Company Law

[By Akshita Bhansali & Niharika Agarwal] The authors are students of Gujarat National Law University.   Background In the backdrop of several tax evasion and money laundering cases, upon the recommendations of the Joint Parliamentary Committee on Stock Market Scam, the Ministry of Finance introduced the Companies (Restriction on Number of Layers) Rules, 2017 (“Layering Rules”) for more transparency. The Layering Rules restrict companies from having more than 2 layers of subsidiaries, counted vertically, subject to certain exemptions. However, linguistic ambiguities in the Layering Rules have created confusion among legal practitioners and academicians alike, which despite abundant pleas have not been clarified. To complicate matters further, in 2022 the Foreign Exchange Management (Overseas Investment) Rules, 2022 (“OI Rules”) along with Regulations and Directions issued by RBI, established a new framework for overseas investment including the setting up of subsidiaries or joint ventures abroad. These rules introduced a relaxation, permitting what was restricted in the earlier regime as ‘round tripping’ i.e., investment in a foreign entity that directly or indirectly invests in India. But this move comes with a restriction under Rule 19(3) of OI Rules, 2022 that such an investment in a foreign entity must not result in a structure of more than 2 layers of subsidiaries. In this provision, though the OI Rules reference the Layering Rules, it is replete with ambiguities as to how their differing provisions interplay in practical application for any business entity.​​ This blog intends to identify these ambiguities through hypothetical scenarios of company structures and provide specific resolutions for the same through the aid of rules of statutory interpretation. Scenario 1: Exception to Foreign Subsidiaries The Layering and OI Rules adopt differing approaches when it comes to counting of foreign subsidiaries on account of their different regulatory purposes. The Layering Rules introduce a provision to the effect that the layering restrictions shall not affect the acquisition of foreign subsidiaries, thereby omitting them from the computation of layers. Such a concession is not granted by OI Rules which were formulated primarily to address intricacies in foreign investment structures and promote legitimate business activities by imposing restrictions on specific FDI – ODI arrangements. Therefore, omission of foreign subsidiaries would strike at the very heart of the OI Rules’ provisions. Keeping this dissimilarity in mind, consider the scenario of an Indian parent entity “A”. Its foreign subsidiary “B” would be excluded from computation by the Layering Rules, but in the realm of OI Rules would be considered as the parent (the reasoning for which is discussed in Scenario 2). Consequently, its Indian subsidiary “C” would form the first layer under both regulatory frameworks. However, complications arise with a subsequent foreign subsidiary “D” classifying as the second layer under OI Rules but accorded exemption under Layering Rules. Now, another Indian subsidiary “E” forming the second layer under Layering Rules yet is barred under OI Rules on account of the restriction of 2 layers. This presents an ambiguity wherein a structure explicitly permitted under Layering Rules on account of the exemption, becomes violative of OI Rules. Fig. 1: Ambiguity in treatment of Foreign Subsidiaries To navigate this quandary, the Doctrine of Lex Specialis, a principle of statutory interpretation favouring specialised laws over general ones, assumes relevance. Legal precedents like Ram Parshotam Mittal vs. Hotel Queen Road Pvt. Ltd. and Union Of India vs M/S.Kiran Overseas Ltd. establish the precedence of FEMA as a special law over the Companies Act and their respective rules. Applying the same in the current context, OI Rules prevails over the exemption granted by the Layering Rules. Consequently, subsidiary “E” would not be permitted, aligning with the more stringent constraints dictated by OI Rules. This approach ensures consistency in regulatory interpretation while maintaining the integrity of cross-border corporate structuring. Scenario 2: Determination of Parent Company Another key distinction is the determination of the entity being considered as the parent company from which the subsidiary layers are counted which also creates a dissonance in counting of layers for compliance, which can be properly addressed through the use of harmonious construction of their provisions for compliance of both laws simultaneously. While the Layering Rules intuitively considers the first Indian Company “A” as the parent company, the OI Rules seem to follow a different pattern. It is important to note that amongst academia there exists an equivocation on the question of determining the starting point for calculation of layers under the OI Rules. However, clause (15) of the ‘Instructions for filling up the Form FC’ in RBI’s Master Directions on Reporting under Foreign Exchange Management Act, 1999 clarifies that for the purpose of calculation, the foreign entity shall be treated as the parent, with a subsidiary directly under the foreign entity being treated as first layer and so on. This diverged position creates a problem in determination of allowance of subsidiaries. For instance, Indian company “A” has subsidiary “B” which has a subsidiary “C” forming layers 1 and 2 respectively in India. “C” sets up a foreign subsidiary “D” through ODI which would not be affected by Layering Rules but would form the parent company for the purposes of OI Rules. Now if “D” were to choose to set up an Indian subsidiary “E”, under OI Rules this would be permitted as the first layer but would clearly breach the limits of the Layering Rules by classifying as a third layer. Fig. 2: Determination of Parent Company and counting of layers thereof. In such a scenario it is important to keep in mind that when interpreting the different positions of the two laws, they cannot be interpreted so as to reduce the provision of any Statute or Rule as redundant. This can be ensured by adoption of the Doctrine of Harmonious Construction as laid down in Commissioner of Income Tax v. M/S Hindustan Bulk Carriers by giving an effective interpretation and upholding the regulatory objective of both law. The ambit and purpose of FEMA being limited to regulating foreign investment and the flow of currency across jurisdictions,

[By Shyam Gandhi] The author is a student of National Law University, Jodhpur.   INTRODUCTION The introduction of Differential voting rights (DVR) shares was initially facilitated by the Companies (Amendment) Act of 2000. In 2008, Tata Motors became the first business to issue DVR shares. Subsequently, in 2009, the Securities and Exchange Board of India (SEBI) implemented a prohibition on the issuance of ‘Superior Voting Right’ shares due to concerns of potential financial misappropriation by shareholders holding shares with differential voting rights (DVRs). The decision was motivated by the aim of safeguarding minority shareholders from potential tyranny and preventing the consolidation of managerial control within family-owned enterprises. In the year 2019, the Securities and Exchange Board of India (SEBI) implemented a policy reversal by disallowing the issuing of shares with inferior voting rights while simultaneously allowing listed businesses to issue shares with Superior Voting Rights (SVR). Section 43(a)(ii) of the Companies Act permits companies to issue equity shares with differential rights in terms of dividend, voting, or other aspects. These shares are commonly referred to as DVR shares. DVR shares can be categorized into two types: ‘Superior Voting Right’ shares, which grant voting rights beyond the conventional ‘one share, one vote’ principle, and ‘Inferior/Fractional Voting Right’ shares. REINTRODUCTION OF DVR MECHANISM SEBI, the Securities and Exchange Board of India, published a consultation paper on March 20, 2019, on the issuing of DVR shares. The purpose of this document is to address the growing discussion surrounding the necessity of allowing the issuance and listing of shares with DVRs in India. The study underscored the advantages and necessity of DVRs in the context of India’s period of rapid economic expansion, which necessitates firms to secure funds in order to maintain this growth. Moreover, it is worth noting that certain companies that adopt asset light business models may exhibit a preference for equity capital as opposed to debt capital. In order to raise equity capital, these companies may consider the issuance of shares with superior voting rights (SRs) to founders as well as shares with lower or fractional voting rights (FRs) to private or public investors. This approach can be viewed as a feasible alternative for such companies. SEBI approved a framework for the issuance of DVRs, on 27th June 2019. ADOPTING A FLEXIBLE APPROACH On September 28, 2021, SEBI proposed the relaxation of restrictions pertaining to differential voting rights (DVRs) for company founders. This recommendation is intended to enhance the prospects of technology startups, wherein founders often possess minimal ownership stakes in later stages but wield disproportionate control over operational matters. During the meeting, SEBI made the decision to raise the minimum net worth requirement for entrepreneurs and their companies from Rs 500 crore to Rs 1,000 crore. This adjustment aims to grant these entrepreneurs enhanced voting rights within their own companies. Moreover, prior to the present time, corporations were required to observe a waiting period of six months before issuing these shares and submitting their documents for the purpose of being listed on the stock market. Based on the recorded minutes of the meeting, the duration has been reduced to a period of three months. The strategy is based on the model observed at prominent companies in Silicon Valley, such as Facebook and Alphabet’s Google. In this model, investors possess larger ownership stakes than the founders, yet the founders maintain control through the allocation of greater voting rights. Typically, this entails granting the founders 10-20 votes per share, while investors are granted one vote per share. EXISTING CHALLENGES REGARDING CURRENT FRAMEWORK Currently, DVRs mechanism faces several challenges. Firstly, there is a lack of awareness and knowledge regarding the DVR. One of the primary factors contributing to the low level of knowledge about DVR shares is the minimal marketing and educational initiatives that have been made. It is possible that many people who are interested in investing do not have a complete understanding of what DVR shares are and how they operate. People are less inclined to make financial commitments to something they do not fully comprehend if there are not sufficient marketing and education efforts. Secondly, those who are in possession of shares that have superior voting rights may, in some situations and under certain conditions, exploit their influence for the purpose of seeking personal gain or moving themselves closer to their own goals. It is possible that, as a result of this, decisions will be taken that are not in the best interest of the company or the individuals who have a stake in it. Third, companies that are organised in a DVR fashion could run into a number of obstacles when they are attempting to raise capital. If a company does not grant equal voting rights to all of its shareholders, there is a risk that some investors may be hesitant to join that company. Thus, as a consequence of this fact, the business can have a more challenging time generating capital. Lastly, there is an unequal distribution of voting power, which prompts people to worry about the propriety of corporate governance. Shareholders who have greater voting rights than other shareholders may be more likely to make decisions that prioritise their own personal interests above the long-term prosperity of the company as a whole or the interests of other shareholders. This has the potential to result in conflicts of interest as well as assessments that are not in line with the development of long-term value. FAILURE OF DIFFERENTIAL VOTING RIGHTS MECHANISM Even after more than 23 years of operation in India, only a handful of listed businesses have issued DVR shares, despite the fact that DVR Shares were originally established there in 2000. Tata Motors, was the first to opt for the DVR Shares, but recently Tata Motors announced that it will convert the DVR Shares into ordinary shares. The aforementioned action is being undertaken with the intention of streamlining its capital structure. As per the company’s statement, the proprietors of ‘A’ shares, who currently receive superior dividends compared to

[By Anaya Nandish Shah & Pulkit Rajmohan Agarwal] The authors are students of Gujarat National Law University.   INTRODUCTION The National Company Law Appellate Tribunal (“NCLAT”), New Delhi in the matter of M/s Sanmati Agrizone Private Limited v. Registrar of Companies & Anr., upheld the decision of National Company Law Tribunal (“NCLT”) and favoured the move of the Registrar of the Companies (“RoC”) in striking off the name of M/s Sanmati Agrizone Private Limited from the list of Register maintained by the RoC. The Companies Act, 2013 (“the Act”) by virtue of Section 248 empowers the RoC to strike off the names of all those companies: that have been incorporated but have not commenced their business within a year of incorporation, that have not obtained the status of a ‘dormant company’ after failure to carry on business operations for a period of two years immediately preceding the financial year, whose subscribers at the time of incorporation obtained the subscription, however, they have not paid the subscription amount and a declaration for the same has not been filed within a hundred and eighty days, that fail to carry on its business operations after physical verification. However, it is important to note that such a strike-off under the aforementioned section can only be undertaken after serving appropriate notice to the company and its directors, along with providing them with an adequate opportunity to submit their defences. Following that, a notice must also be published in the Official Gazette,in order to inform other stakeholders of the company such as creditors, business traders, vendors, etc. In the present case, the records indicate that Sanmati Agrizone Pvt. Ltd. dealt in a number of agricultural activities, and filed income tax regularly . However, it failed to file returns and other financial statements from 31.03.2016 to 31.03.2020 before the RoC, owing to certain financial uncertainties. Upon becoming aware of the issue of non-submission of documents, the Company decided to expeditiously deposit all the relevant documents with the RoC. However, on 08.08.2018, they discovered that their name had been abruptly struck off by the RoC, without any prior notice. The legal conundrum that arises herein, is whether such a non-compliance results in a violation of principles of natural justice and whether the aftermath of such judgment creates adversities among the already existing companies. Typically, the repercussions of such non-compliance  with statutory procedural requirements have proven to be detrimental. Abstractly omitting essential requirements before coming to a conclusion often leads to more harm than good. INFRINGING THE PRINCIPLES OF NATURAL JUSTICE In the present case, the problem stems from the fractional and erroneous application of the law. While analysing the section, the tribunals merely ensured that the act of striking down was well within four corners of the provision. However, they failed to acknowledge the mandatory procedural obligations upon the RoC to serve the notice to the company before such a strike off. Moreover, the principles of natural justice, which are very well-established within our legal system, were blatantly disregarded. The Supreme Court in its landmark judgement of A.K. Kraipak v. Union of India, expanded the principles laid down in the case of Ridge v. Baldwin, infamously referred to as the Magna Carta of principles of natural justice in the English law. It emphasized on the importance of these principles and defined them as the safeguards of justice. Natural Justice, which is synonymous with “fairness”, is centred on two fundamental principles: “Nemo Judex in Causa Sua” and “Audi Alteram Partem”. The latter principle finds its application in the case at hand, which stands for “the right to be heard and to defend oneself”. Recently, the Apex Court in State Bank of India v. Rajesh Agarwal upheld the principle of Audi Alteram Partem and stated that an opportunity of being heard is quintessential before declaring the defaulters as fraudulent. Supreme Court in another case, State of Orissa v. Dr. Binapani emphasized the right to be heard especially in situations where an administrative action has civil repercussions. It can thus be agreed upon that the fundamental tenet of a fair hearing, is that the party being sued be made aware of the case against him, before the adjudication process begins, so as to give him a fair opportunity to defend himself. It is through the notice, that the concerned party is informed of the case and the proposed actions/ charges levelled against him. The Apex Court in Olga Tellis v. Bombay Municipal Corporation underlined the importance of notice in adjudicatory proceedings. Thus, notice is a sine qua non of a fair hearing, in the absence of which, the fundamental right to be heard stands compromised. IMPLICATIONS OF OVERRIDING THE LEGAL PROCEDURE This arbitrary application of the law, without following the due procedure, can have multifold implications. It is pertinent to note that once a company is deregistered it can undoubtedly approach the NCLT under Section 252 of the Act for its re-registration. The NCLT may also reverse the orders, nonetheless, the harm caused cannot be wholly remedied. This can have substantial ramifications for a company since its day-to-day operations, contractual commitments, and prospects stand stalled. Moreover, regaining stakeholders’ trust becomes difficult, consequentially resulting in the loss of a company’s value and its probable insolvency. Furthermore, the whole process of reinstating the company’s name comes at an enormous cost, which could have been avoided if an opportunity to present their case had been offered initially. Without affording an opportunity to represent, like in the present case, the fallacious removal of names from the register by RoC can lead to a loss of reputation and credibility of a company. The Supreme Court’s ruling in Erusian Equipment & Chemicals Ltd v. State of West Bengal & Anr. highlighted the damaging effects of arbitrary blacklisting on a business’s reputation.  This can be compared to the de-registering of a company by RoC. The implications of the latter are even more perilous since the company ceases to exist. The Tribunals have not only overlooked the procedural irregularity

[By Gunjan Hariramani & Pooja Arora] The author is a student of Maharashtra National Law University, Mumbai and ILS Pune.   Introduction In India, the role of an auditor affects the corporate governance of the company by promoting accountability, representing interests of the stakeholders, managing financial crises and assessing risks. However, an auditor must exercise reasonable care in the discharge of their duty. This ensures that a company or its directors do not defraud its shareholders and other stakeholders. A number of corporate scams including the Satyam scam, could have been prevented if there had been stricter guidelines and severe penalties on the auditors. Recently in the case of Union of India v. Deloitte Haskins and Sells LLP. [“the Deloitte’s case”], the constitutionality of 140(5) of the Companies Act, 2013 [“the Act”] which provides for removal of the auditors when they commit fraudulent activities was upheld. The Supreme Court held that it was not violative of Article 14 and 19(1)(g) of the Constitution. In this article, the authors have attempted to analyse the extent of auditor’s responsibility in light of the principles of corporate governance. Further, an analysis of the Deloitte’s case where the Supreme Court had ruled that an auditor’s resignation could not be the taken as a ground to escape from the liability stated under Section 140(5) of the Act, has been provided. Brief Facts In the present case, there were defaults faced by the IL&FS Financial Services Limited [“IFIN”], which amounted to over Rs. 91,000 crores in debt. These defaults occurred between June 2018 and September 2018. To address the situation, the Department of Economic Affairs, Ministry of Finance issued an Office Memorandum on September 30, 2018 requesting the Ministry of Corporate Affairs to take action under the Act. The memorandum highlighted the magnitude of the debt of the IFIN, attributing it to the failures of corporate governance and the presence of window-dressed accounts. Further, it also emphasized that the defaults could have severe consequences on the financial markets and the Indian economy. In response to the defaults, the Ministry of Corporate Affairs filed a Company Petition before the National Company Law Tribunal [“NCLT”] seeking the removal of the existing Board of Directors of IFIN and the appointment of a new board. The NCLT, in an interim order on October 1, 2018 superseded the existing board and appointed a new Board of Directors to take charge of IFIN. Deloitte Haskins and Sells LLP [“Deloitte”] and BSR and Associates LLP [“BSR”] were appointed as the statutory auditors of IFIN. Consequently, IFIN issued a notice under Section 140(1) of the Act to BSR and Deloitte, seeking their removal as auditors. BSR denied the allegations, and a hearing was held on May 29, 2019. Subsequently, the Ministry filed a petition under Section 140(5) of the Act, on June 10, 2019, seeking the removal of BSR and Deloitte as auditors, as well as other related actions. BSR resigned as the auditor and both BSR and Deloitte challenged the maintainability of the petition filed under Section 140(5) before the NCLT. The NCLT upheld the maintainability of the petition. In the writ filed by BSR before the High Court, it upheld the validity of Section 140(5) and set aside the NCLT’s order also quashing the petition filed under Section 140(5) and the related directions from the Ministry of Corporate Affairs. An appeal against the High Court’s decisions was filed before the Supreme Court. Judgment of the Supreme Court The Supreme Court interpreted Section 140(5) of the Act in light of other provisions of the Act i.e., Section 143(12) and Section 144. The Court highlighted that Section 140(5) explicitly states that its provisions are “without prejudice” to any actions under the Act or any other prevailing law. Thus, the legislative intent behind enacting Section 140(5) is clear, and the Tribunal has the authority to issue a final order against an auditor who has acted fraudulently, irrespective of other provisions in the Act. The Court emphasized that the powers of the NCLT under Section 140(5) are quasi-judicial in nature and must be exercised with due process and by providing opportunity to both the parties involved. The Court, while examining the question of violation of Article 14 and Article 19(1)(g) of the Constitution, ruled that the auditors cannot be equated with directors or management. Auditors have a crucial role in protecting the public interest and stakeholders. Chapter X of the Act specifically addresses the importance of auditors; therefore, Section 140(5) cannot be deemed discriminatory or in violation of Article 14 of the Constitution. The court observed that it would not be correct that despite a fraudulent conduct by a person, they could claim the right to freedom of trade and profession under Article 19 of the Constitution. The Court also dismissed the claim that the penalty of automatic disqualification, including partners, for a five-year period is disproportionate or akin to civil death. It observed that auditors and their firms bear joint and several liability, and Section 140(5) serves as a consequence for acting fraudulently. The Apex court, therefore, set aside the High Court’s judgment that quashed the proceedings under Section 140(5) on the grounds that it was not maintainable after the auditors’ resignation. Scope of Section 140(5) of the Act vis a vis the principles of corporate governance The recent trends have shown that Indian Courts are opting to choose a stringent model of corporate governance in the wake of corporate scams. Corporate governance necessitates the establishment of a structured framework focused at maintaining an effective control and governance over the business corporations, thereby ensuring the proper distribution of rights and duties of every participant in the corporation. Auditors are one of the participant groups in the corporation that are held responsible to show an unbiased analysis of the financial statements to the shareholders and prevent or report any fraud within the corporation. Auditor’s scams and frauds in the past showed the failures within the structure of corporate governance. Satyam Scam was a glaring example

[By Vansh Gupta & Mehar Kaur Arora ] The authors are students at Gujarat National Law University.   Introduction Overseas Direct Investment (ODI) means acquisition of any unlisted equity capital or subscription as a part of the Memorandum of Association of a foreign entity, or investment in 10% or more of the paid-up equity capital of a listed foreign entity, or investment with control where investment is less than 10% of the paid-up equity capital of a listed foreign entity. RBI identified that entities having their subsidiaries in India and outside India would use round tripping to siphon-off funds by providing inter-corporate loans to their subsidiaries and evade tax liability leading to a ban on the practice unless undertaken for legitimate purpose with the approval of RBI. However, the ban could disincentivise foreign investment by Indian entities due to compliance burden and cost. In order to create a balance between the need for regulatory oversight and to facilitate ease of doing business, the new ODI Rules introduced the layering restriction. Although the layering restriction is expected to expand the horizon of growth for Indian entities, further clarity is required with respect to the understanding of layers and the exemption provided to certain entities. Overseas Direct Investment is allowed in a company engaged in Bona fide business activity only. An activity that is legal as per the laws of India and the host country is considered a bona fide business activity. Though the definition brings about a level of lucidity, there are certain reservations. For instance, it is not clear what repercussions does the term “law in force in India” have. It is possible that certain activities, lacking a central law, might be legal in some states, while not permitted in other states. This article explores the complexities of the ODI framework, the layering restriction, and the need for further clarity and harmonization of definitions to balance regulatory oversight and ease of doing business in India. Layering restriction and the base entity for calculation of Layers: Rule 19(3) of the New ODI Rules states that, “no person resident in India shall make financial commitment in a foreign entity that has invested or invests into India, at the time of making such financial commitment or at any time thereafter, either directly or indirectly, resulting in a structure with more than two layers of subsidiaries.” Hence, investment into foreign entities is not permitted if it results into a structure of more than two layer of subsidiaries. However, the confusion arises when determining how to calculate the layers, specifically whether to consider an Indian entity as the foundation or a foreign subsidiary. For instance, an Indian company ‘X’ makes investments in a foreign company ‘Y’, which in turn has two more layers of subsidiaries ‘G’ and ‘H’ which invest in India. Now if H is counted as a layer with respect to the Indian entity, it will be considered as the third layer, and therefore triggering the layering restriction. Clause 20(2) of the ODI Directions clarifies that foreign entity should be taken as the base for calculation of the number of layers of subsidiaries. The instructions for Form FC under the Master Direction – Reporting under the Foreign Exchange Management Act 1999, which state that the level of Step Down Subsidiary shall be calculated by treating the foreign entity as the parent, provide yet another confirmation in favor of foreign entities. Defining “Subsidiary” and the threshold for “Control”: Department of Corporate Affairs has time and again proposed steps to ensure that ‘subsidiary route’ is not used to siphon-off funds and to prevent the misuse of the complex corporate structure to bypass the restrictions. Hence, it was recommended to introduce a statutory cap on the number of layers of subsidiaries permitted for a holding company. However, there is a notable disparity between the definitions of “Control” and “Subsidiary” in the OI rules and the Companies Act. Rule 2(y) of the ODI Rules defines a subsidiary as a company in which a foreign company has ‘control’. “Control” refers to the right to appoint majority of directors or control of the management exercisable individually or with person acting in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders’ agreements or voting agreements that entitle them to 10% or more of voting rights. However, the definition of control under Section 2(27) of the Companies Act, 2013 is silent on the 10% threshold. On the contrast, a 50% threshold is mentioned for a company to qualify as a ‘subsidiary’ of a holding company under Section 2(87) of the Companies Act. Setting the threshold at 10% rather than over 50% for determining subsidiary status under the ODI Rules expands the scope to encompass a greater number of foreign entities. This ensures that they are subject to the restrictions on the number of subsidiary layers. Otherwise, companies could have easily invested substantial funds in another entity while maintaining ownership below 50%, allowing them to siphon funds to foreign entities without scrutiny. It is important to highlight that the definition of control is inclusive in nature and can cover other scenarios where an entity may not have 10% shareholding but may influence policy decisions of the company by certain exclusive veto powers or by any other means. Horizontal layers of subsidiaries: The definition of “Control” further talks about indirect control by the Holding Company. To illustrate A is a holding company having a subsidiary B and C. B further has control in C. Therefore, A may not directly control C but exercise an indirect control by virtue of B. Since there is no restriction in layers of subsidiaries in horizontal propagations, a company is allowed to make as much investment as it wants into enterprises at horizontal level. Further, the first proviso to Rule 2 of Companies (Restriction on number of layers) Rules, 2017 provides and allows an Indian entity to acquire a foreign entity having more than two layers if it is permitted under the

[By Saloni Neema & Jeeri Sanjana Reddy] The authors are students of Damodaram Sanjivayya National Law University Visakhapatnam.   Introduction Partnerships have emerged as a distinguishing element of the business world as a long-term success element. An established business accrues goodwill by building relationships in the market based on customer trust and preference. Goodwill is therefore considered to be the reputation associated with a business or the “economic benefits a going concern may enjoy as compared to a new firm.” The goodwill of a partnership is ascribable to all partners since it is the result of their collaboration. Dissolution of partnership is followed by the distribution of assets, and factoring in goodwill as an intangible asset is not uncommon. However, while the law is well-settled on the sale of goodwill after dissolution and the intricacies surrounding non-competes, a partner’s demand for payment for the goodwill of the firm after leaving the firm remains controversial. When a partner is fired, will the firm’s refusal to pay up lead to a breach of fiduciary duty by the remaining partners? These questions remain largely unaddressed in India, where the law on the existence and ownership of goodwill is not very uniform. Goodwill Payment: Lessons From Across Jurisdictions In the landmark judgment of Dawson v. White & Case LLP (‘Dawson’), Mr Dawson returned from a vacation in July 1988; he found that his partners had decided to dissolve the firm and start a new one without him. The partners of White & Case founded a new firm with the same name, address, and customer list after expelling him. He filed a lawsuit to see if the Court would rule in his favour about his claim to goodwill in the company and if so, the value of that goodwill. Judge Ciparick settled the issues in this case as to whether goodwill is a “distributable asset” of a partnership and whether an underfunded pension plan would become a liability of the firm upon its dissolution. Regarding the first issue, the court determined that goodwill should be considered as the partnership’s asset, unless the agreement declares it to be of no value and the partners’ business conduct supports that assertion. The Court will honour an agreement among partners, whether express or implied, to determine the goodwill and assets of the firm. According to White and Case, unfunded pension plans, the future pension payments were property disallowed as partnership liability. This case stirs up many questions on the valuation of goodwill, classifying it as a distributable asset and the possibility of paying goodwill compensation to a fired partner. Entitlement To Goodwill: Conflicting Views Generally, the goodwill earned by an employee’s actions belongs to the employer, and the firm ensures the quality of services provided by every attorney. Lord Hacon in Bhayani v. Taylor Bramwell LLP[i] (‘Bhayani’) held that the individual creates goodwill in his professional capacity as a partner of the firm, not personally. Therefore, if a person worked for a partnership, the goodwill created by his actions would typically belong to the partnership. Similar reasoning was adopted in Starbucks (HK) Ltd v. British Sky Broadcasting Group Plc. (‘Starbucks’). If the quality falls short, the firm is liable for the compensation, not the individual attorney. The Court further concluded in Mrs Sujan Suresh Sawant v. Dr Kamlakant Shantaram Desa (‘Sujan Suresh’). Even a partner’s legal representative will be eligible for a share of goodwill of a continuing partnership. It was further held that, “it is impractical to direct a sale of goodwill between partners when goodwill has been fully appropriated by the surviving partner with all the benefits resulting from the previous business dealings.” In these situations, it is more likely to distribute a proportionate share of goodwill to the heirs of the deceased partner after proper valuation. Another argument in favour of goodwill payment is that “partnership assets encompass anything to which the firm or all of its partners may be deemed entitled.” Referring to Section 52 of the Partnership Act, 1932 the Calcutta High Court, in Bhuban Mohan Das v. Surendra Mohan Das reasoned that in the event that a contract creating a partnership is rescinded, the party who rescinds has the right to the “surplus” of the firm’s assets which remain after its debts have been paid, and for any amount paid by him towards the partnership. Contractual Stipulation of Goodwill in the Agreement Another approach of determining whether or not a leaving partner is owed goodwill depends on whether or not the partnership agreement specifically mentions goodwill. The Supreme Court of Ohio in Spayd v. Turner, Granzow & Hollenkamp held that good will payments to a terminating partner are subject to contractual specifications and should be specified in the partnership agreement with the approval of all partners. In contrast, the approach taken in Roger Siddall v. Cletus Keating et al. (‘Siddall’) holds that a partnership, whose repute depends on the individual skills of the members, has no goodwill to be divided as a partnership asset following its dissolution. This approach is further backed by the settled position of law that partnership books and entries belong not only to the firm but to each member of the firm, as laid down by Justice Sterling in Tregov. Hunt (‘Trego’).[ii] The Bombay High Court in Sujan Suresh appears to have followed a similar line of reasoning when it ruled that under Section 55(1) of the Partnership Act, 1932, goodwill must be categorised as an asset even if the partners have not made any provisions for it in their partnership agreement. In the event that the agreement mentions it, goodwill must be sold in accordance with it. Decoding The Reluctance: Are Goodwill Payments and Loss To The Existing Firm Interconnected? The standard practise is for a departing partner to sell his share of goodwill to the other partners if the firm continues regardless of his departure. He doesn’t sell his share of the firm’s goodwill but loses it when expelled. Therefore, he should be able to rightfully claim compensation. Moreover, as recognized in Johnson v. Hartshorne (‘Jonhson’), the firms’ anticipated earnings are largely linked to the partners’ qualifications and standing. So why

[By Arghya Sen] The author is a student of Amity University.   Introduction The intersection of intellectual property and antitrust law is an increasingly important issue in the tech industry. On the one hand, intellectual property protection can incentivize innovation and drive economic growth. On the other hand, antitrust law is designed to promote competition and prevent monopolies. When these two legal frameworks intersect, they can have a significant impact on the tech industry’s future.[1] In this article, we will explore the intersection of intellectual property and antitrust law in the tech industry. First, we will define intellectual property and antitrust law and explain how they intersect. Next, we will examine the benefits and risks of intellectual property protection, as well as the role of antitrust law in balancing innovation and competition. We will then analyze case studies that illustrate how these legal frameworks have intersected in the tech industry and their implications for the future. Finally, we will conclude by summarizing the main points and offering insights and recommendations for policymakers and stakeholders. Understanding Intellectual Property and Antitrust Law India has a robust legal framework for intellectual property and antitrust law. Understanding these frameworks and how they intersect in the tech industry is critical to navigating legal issues and promoting innovation and competition. In India, Intellectual property refers to creations of the mind, such as inventions, literary and artistic works, and symbols, designs, and names used in commerce.[2] In India, intellectual property is protected by various laws, including: The Patents Act, which provides for the grant of patents for inventions and specifies the rights and obligations of patent holders. The Copyright Act, which protects original works of authorship, including literary, dramatic, musical, and artistic works. The Trade Marks Act, which provides for the registration and protection of trademarks, including logos, names, and symbols used to identify goods and services. The Designs Act, which provides for the registration and protection of industrial designs, such as the shape and appearance of a product. Antitrust law in India is governed by the Competition Act, 2002.  The Act aims to promote competition and prevent anti-competitive practices in the market. The Competition Commission of India (CCI) is responsible for enforcing the Act and ensuring that businesses do not engage in activities that harm competition. Examples of antitrust violations under the Competition Act include: Cartels, where businesses collude to fix prices or restrict output. Abuse of dominance, where a dominant company engages in practices that prevent or restrict competition. Anti-competitive mergers and acquisitions, where a merger or acquisition may result in a significant reduction in competition in the market.[3] In the tech industry, intellectual property and antitrust law intersect in various ways. For example, a company may hold a patent for a technology that gives it a competitive advantage in the market. However, if the company uses its patent to prevent competitors from entering the market or to charge excessive licensing fees, it may violate antitrust law. Similarly, a dominant tech company may use its market power to acquire other companies, which may harm competition in the market. To balance innovation and competition, Indian authorities have taken steps to ensure that intellectual property and antitrust law work together effectively. For example, the CCI has issued guidelines on the intersection of intellectual property and antitrust law to provide clarity to businesses and promote competition. Additionally, Indian courts have recognized that the abuse of intellectual property rights can lead to antitrust violations and have taken steps to prevent such abuse. Overall, understanding the intersection of intellectual property and antitrust law in the tech industry in India is critical to promoting innovation, competition, and economic growth.[4] The Role of Antitrust Law in Balancing Innovation and Competition Antitrust law plays a critical role in promoting competition and preventing monopolization in the tech industry. In India, the Competition Act, 2002 governs antitrust law and the Competition Commission of India (CCI) is responsible for enforcing the Act and ensuring that businesses do not engage in activities that harm competition. Antitrust law in India aims to promote competition by prohibiting anti-competitive agreements and abuse of dominance.[5] The Competition Act prohibits cartels, abuse of dominance, and anti-competitive mergers and acquisitions. The CCI can impose penalties on businesses that engage in anti-competitive behavior and may order them to cease their anti-competitive practices. Antitrust law in India also aims to prevent monopolization by ensuring that dominant companies do not use their market power to harm competition. For example, a dominant company may engage in practices that prevent or restrict competition, such as price-fixing, exclusive dealing, or tying arrangements. The Competition Act prohibits such practices and the CCI can impose penalties on businesses that engage in them. Antitrust law and intellectual property law can intersect in various ways in the tech industry. Intellectual property protection can give a company a competitive advantage, but if the company uses its intellectual property to prevent or restrict competition, it may violate antitrust law. In practice, antitrust authorities in India examine whether a company’s intellectual property rights are being used in a way that harms competition. For example, if a company holds a patent on a technology that is essential to a particular industry, it may be required to license that technology to other companies to prevent it from obtaining a monopoly. Similarly, if a dominant company uses its market power to acquire other companies that could harm competition in the market, antitrust authorities may block the acquisition or impose conditions on it to preserve competition. The reports[6] emphasize the need for a balanced approach to ensure that competition and innovation are not compromised in the tech industry. The CCI report suggests that antitrust law should be used to prevent anti-competitive conduct, including the abuse of intellectual property rights by dominant players. It recommends that competition authorities should carefully scrutinize the conduct of dominant players in the market and take appropriate remedial measures to promote competition and innovation. Similarly, research[7] has highlighted the importance of balancing the interests of

[By Vidushi Gupta] The author is a student of National Law School of India University, Bengaluru.   INTRODUCTION Hostile takeovers make up a great proportion of global deal activity and have become a well-established strategy for growth in the corporate world. Golden Parachutes (GPs) are clauses within employment contracts, that grant the key executives of corporate entities lucrative severance benefits when their services are terminated. These benefits can include long-term salary guarantees, stock options, cash bonuses, generous severance pay, ongoing insurance and pension benefits etc., and are triggered only by a change in the company’s control/management through a sale, merger, acquisition, or takeover. Interestingly, GPs are also a type of shark repellent, i.e. they may be adopted by target companies as a tool to ward off hostile takeover attempts. They have attracted much attention around the world, due to their common use and significance in takeover activities. Although GPs have not been a prominent issue in the Indian corporate governance discourse, they are fast gaining traction in India as well. This article aims to contribute to the existing discussions and jurisprudence on GPs, and seeks to analyse whether GPs are a desirable way of trying to prevent hostile takeovers, by adopting a law and economics perspective. In India, GPs are primarily dealt with under Section 202 of the Companies Act, 2013. However, since hostile takeovers are quite uncommon in India, GPs are not really used as takeover defences in the Indian context. It is argued that GPs are a weak and inefficient form of takeover defence, due to the costs associated with them. They largely help to convert hostile takeovers into friendly ones, rather than deterring hostile ones. However, it is possible to overcome some of the shortcomings of GPs, if they are treated as a reactive defence, rather than as a pro-active defence. The article also argues for a binding, disclosure-based regime as an effective means of promoting GPs which reflect shareholder interests. GAINS ASSOCIATED WITH GPs Proponents argue that GPs can prevent hostile takeovers, by threatening high transaction costs, making acquisitions more expensive, and making target companies unattractive or less profitable for the acquiring entity. Further, GPs can provide a soft landing for executives who lose their jobs, protect them against financial and career-related risks, and help to attract talented executives in industries and sectors that are takeover-prone and face talent crunch. Therefore, GPs can be said to help reduce agency cost problems between shareholders and managers of the target, by helping executives of corporations to remain objective and impartial, and preventing them from opposing takeovers that benefit shareholders. GPs can also improve the bargaining position of the target management, enabling them to negotiate better terms with the acquirer. However, the acquisition can no longer be termed to be truly hostile in such a situation. Hence, GPs are correlated with a higher likelihood of receiving an acquisition offer or of being acquired, leading to a paradox. COSTS ASSOCIATED WITH GPs GPs can lead to significant countervailing costs as well. GPs fail to thwart/deter hostile takeovers, since payments under GPs are minuscule compared to the cost of the acquisition, thereby having little impact on the outcome. A recent example of the failure of GPs to act as takeover defences can be seen in the successful hostile acquisition of Twitter by Elon Musk in a $44 billion deal and the subsequent firing of the top executives of Twitter (including CEO Parag Agrawal), despite the fact that these executives were entitled to GPs or severance pay-outs amounting to around $90 million or more upon termination of their employment. Further, GPs do not necessarily correlate the pay with the performance of the company or the value created for shareholders. Short-lived executives may get paid large sums for little work. Executives may be paid GPs, even when shareholders and the company suffer losses or the latter becomes insolvent. Hence, GPs can lead to perverse incentives for the executive officers of corporates by providing a “guaranteed bonus” to them. Moreover, GPs are essentially sunk costs, as the acquiring entity cannot expect to gain any returns on the payments made. Executives have a fiduciary responsibility to act in the best interests of the company, and should not require additional financial incentives to remain objective and fulfil their duties. Moreover, GPs can also lead to the creation of agency cost problems, since the executive has an incentive to enable the takeover to happen, which may prove detrimental in case a takeover is not wealth-enhancing for the shareholders. Further, GPs fail to serve the interests of target shareholders and investors. They are associated with lower (risk-adjusted) stock returns and erosion of firm value. This indicates that by ensuring executives of a cushy landing after an acquisition, GPs weaken the disciplinary force on executive performance exerted by the market for corporate control and lead to increased slack. GPs may be tied to the volume, not the quality, of business, but few companies may require executives to return bonuses based on inflated numbers. Hence, GPs incentivise short-term behaviour to the detriment of long-term shareholder interests. Additionally, GPs are negatively associated with the acquisition premiums earned by target shareholders. They weaken executives’ bargaining position in acquisitions that would take place regardless of a GP. GPs can’t be used to negotiate better offers, since hostile takeovers involve little negotiation. If there is serious negotiation, it in fact becomes a friendly takeover, meaning that the GP is not a defence anymore. GP’s nature as a pre-emptive defence also prevents negotiation, as they cannot be entirely eliminated due to being guaranteed and promised in the employment contract. Hence, even if negotiation happens, executives may use their bargaining power only to extract benefits for themselves. The shortcomings indicate that the costs of GPs exceed the benefits, and the gains are insufficient to offset the losses resulting from such GPs, thereby leading to inefficient outcomes. Moreover, it is evident that GPs, instead of functioning as a hostile takeover defence, are more helpful to convert hostile

[By Amartya Sahastranshu Singh and Atika Chaturvedi] The authors are students of National University of Study and Research in Law, Ranchi.   Related party transaction [“RPT”] means “A transfer of resources, services or obligations between a reporting entity and a related party, regardless of whether a price is charged.” Simply put, RPTs are covenants between parties who share a ‘relationship’. What relationships make a party ‘related’ are already prescribed in law. Broadly, it means an ally, relative, holding company, subsidiary, an affiliated entity, etc. This concept of RPTs has quite a significance. It can create a conflict of interest between the management and the stakeholders. For instance, sometimes, dealings with related parties may occur at above or below market rates. In other words, they may not occur at an ‘arm’s length basis’. This deludes investors who rely upon the company’s financial statements. The non-disclosure of RPTs may misrepresent the company’s true financial results. Thus, disclosure is made necessary. Provisions and regulations related to RPT are widely spread across the following: Companies Act, 2013 [“the Act”] (S. 2(76), S. 177, S. 188), Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 [“LODR”] (Regulation 23), Companies (Meeting of Board and its Powers) Rules, 2014 (Rule 15), Companies (Specifications of Definition Details) Rules, 2014, (Rule 30) and Indian Accounting Standard 24. The basic functions that these laws perform are defining the nature and scope of related parties, describing related party transactions, regulating its approval and audit aspects, and extending the concept of ‘arm’s length’. Arm’s length transactions involve two related parties acting as though they were unrelated. The rationale of these provisions is to avoid conflict of interest. However, despite various regulations, the media has pointed out the growing frequency of non-disclosure and defaults in RPT approval from listed companies. Thus, SEBI, alarmed at this development, resorted to amending the law related to RPTs. The motive behind this was strengthening corporate governance, ensuring disclosure, and protecting public interest. The foundation of this Amendment was the recommendations of the SEBI Working Group. The Amendment was ushered in 2021 on the basis of their Report dated 27th January, 2020. From a bird’s eye perspective, the amendment brought the following changes in the regulations: Earlier, a ‘promoter’ was not included in the definition of a related party. But post-amendment, promoters/promoter groups are encapsulated within the definition of ‘related party’. The definition of ‘related party’ has been amended to incorporate any party having equity shares worth 20 percent or more with effect from 1st April, 2022, and 10 percent or more with effect from 1st April, 2023, either on a direct or beneficial interest basis. SEBI expanded the term “RPT” under Regulation 2(1)(zc) of the LODR to include subsidiary transactions. A transaction between the listed entity or any of its subsidiaries and any other person or entity which benefits a related party will also constitute an “RPT” as of April 1, 2023. This provision was drawn from the UK Premium Listing Rules. The Amendment also classified transactions even between two subsidiaries (including overseas) as RPTs and subjected those to the approval of listed entity’s audit committee [“AC”]. For the approval of the AC when the estimate of every transaction that surpasses 10% of the annual consolidated turnover, according to the last audited financial statements. The materiality threshold for attaining approval of shareholders has been modified to contain transactions that surpass Rs. 1000 Crore or 10% of the annual consolidated turnover, whichever stands lower. Under this amendment, the scope of RPTs has widened. Companies and their subsidiaries now require several clearances for RPTs. This poses complications for listed several companies. It will also affect the businesses of many companies because of the general business structure of India. Most of the big corporate entities in India are managed by families or groups. As of March 2020, the average number of subsidiaries for Indian public companies has more than tripled in the last 15 years. A survey by SEBI and OECD revealed that the primary reasons for the group structure of Indian companies were ‘economies of scale’ and ‘efficient resource allocation’. This cohesive structure of Indian Companies makes RPTs a commonplace. A classic example of that is the Adani Group. Companies such as Adani Transmission and Adani Enterprises have witnessed a meteoric soar of over 1000% in their share prices. However, this phenomenal growth of the Adani Group is under question, causing a political stir. Inter alia, the group is alleged to be involved in unethical RPTs. At this juncture, it is important to deal with the concept of ‘float’. Angle One, one of India’s leading full-service retail brokers defines ‘free float’ as, “shares you can trade publicly in the secondary market or the stock exchange.” Currently, the minimum float is set at 25% of total outstanding shares as per SCRR. This ensures liquidity in the secondary markets. However, the Adani Group allegedly violated these norms. Hindenberg Research which specialises in ‘forensic financial research’ recently released a report on Adani Group. Among other irregularities, it pointed out several undisclosed RPTs. The report highlighted that the close relatives and associates of Gautam Adani, the chairman and founder of the Adani Group, were running several shell entities offshore. These entities are allegedly the largest public  (‘non-promoter’) shareholders of the Adani Group. Moreover, the research explicitly pointed out that “4 of Adani’s listed companies are on the brink of the delisting threshold due to high promoter ownership.” According to the data from the research, the following is the percentage holdings of the promoter group: Sr. Listed Entity Percentage Holding by Promoter Group 1 Adani Power 74.97% 2 Adani Total Gas 74.80% 3 Adani Transmission 74.19% 4 Adani Enterprise 72.63% As evident, about 75% of the shares are held by the promoter group. Only 25% of the total outstanding shares have been left floating. Here, those offshore shell companies come into the picture. They hold the lion’s share of the float. The public is left with very low liquidity.