidarbha Industries”), rendered the aforementioned provision discretionary. The ruling disturbs settled law and could significantly impact India’s insolvency and credit recovery mechanism. Facts The appellant, a power generating company, was contracted for implementing a Group Power Project (“GPP”) by the Maharashtra Industrial Development Corporation (“MIDC”). In 2016, the appellant filed an application before the Maharashtra Electricity Regulatory Commission (“MERC”) demanding the actual fuel costs for the Financial Years 2014-2015 and 2015-2016. MERC rejected the appellant’s request, disallowing a major proportion of the demanded fuel costs while also capping the tariffs for the Financial Years 2016-2017 to 2019-2020. This was challenged before the Appellate Tribunal for Electricity (“APTEL”). Allowing the appeal, APTEL directed MERC to allow the actual costs incurred by the appellant to purchase coal for the plant’s first unit. It also temporarily imposed a limit on the fuel costs for the second unit. According the appellant, Rs. 1,730 crores were due to it as a result of the APTEL’s order. Subsequently, the appellant filed an application before the MERC for implementing the APTEL’s order. However, MERC filed a civil appeal before the SC which remained pending. The appellant claimed that it was unable to implement the directions in the APTEL’s order due to MERC’s pending appeal before the SC and that it faced a fund shortage. An implementation of the said order, the appellant argued, would help it discharge its outstanding obligations. In 2020, Axis Bank, the financial creditor, initiated CIRP against the appellant under Section 7 of the IBC before the National Company Law Tribunal (“NCLT”), Mumbai. Upon being challenged, NCLT, Mumbai declined the appellant’s plea demanding a stay on the CIRP, ignoring the pending amount realizable by the APTEL’s order, adding that disputes between the appellant and MERC were irrelevant to the concerned issue. The National Company Law Appellate Tribunal (“NCLAT”) affirmed NCLT’s observations, also adding that if the latter is satisfied about the existence of both debt and default, that itself would be sufficient to trigger CIRP. The appellants, aggrieved by the order, approached the SC for relief. Decision Section- 7(5)(a)- Discretionary or Mandatory? While deciding the nature of the provision, the Court acknowledged that although no extraneous factor should impede a speedy insolvency resolution under the IBC, it importantly held that aspects particular to the case, such as a pending appeal and the appellant’s financial condition cannot be termed ‘extraneous. The SC categorically stated that the NCLAT incorrectly observed that it merely has to ascertain the presence of a debt and default as sufficient conditions to trigger CIRP. The Court opined that the NCLT must apply its mind and consider relevant factors and examine the corporate debtor’s arguments against admission on its own merits, before admitting a CIRP application. Notably, it pondered on the connotations of ‘may’ in Section 7 (5) (a) observing that had the legislative intent been to construe the aforementioned provision as ‘mandatory’, then it would have used ‘shall’ instead of ‘may’. The Court reasoned that the object of the IBC is not to penalise solvent companies who temporarily defaulted on their dues. Therefore, CIRP, in the Court’s opinion, does not arise unless the concerned entity is insolvent or bankrupt. These observations led the Court to hold that Section 7 (5) (a) is a discretionary provision and that the NCLT is not compelled to admit a financial creditor’s CIRP application even when the corporate debtor has defaulted on its dues. The SC noted that the admission in the cases of financial creditors may be suspended indefinitely, till the extraneous matter is sorted. However, spelling out different standards for operational creditors, the Court observed that if such a creditor files a CIRP application, then it is obligatory for the AA to admit it, provided it is satisfied about the existence of a debtor’s default. Analysis Troubling consequences for the insolvency regime This is a concerning judgment that can potentially hamper the IBC’s effective application and dilute the robustness and efficacy of the prevailing insolvency culture. Firstly, the legislative scheme prescribed by the IBC provides for a judicial ‘hands-off’ approach by strictly limiting the scope of judicial intervention. The Court clarified this legal position in the landmark Essar Steel judgment wherein it was held that the AA is merely required to ascertain whether the legal requirements under the IBC have been satisfied and that it cannot sit in judgment over the ‘commercial wisdom’ of the CoC. Other than several orders of the NCLTs and the NCLAT, this position was reiterated by the Court itself in a number of well-known precedents like  K. Sashidhar v. Indian Overseas Bank and Vallal RCK v. Siva Industries and Holdings Limited. By requiring NCLT to scrutinize the corporate debtor’s financial health and viability, generally considered to be the domains of the CoC, the judgment in Vidarbha Industries completely goes against this established and settled legal principle, distorting the clearly defined boundaries stipulated both in the IBC and in a litany of judgments. It deprives the CoC of having an authoritative say in matters crucial to their interests while paving the way for greater judicial overreach. Secondly, the Court’s opinion, that the AA is required to examine additional grounds raised by the corporate debtor on merits before admitting a CIRP application, could adversely impact both the IBC’s application and its objectives. Till now, the NCLT only had to consider the existence of a debt and the evidence proving that the corporate debtor has defaulted on honouring the said debt. Once these two elements were ascertained, a CIRP application could

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Competition (Amendment) Bill 2022- Amiss for Cartel Enforcement?

Leave a Comment / Competition Law, Contemporary Issues /

[By Prakriti Singh] The author is a student at HNLU. The Indian Competition Law Regime is bracing for the first amendment to the Competition Act, 2002. The Competition (Amendment) Bill, 2022 has proposed substantial changes for both the arms of the Indian Competition Law Regime, i.e., merger control and cartel enforcement. Cartels are considered to be a heinous offense under the antitrust law. These twenty years of the Competition Act have witnessed a robust anti-cartel drive in India. Unlike the USA, India does not consider cartels to be a crime. However, the imposition of huge penalties is the Competition Commission of India’s (“CCI”) weapon to create a deterrent effect on the cartels. The Amendment Act has proposed several progressive changes to the Competition Act, 2002. In line with the Competition Law Review Committee Report, it has included hub and spoke cartels under the Act. The Leniency Regime goes hand in hand with the Cartel enforcement. The Amendment Act seeks to revamp the leniency provisions by permitting the withdrawal of leniency petition and dealing with the disclosure of multiple cartels. While the Amendment Act has taken an active step in recognizing different categories of cartels and advancing the leniency provisions under the Indian Competition Law Regime, it has failed to cure the existing mischief in the cartel enforcement law in India. The primary objective of cartel enforcement law is to alleviate cartel formation and thereby promote competition in the market. The statistics presented in India Chapter of Asia Pacific Antitrust Review, 2022 clearly demonstrates the failure to achieve this goal. The primary cause is the inconsistency in cartel enforcement on the part of the CCI. In order to prevent the death of enterprises in the wake of the pandemic, the CCI has abstained from imposing penalties in a number of cases. However, this soft approach might be antithetical to the antitrust regime. This article aims to present an analysis of the missing parts in the 2022 Amendment on the cartel enforcement arm. It will suggest some changes in the cartel enforcement provisions in order to strengthen the regime. Cartel enforcement in India Monopolies and Restrictive Trade Practices Act, 1969 is the predecessor of the Competition Act, 2002. One of the mischiefs pointed out in the 1969 Act by the Raghavan Committee was the absence of any provision to reduce cartel activity. The 2002 Act brought in provisions to prevent cartel activities in the economy which are extremely secretive and difficult to prosecute. The CCI (Lesser Penalty) Regulation, 2009 was notified in order to enhance the cartel detection rate which has led to the evolution of the cartel enforcement regime. As opposed to relying on mere circumstantial evidence, the CCI has now transitioned to relying on the evidence gathered from dawn raids. Analysing the inconsistency in the Cartel enforcement- Case Study of the Railway Sector The Railway market is a monopsony market prone to cartel formation. The first ever order of the leniency regime was related to cartelization in the Railway sector. In recent times, cartel detection in this market has been made possible by the exercise of the Leniency application. However, the inconsistent approach of the regulator is problematic. It even bears the threat of discouraging the leniency petitions. On 10 June 2022, the CCI released an order imposing penalties on seven firms. These seven firms were engaged in cartelization in the supply of protective tubes. The detection of this cartel was made possible by one of the member firms in the cartel. The Director General in his report had submitted evidence of cartelization relating to the polyacetal protective tube in the Indian Railways. The CCI, after a detailed analysis, concluded that the communication between the firms clearly demonstrated the existence of a cartel arrangement. The CCI took a harsh stance on the cartel arrangement. The member firms attempted to justify the presence of a cartel in the monopsony Railway market. However, the CCI strictly demonstrated an anti-cartel stance. The monopoly of the Indian Railways is no good ground to engage in cartelization and manipulate the bidding process. Except for the whistleblower, all the firms were penalized. Even in this cartel, there were MSMEs facing economic disruptions caused by the pandemic. However, the CCI, instead of issuing a stringent warning, imposed penalties on these firms. In 2021, in Eastern Railway, Kolkata v. M/S Chandra Brothers and Others, the CCI found evidence of cartel activity in the Axle Bearings market. This cartel was also detected as a result of a Lesser Penalty Application. Even the suppliers, in this case, attempted to justify a cartel in a monopoly market. This cartel also included MSME enterprises bearing the brunt of the pandemic. The CCI abstained from imposing penalty and rather issued a cease-and-desist order. In Re: Chief Materials Manager, South Eastern Railway v. Hindustan Composites Limited and Others, the CCI had found evidence of cartel in the supply of Brake Blocks to the Railways. However, it restrained from imposing any penalty as the MSMEs were adversely affected by the pandemic. In this case, the CCI, analysed the turnover of the Opposite Parties, on the basis of which, it issued a cease-and-desist order. Similar leniency towards MSMEs engaging in cartelization in the supply of cartel brushes to the Railways was demonstrated in Mr. Rizwanul Haq Khan, Dy. Chief Material Manager, Office of the Controller of Stores, Southern Railway v Mersen (India) Private Limited and Another. Thus, within a single market, the CCI’s approach has been replete with inconsistency, that too, while deciding cases with similar circumstances. This inconsistency causes mischief on two counts. Firstly, it dilutes the magnitude of deterrence originally envisioned by the cartel enforcement regime. Secondly, it also dilutes the efficacy of the Leniency Programme. If the applicant has no incentive of getting lenient treatment compared to the other cartel members, the entire process of filing a Lesser Penalty Application would seem to be futile. A stringent approach to cartels- the cure for the mischief of inconsistency? In the past two years,

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Analyzing the Competition Amendment Bill vis-a-vis Regulation of Digital Market

Leave a Comment / Competition Law, Contemporary Issues /

[By Akrama Javed and Aditya Maheshwari] The authors are students at the Gujarat National Law University. Introduction Recently, after a coon’s age of introduction of the Draft Competition (Amendment) Bill, 2020, the legislature introduced the Competition (Amendment) Bill, 2022 (hereinafter as “Bill”), wherein certain changes in the present legal regime have been incorporated. The Bill so proposed needs to be analyzed in the context of the digital market (hereinafter as “market”) owing to two major reasons. Firstly, the complexity in the regulation of the market owing to its complex and multifaceted nature due to the involvement of data, complex algorithms, and lack of technical tools for regulation. And secondly, the effect of the anti-competitive dominant policies of these Big-Tech on new entrants, as well as the existing competitors in the market. Therefore, in this article, the authors have analyzed the upcoming legal regime pertaining to the rise of the digital market in India. Competition Bill 2.0 – amendments pertaining to Market Some of the indispensable changes in regard to regulating the market are: Inclusion of Technology Experts in the Competition Commission of India  Taking a leaf out of Indian security law wherein the special focus is being made on the expertise of the members with regard to the securities market, the legislature intending to add investigative muscle and professional expertise to intensify scrutiny of Big-Tech companies, introduced the inclusion of expression ‘technology’ under Section 8 of the Competition Act (hereinafter as “Act”) wherein it would be one of the factors for the selection of the chairperson and other members. Moreover, while complementing section 8, an amendment is also introduced in Section 9 of the Act to include ‘technology’ while forming the selection committee. Material influence as part of the control Through the amendment, the legislature intends to amend the definition of ‘control’ to include the lowest threshold of control i.e., material influence. The inclusion of this would keep the digital transactions under the Competition Commission of India’s (hereinafter, “CCI”) supervision as such transactions don’t come under the realm of quantitative criteria provided. Hub and Spoke Cartel Propelling from the traditional cartel i.e., horizontal and vertical cartel, the CCI introduced Hub and Spoke Cartel under Section 3 of the Act. Here, the CCI intends to include such transactions which are done through intermediaries. For instance, the use of price algorithms for anti-competitive activities by companies like Ola and Uber shall be scrutinized under this provision. Demystifying the existing conundrum in the market in India As mentioned earlier, the amendment is introduced keeping in mind various actions being taken by the CCI against Big-Tech and it is pertinent to discuss the same to understand the contemporary contextual issues existing within the domain. The data induced jurisdictional tussle The issue was ignited for the first time when suo-moto cognizance was taken by the CCI against WhatsApp’s Terms and Services relating to Privacy Policy which effectively asked users to accept the sharing of their data with Facebook and initiated an investigation. It should be noted that prior to this, CCI had generally avoided intervening in matters having data privacy undertones to them. However, herein, CCI had held that WhatsApp Inc., through this policy, was arbitrarily degrading the non-price parameters of competition i.e., data, to an extent that it violated Section 4(2)(a)(i) of the Act through the imposition of unfair terms and conditions. In all of this, the idea of the CCI overstepping its jurisdiction to meddle in privacy issues is concerning when there is almost a legal vacuum in the area of data privacy due to the withdrawal of the Data Protection Bill, 2021. The case of apprehensive App Store arrangements The case of apprehensive app store arrangements is exacerbated by dominant tech firms i.e., Apple Inc. and Google, and action was taken against them. Recently, an investigation was launched against Apple Inc. on grounds including App Store Review Guidelines being violative of Section 4(2)(a)(i) of the Act due to its ‘take it or leave it’ nature, the mandatory use nature of the in-app payment system and the tie-in arrangement restricting other developers to develop iOS apps. Likewise, Google has also been found guilty of abusing its dominant position by denying market access, leveraging, and restricting technology to the prejudice of consumers. The problematic allegory of the algorithms The concept of Algorithmic collusion has been addressed by the CCI in two cases. Taking a narrow approach in the case of Samir Agrawal v. ANI Technologies Pvt. Ltd, CCI held that there did not exist hub and spoke agreement because there existed no agreement to set the prices or coordinate the prices between the parties. Secondly, in the case of Re: Alleged Cartelization in the Airlines Industry where the existence of hub and spoke agreement was investigated w.r.t common software algorithm software used by airlines to determine the ticket pricing. In this, the CCI found that the revenue management team of the airline modulated the algorithm, and the role of the algorithm was limited only to aiding the team in arriving at the price which would ensure optimal revenue. Here, the question would again arise in front of the CCI in case there is an employment of a self-learning algorithm. Foreign Approaches Countries around the world getting a move on from the traditional competition laws by reconsidering the present legal regime to include safeguards against modern anti-competitive activities such as tacit collusion. Some of the best safeguards being adopted by various countries are discussed below. Digital Market Act – European Union The European Union recently enacted the Digital Market Act as a means of limiting the ability of major digital firms to respond to and head off the competitive threats posed by their business models. It is enacted to impose a stringent regulatory regime on the gatekeepers. Moreover, investigation regarding the compliance of regulations is provided to give ex-ante effect to it. Moreover, the obligations are imposed on gatekeepers to explain their algorithms and the non-compliance of the same would invite severe penalties. Open Market App

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Investors’ Confidence – An Indispensable Exigency for Securities Markets

Leave a Comment / Capital Markets and Securities Law /

[By Aditya Maheshwari and Kaushlendra Pratap Singh] The authors are students at the Gujarat National Law University, Gandhinagar. Introduction The securities market (“market”) is a gravitating concept modulated by various controllable and uncontrollable factors. One of the significant aspects of the flourishment and progression of the market is the role of investors’ confidence in the market and the regulatory body. On various occasions, an accentuation is being made on the part of transparency in economic and regulatory policies for perpetuating the Investors’ Confidence in the market. The term investors’ confidence in its generic sense can be understood as investors’ readiness to capitalize on the investment possibilities and intermediation channels that are accessible to them based on their assessment of risk and reward. To make it possible for investors to access information related to various securities and regulations, the role of the Security Exchange Board of India (“Board”) has become prominent. This article intends to crack wide open the efforts being made by Board to protect investors’ interests, the comparison being made to other foreign legal regimes, and the aperture in the present legal regime related to it. The mutuality between investors’ confidence and transparency in the policies regulating investors The relationship between Investors’ Confidence and Transparency has been impregnable when it comes to the legal or the financial aspect. Investors consider the legal and regulatory environment along with political and economic aspects before making any kind of investment in the market. As per the Global Investment Competitiveness (GIC) survey in the years 2017 and 2019, two-thirds of the investors in the market, study policy uncertainty as a significant factor in their investment decision. When it comes to transparency, systematic publication of the rules and regulations,  clarity and specificity of the legal provisions of the administrative procedure, and the availability of the portals and other mechanisms are some of the criteria to be considered by the regulatory body. There is an inverse relationship between  the regulatory risk and the investment by the foreign investors as the lack of certainty holds the investors back from investing in such market While it has already been discussed the mutuality between the transparency in the regulation and the investors’ confidence, the upcoming sections would discuss the present regulatory framework in India to enhance investors’ confidence and how changes can be made in the present legal regime. For instance, European Union enacted separate legislation to bring transparency to increase investors’ confidence. Investors’ confidence – present legal regime and recent amendments As discussed above, the mutuality between investors’ confidence and transparency in the policies regulating investors in the market, the Board, since its inception in the year 1992, has undertaken specific measures and further made amendments for the protection of the investors’ interest as well as bringing transparency in the process regulating them. Existing legal framework for the protection of investors’ interest in India Since the inception of the Security Exchange Board of India Act, 1992 (“Act”), the legislature’s intention and objective were clear behind enacting this statute which can be determined through the preamble of the statute. The preamble uses the expression “protect the interests of investors in securities” in the preamble which upfront clears the role of the regulatory board. Moreover, to make it an obligation, the same is enshrined under Section 11(1) of the Act. Further, in regarding initiating an investigation as well as passing orders by the Board, one of the significant reasons is to protect the interest of the investors and against transactions that are detrimental to the investors. Initially, the investors’ grievances redressal procedure under this Act was incorporeal, however, with the introduction of the Investor Grievance Redressal Mechanism, the investors’ confidence in the market increased significantly. To add extra cushion to investors’ protection in the market, the penalty is being imposed on the listed company and person acting as an intermediary that fails to address the grievances of the investors. Consolidating the present legal framework for the protection of investors’ interest in India While in the initial legislation, certain statutory remedies were available to the investors in India however, to consolidate the existing legal framework, the Board over the last decade made substantial amendments to the Act as well as issued circulars to further substantiate the position of investors in India. Starting with the introduction of the Investors Protection and Education Fund in the year 2009 which is used to educate the investors about the current market situation as well as provide restitution to eligible and identifiable investors who have suffered losses resulting from a violation of securities laws under regulation 5(1) and 5(3) of the Securities and Exchange Board of India (Investor Protection and Education Fund) Regulations, 2009. As discussed in detail earlier about the role of transparency in policies regulating investors and investors’ confidence, the Board to provide clarity and transparency regarding revealing the shareholding pattern to the investors amended in the initial circular issued in the year 2015. Moreover, the Board to enhance the investors’ grievances mechanism, put forwarded various measures such as – Arbitration Mechanism at Stock Exchanges To vitalize the investors’ grievance mechanism, the Board introduced the arbitration mechanism to resolve investors’ grievances. The measure was taken regarding the speedy disposal of the grievances. Moreover, to further enhance this mechanism, the Board brought transparency to the process of arbitration by providing public dissemination of profiles of arbitrators. SEBI Complaints Redress System The SEBI Complaints Redress System (“SCORES”) is an online mechanism to assist investors’ to lodge compliant and further track the process of such complaints virtually. Moreover, the Board made it a devoir for the recognized stock exchanges to design and implement an online web-based complaints redressal system of their own. Analysis – shortcomings in the present legal regime Now that it has been discussed in detail the regulatory regime concerning investors’ protection in India, this section aims to compare the grievances redressal mechanism prevailing in India and other countries along with the challenges in the present regime. Comparison of investors’ grievances redressal mechanism in India

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