Contemporary Issues

Re–Examining the Domestic Tax Scenario in a Pandemic (Part 1)

Leave a Comment / Contemporary Issues, Guest Posts, Taxation Law /

[By Mohit Gupta] The author is a Ph.D. Researcher at Centre for the Study of Law and Governance, Jawaharlal Nehru University, New Delhi. There are various types of taxes levied by the government which can broadly be categorized into two categories – Direct and Indirect Taxes. Direct Taxes are those taxes for which the burden and incidence of the tax fall on the same person- that is the tax cannot be shifted by a taxpayer on some else and it includes takes on Income, Wealth, Corporation Tax, etc. On the other hand in the case of Indirect taxes, the burden, and incidence of the tax fall on different entities which imply that tax can be shifted by the taxpayer to someone else and includes central excise duty, Valued Added Tax (VAT), customs duty, Goods and Services Tax (GST), etc. In the case of direct taxes like Income tax there is usually an increase in the percentage of taxes with an increase in intervals of a threshold level of income which is known as ‘progressive rate of taxation; whereas Indirect taxes may have to be paid by customers on commodities which are consumed by rich or poor irrespective of their income levels (like VAT on petrol, diesel or GST on eatables like biscuits, butter, etc.) and thus an increase in indirect tax hurts the poor more compared to the rich making them ‘regressive taxes’. It is important to keep this otherwise obvious distinction in mind regarding the nature of taxes. It is based on this difference and other important factors that we argue that there is an urgent need to re-examine the domestic tax scenario in the country in order to meet the economic challenges posed by the recent Covid-19 pandemic. This is more so because supply bottlenecks notwithstanding, what is a grave problem currently is a demand constrained economy. Thus, there is an urgent need for an expansionary fiscal policy that can revive domestic demand by an increase in government expenditure; more so because there is a near collapse of all other domestic activity following a negligible expenditure by household and private sector (Ghosh, 2020). In these difficult times, an impetus for such a policy can come from raising the tax revenues alongside other measures, especially when the government is reluctant to raise its borrowing (to fund any extra government spending)  to adhere to its objective of keeping the fiscal deficit in check. However, it is another matter of concern that the obsession of the government of keeping ‘fiscal deficit to Gross Domestic Product (GDP)’ ratio in check by not increasing government expenditure in times of a pandemic is a flawed economic policy because an attempt to do so by suppressing government expenditure, in turn, will lead to lower GDP which implies a lower denominator value in fiscal deficit to GDP ratio and thus an increase in the overall value of deficit ratio even with similar expenditure (Chandrasekhar and Ghosh, 2020). Be that as it may, let us shift our focus back towards gauging at ways resorted by the government for raising the tax revenues in the present times while struggling to keep the deficit ratio in check. In the present discussion, we shall keep our focus on two of the important taxes of the government and the need to re-examine their levy in times of a pandemic. One of these is a direct tax (Corporation tax) and the other is an indirect tax (GST). In addition to these two taxes being the key contributor to the overall tax revenues of the government, the need for re-assessing and focussing on these two taxes, in particular, emanates from the fact that there have been some key developments around them recently which requires a re-examination which is pointed out in the ensuing discussion. First, if one talks about the direct taxes then taxes on income is the main source of direct taxation in India. The rules for income tax in India are defined by the Income Tax Act, 1961. The rates of taxation for various entities (Individuals, HUFs, Firms, Companies, and Others)  laid down in this Act are amended every year through the Finance Act. These rates which are prescribed by law are called the ‘statutory rates of taxation’. These are defined in terms of tax slabs where a percentage of taxation is announced corresponding to a certain threshold income level. However, the income earned by the various assesses is not always subjected to this statutory rate of taxation. The total income that is subjected to taxation is reduced from the original income because of various deductions available as per law. Thus there is a distinction between the statutory rates prescribed by law and what actually the assessee end up paying as taxes because of these deductions. The actual payment of tax as a proportion of the total declared income of the assessee is the ‘effective rate of taxation’ (Bandyopadhyay, 2012; Rao, 2015).  Thus to put it simply, the effective tax rate paid by an assessee can be computed as the ratio of tax paid to the total income expressed in percentage terms. The effective rates of taxation by their very construct are thus lower than the statutory rates of taxation. It is important to understand this distinction in the backdrop of the recent changes in the corporate tax rates in India which were announced last year on 20th September 2019 through the Taxation Laws (Amendment) Ordinance 2019 by making amendments in the Income-tax Act 1961 and the Finance (No. 2) Act 2019. This amendment and the corresponding reduction in the corporate taxes were hailed as unprecedented structural reforms in the history of the country which were aimed at reviving a sluggish economy by boosting private investment[1]. After this amendment, the effective rate for existing companies was slashed to 25.17% (including surcharge and cesses) while that for new manufacturing companies (incorporated after 1st October 2019) the effective tax rate was slashed to 17.01% (including surcharge and cesses) subjected to the condition

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Standard Essential Patents: The Controversial FTC v. Qualcomm Judgement

Leave a Comment / Competition Law, Contemporary Issues /

[By Varsha Jhavar] The author is a student at Hidayatullah National Law University, Raipur. Introduction The world’s leading company in 5G innovation is embroiled in antitrust litigation with the United States Federal Trade Commission (hereinafter FTC), the US’ competition regulatory authority. On 21 May 2019, Judge Lucy Koh of the United States District Court for the Northern District of California held that Qualcomm was in violation of its antitrust obligations under the FTC Act. As the world is transitioning to 5G, the present case which lies on the interface between intellectual property law and competition law is of grave importance to holders and licensees of standard-essential patents(hereinafter SEPs). Qualcomm licenses its patented technologies to more than 340 companies, particularly to original equipment manufacturers (hereinafter OEMs) such as Apple, Samsung, Motorola. This article analyses the controversial 233-page decision in FTC v. Qualcomm as well as its potential impact, if the decision is upheld by the Ninth Circuit. Factual Background and Issues Qualcomm is engaged in the manufacturing of ‘modem chips’ that facilitate smartphone communication over cellular networks by utilizing industry standards such as CDMA, LTE. In 2017, FTC filed a complaint against Qualcomm alleging that through its unique business model the latter had monopolised two modem chip markets – CDMA(3G) and LTE(4G). The complaint was filed under section 5(a) of the FTC Act that prohibits ‘unfair methods of competition’. In November 2018, the District Court granted FTC’s request for The Court gave its final decision on 21 May 2019, where it primarily dealt with three issues – first, whether the Defendant followed a ‘no license-no chips’ policy; second, whether the Defendant had refused to license SEPs to its competitors in the modem chip market; and third, if the Defendant had coerced Apple into a de facto exclusive dealing arrangement. The FTC’s chief argument, the ‘no license-no chips’ policy, essentially states that Qualcomm abused its considerable market dominance in the modem chip segment, to strong-arm its chip buyers to enter into agreements for patent licensing and exclusive modem chip arrangements. Court’s Decision Judge Koh ruled in FTC’s favor, holding that Qualcomm by exhibiting ‘exclusionary conduct’ had acted in violation of the Sherman Act and thus, the FTC Act. The court found that Qualcomm had been involved in anti-competitive conduct against OEMs such as Apple, through the utilisation of its market dominance in the chip sector for securing higher royalty rates and also providing conditional rebates to OEMs who agreed to exclusive arrangements. With regard to licensing to competitors, the court citing Aspen Skiing Co. v. Aspen Highlands Skiing Corp. held that Qualcomm had an antitrust duty to license to rivals such as Intel and MediaTek, and that its conduct had harmed competition. Further, it observed that the agreements between Apple and Qualcomm were de facto exclusive licensing arrangements, as Apple had been compelled into procuring a substantial portion of their chip supply from Qualcomm. Judge Koh found that Qualcomm’s anti-competitive conduct had not been discontinued, and issued an injunction requiring it to negotiate patent licenses in good faith and facilitate the availability of licenses to its rivals on FRAND terms. Analysis Judge Koh’s decision has been praised and criticised by many, but in my opinion, there are certain concerns that the judgement failed to address. The injunction granted against Qualcomm is broad in nature and might result in a change in its business model. The remedy should have been tailored according to the specific problem, taking into consideration the potential adverse effect on innovation. Judge Koh has also failed in territorially limiting the injunction, incorporating actions that would come under the purview of foreign antitrust authorities. In the US, a claim for monopolisation cannot be brought solely on the basis of excessive pricing, it requires the exclusion of rivals, which is not the situation in this particular instance. The Aspen Skiing case is not concerned with the licensing of patented technologies, thus the court’s reliance on it is questionable. The injunction is expected to have an effect on Qualcomm’s R&D spending in 5G technology and consequently, will affect its ability to compete with other players in the market. Conditional pricing and loyalty rebates should not be considered anti-competitive,as it is a part of the business model of many companies and this decision will have a negative impact on them. The District Court had evaluated the case under the law of California and the policies of the two specific SSOs of which the Defendant was a member. The court failed to clearly specify that its partial summary judgement only applied to this particular case and not to all SEP holders subject to FRAND terms under any SSO. Judge Koh erroneously qualified the royalty rate as being ‘unreasonably high’, failing to consider any established royalty rates for determining a reasonable royalty rate. Any diminishment of Qualcomm’s global leadership could potentially affect the US’s leadership in 5G. This judgement also raises national security concerns as the company is a trusted supplier of products and services to the US Department of Defense. Current Status Qualcomm filed an appeal to the US Court of Appeals for the Ninth Circuit and pending appeal, in August 2019 the court partially stayed the injunction ordered by Judge Koh. Amicus briefs have been filed by various organisations and individuals working in the sectors of economics and law, such as the Department of Justice (hereinafter DOJ), Retired Judge Michel, International Center for Law & Economics, Scholars of Law and Economics. The DOJ criticising this decision stated that it threatens ‘competition, innovation, and national security.’ It was even condemned by a sitting FTC commissioner, Christine Wilson, averring that the decision has created for SEP holders ‘a perpetual antitrust obligation to sell every product to every competitor.’ On 13 February 2020, the Ninth Circuit heard oral arguments and the DOJ had also been granted time to argue on Qualcomm’s behalf. The court mainly attempted to determine whether Qualcomm’s behaviour was hyper-competitive or anti-competitive, as the Sherman Act does not prohibit hyper-competitive behaviour. The

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Amendments to the Indian Stamp Act – Ushering into a New Regime

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[By Saksham Shrivastav and Urvisha Kesharwani] The authors are students at the National University of Study and Research in Law, Ranchi. To retrench the needless overlaps of liable stamp duties in the earlier regime and provide a more uniform and centralized collection system, the Government of India (“Government”) last year introduced certain legislative amendments. The amendments brought in by  Chapter IV of the Finance Act 2019 (“Amendment”) to the Indian Stamp Act, 1899 (“Stamp Act”) along with the Indian Stamp (Collection of Stamp Duty through Stock Exchanges, Clearing Corporations, and Depositories) Rules 2019 (“Rules”) finally came into force from July 1, 2020. However, this Amendment comes into effect after facing several delays as it was originally supposed to be implemented from January 9, this year. Since the power of imposing stamp duties falls under all the three lists depending upon the nature of the transaction, it allows different states to levy different stamp duty rates for the same instrument. Thereby in the prior regime, multiple incidences of duty were allowed, this not only caused varying rates for the same instrument but also raised the transaction cost in the securities market thereby impeding capital formation. Through these reforms, the Government aims to create a more cost-effective, zero-evasion centralized mechanism by harboring a uniform approach and curbing down the unnecessary transaction costs. This is not only expected to enhance capital formation but also minimize jurisdictional disputes. Following is an analysis of some of the major reforms that have been introduced in the new regime. a) Streamlining the Definitions The Amendment has brought about changes in some existing definitions and has introduced some new definitions in order to keep up with the ever-changing securities market. Following are some of the key inclusions: Instrument: The definition of ‘Instrument’ has further been broadened by the Amendment and now encompasses, a document, electronic or otherwise, created for a transaction in a stock exchange or depository by which any right or liability is, or purports to be, created, transferred, limited, extended, extinguished or recorded. Securities: A more inclusive definition for ‘securities’ has also been introduced. The prior exposition of the term ‘securities’ given under section 8A of the Stamp Act was drawn from the definition in the Securities Contract (Regulation) Act, 1956 (“SCRA”) for the purposes of that section. The Amendment has introduced the definition of ‘securities’ which now includes: Securities as defined in clause (h) of section 2 of the SCRA; ‘Derivative’ as defined under the Reserve Bank of India Act, 1934; Certificate of deposit, commercial usance bill, commercial paper, repo on corporate bonds and such other debt instrument of original or initial maturity up to one year; and Any other instrument declared by the Central Government, by notification in the official gazette. It is a, however, essential to bring to attention the fact that despite the amendment, there remain several instruments that lack clarity on whether they would come under ‘securities’. These include Warrants, Units issued by Real Estate Investment Trusts (REITs), Infrastructure Investment Trust (InvIts), and Alternate Investment Funds (AIFs) governed by the Securities Exchange Board of India (SEBI), under the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (FDI Rules), these were categorized by the RBI as ‘Non-Debt Instruments’. Debentures: Under the previous regime, the term ‘debentures’ was not defined under the Stamp Act and only ‘debentures’ that came under marketable securities were stamped as per Article 27 of the Stamp Act. Further, the amendment has also excluded the ‘debentures’ from the definition of ‘bonds’ thereby, preventing any state government from charging stamp duty on the issuance of debentures under the classification of bonds. Market Value: Prior to the Amendment the stamp duty was collected on the value of the security according to the average price or the value thereof as on the date of the instrument. However, now the stamp duty will be calculated on the ‘market value’ of security to ensure that the stamp duty is levied on the price it is transacted rather than the average price of the day. According to section 12(h) of the Amendment ‘market value’ is defined as, in relation to an instrument through which: Any security is traded in a stock exchange, means the price at which it is so traded; Any security that is transferred through a depository but not traded in the stock exchange means the price or the consideration mentioned in such instrument; Any security dealt otherwise than in the stock exchange or depository means the price or consideration mentioned in such an instrument. b) Integrating the Stamp Duty Laws The main purpose of this Amendment was to bring uniformity in the imposition of stamp duty across the country. With the insertion of sections 9A and 9B in the Stamp Act, the provisions relating to the issue, sale, or transfer of securities have been consolidated. This has been the most significant of all the changes since earlier, different state governments would have different rates on the same instrument, which lead to ‘rate shopping’. These rate differences were heavily exploited by the companies, which resulted in widespread rate shopping, thereby causing loss to the exchequer. Apart from this, uniform stamp duty rates have been prescribed for issuance and transfer of securities. The stamp duty will now be paid by only either the buyer or the seller. For example, according to Section 9A (read with the Rules), in the case of sale of securities through stock-exchange, the stamp duty will be collected only from the buyer and in the case of sale of security otherwise than through a stock-exchange or depository, from only the seller. This will remove the double imposition of stamp duty on buyer and seller, which was happening under the previous regime. c) Centralized Collection Mechanism One of the key changes brought by the Amendment is the introduction of a Centralised Collection Mechanism (“CCM”). Under CCM the stamp duty on securities will be collected on behalf of the state government by the authorized stock exchanges, clearing corporation, or depositories. The stamp

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THE DRAFT NATIONAL E-COMMERCE POLICY OF INDIA: HARMS MORE THAN IT BENEFITS

Leave a Comment / Contemporary Issues /

[By Antara Deshpande]  The author is a student at National Law University, Odisha. In the last few years, India has attracted many global e-commerce giants like Amazon, Alibaba, Google, etc., with a growth rate of 17% in the financial year 2018-19. The rapid demand and progress in the e-commerce market have gradually increased the government’s inclination to regulate and maintain fair competition. With various ongoing government programs floated to digitalize Indian commerce, the need to regulate the sector was felt even more after Walmart Inc. acquired a 77% stake in the Indian e-commerce company Flipkart. The Indian Government, in February 2019 released the Draft National E-Commerce Policy (“Draft Policy”) prepared by the Ministry of Commerce and Department for Promotion of Industry & Internal Trade (“DPIIT”), and consumers with the aim of forming a regulatory framework, to check dominant e-commerce giants and ensure fair competition. It covers broad issues of the e-commerce space separated by i) Data ii) Infrastructure development iii) E-Commerce marketplaces iv) Regulatory issues v) Stimulating domestic digital economy and v) Export promotion. The move is directed towards developing a strong ecosystem for Indian apps, however, it has also raised concerns for established entities in the field. The overall narrative of the Draft Policy revolves around personal data privacy, consumer protection, and creating a level playing field between domestic and international players, however, the strategies through which the proposed policy aims to reach these objectives seem to blur the ultimate purpose. The Draft Policy which was supposed to be enacted in 2020, has been put on hold in view of COVID-19. While the policy is focused on personal data, a separate committee has been created to study issues related to non-personal data. Key Particulars of the Draft Policy: Data security or processes sensitive data shall not make it available for entities outside India or any other third party, even if the customer consents to it. Infrastructure development– An appropriate authority will take steps to develop the capacity for data storage in India. E-commerce entities will require to localize or mirror certain data as per the required guidelines, which shall be invigilated over periodic audits. A time frame will be provided to e-commerce companies to adjust to the data storage requirements. Disclosure & monitoring– The government will reserve the right to seek disclosure of source code and algorithms on demand, with the view of striking a balance between commercial interests and consumer protection issues. The proposed policy will allow the government to review, investigate, and take any action as a security measure. Business registration requirement – All e-commerce websites or apps that are available for download in India to have a registered business entity in India as the importer on record. Export promotion– The policy will aim to streamline logistics and strengthen India’s post. It shall also reduce administrative restrictions to promote exports. A specialized cell and support policy will be created to encourage MSME export activities, along with the creation of E-commerce Export Zones (EEZ), for storage, certification, customs clearance, etc. Consumer protection– A clear representation of the country of origin on imported products shall be made. All seller details shall be made available on the marketplace website. Creation of a rogue e-commerce entities list – A list of ‘Rogue E-commerce Entities’ will be created, which will include websites or apps that sell pirated content. After verification, such websites will face stringing actions like disabled access to their website, prohibition by payment gateways, etc. under the ‘Infringing Website’s List’. Grey Areas: Definition of E-commerce The Draft Policy uses the terms ‘e-commerce’, ‘electronic commerce’, and ‘digital economy’ interchangeably. It has defined e-commerce as buying, selling, marketing, or distribution of (i) goods, including digital products and (ii) services; through an electronic network. It has, therefore, expanded the generally accepted definition given under the Foreign Direct Investment Policy (“FDI Policy”) and Consumer Protection Act, 2019, which have restricted the definition of buying and selling goods and services, over digital and electronic networks. The expanded definition could potentially qualify all web services like e-commerce, even the websites providing information services, email services, or file storage services. Considering the broad definition and the requirement for every downloadable app or website to establish a registered business entity in India, many existing global services could step back from providing their services due to the increased compliance burden. This would ultimately affect the availability of choice and quality to consumers. Hence, the current ambiguity calls for the streamlining of the definition which is in sync with the other applicable laws. Cross-border data flow The Draft Policy has emphasized time and again on its intention to restrict cross-border data flow from India to any other nation. Such a step will unnecessarily disturb the existing mode of operation and can increase the expense of established multinational companies that transfer and process data in their jurisdiction. Additionally, it will also hurt Indian startups, which extensively require data analytics services amongst many other services that global distributors deliver at affordable prices. Presuming that domestic market entrants develop a data processing infrastructure, the additional cost of data storage will consequently affect the final price of the service or product, making it more expensive for the consumers and failing the purpose of the policy. The Committee of Experts report under the chairmanship of Justice B.N. Srikrishna extensively discussed the free transfer of personal data across borders and recommended against unjustifiable prevention of international transfer of data. Moreover, a complete prohibition on cross-border data flow, seemingly avoids the provisions of the proposed Personal Data Protection Bill2019, that prescribes for monitoring of cross-border transfer of personal data under section 49, and allows the authority to discontinue such transfer, only after a proper inquiry is made on reasonable grounds, under section 54. Therefore, rather than an absolute ban on international data flow along with the requirement of data localization, a sector-specific restriction of sensitive data will be a beneficial option. Foreign Direct Investment. The Draft Policy has laid down the extant FDI norms for e-commerce

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Hinged Upon Conjectures: A Meticulous Study of WhatsApp Leak Case

Leave a Comment / Capital Markets and Securities Law, Company Law, Contemporary Issues /

[By Lakshya Garg and Vimlendu Agarwal] The authors are students at Gujarat National Law University, Gandhinagar. Background The social media platform is an all-pervading phenomenon[i] and despite of the developments that this platform has brought by providing easy access to the information it has still paved way for exploitation of the confidential information[ii]. This article, in pursuance of the objective to demystify the peculiarities in the Shruti Vishal Vora Case, is an attempt to discuss the SEBI’s Order No. Order/BD/NR/2020-21/7591-7592[iii]dated 29.04.2020 as it holds a lot of conjectures within itself. While pinning our hopes for a robust security law regime in conjunction with well-established data privacy laws the article constructively criticizes the Securities Appellate Tribunal’s (SAT) decision to penalize a person for releasing unpublished price sensitive information related to the financial result of a Company along with the challenges faced throughout the pronouncement. Factual Matrix The said case concerns itself with the circulation of Unpublished Price Sensitive Information (hereinafter referred as “UPSI”) [regulation 2 (n) of SEBI (Prohibition of Insider Trading) Regulations, 2015] through WhatsApp (group) Messages revealing sensitive information about big shot companies such as Ambuja Cement Ltd. Section 3 (1) of SEBI (Prohibition of Insider Trading) Regulations, 2015[4]prohibits communication or procurement of unpublished price sensitive information, relating to a company or security listed or proposal to be listed, to any person including other insiders except where such communications is in furtherance of legitimate purpose, the performance of duties or discharge of legal obligations. The eccentricity lies in the fact that to scrutinize similarities with the 3rd financial quarter results 2016-17 and the propagated information- about 190 devices, records, etc. were seized. To one’s surprise, the derived information closely matched with the messages circulated in WhatsApp group chats (retrieved from Shruti Vora’s device). The said Notice argued the information to be “Heard On The Street” in its defense. However, as per SEBI the mentioned figures were too accurate to be considered as estimates and held that the numbers can’t be associated with any brokerage or internal research. Hence Shruti Vora and Neeraj Kumar Agarwal both were considered as insiders and were penalized with 15 Lakh rupees each under Section 15G, 12A (d) & 12A (e) of the Securities and Exchange Board of India Act, 1992[5]for possessing and communicating unpublished price-sensitive information. Lacunae In The Method Of Investigation The method used to declare someone guilty of “insider-trading”[6]was quite simple in this case. The investigation authority looked for the information that was circulated through the WhatsApp groups and then compared it to the final declaration made by the company. However, while following the said procedure, the investigation authority faulted in the following: Due to technological restrictions, it was unable to establish the source of the information, thereby solving a case while covered with a blindfold. It didn’t focus on the possibility that the accused might have not known the information to be UPSI, thereby making the whole case an ignorance of facts. It failed to establish the thought-process that the accused might have while circulating the information. If he/she believed it to be a genuine result of market study then the whole case becomes a formality. For instance, the Bata order[7]wherein the Adjudicating officer acknowledged the communication of UPSI ahead of their official announcements but ruled out the fact that being financial analyst, brokerage firms often keep a close trace on a wide range of determining factors and are repeatedly accurate in accomplishing close estimates and figures. HOS V UPSI: The “Heard On The Street” Mockery The major argument contended in these cases was basically an attempt to prove the information that was circulated is an unsubstantiated gossip that was forwarded as a rumor or a general approximation. It further argued that these kinds of speculations are common parlances that were majorly based on financial modeling, management guidance, meetings with the management, and the other global factors. Likewise, HOS being a global formula was applied by the entire trading and investor community in the instant case to plan trades. An analysis of SEBI orders in the recent cases, solves the enigma of the information belonging to the category of UPSI as it mentions: The information was available in a closed chain group instead of being available to the public at large The information was not a result of any market research or publicly available data. Moreover, the ignorance pleaded by the market professionals regarding the nature and materiality of information is ignorance of law. The suspicion should have aroused when the information available matched with the announced result and hence should have been duly reported. Scrutinizing The SEBI Orders The basic questions such as ‘who is an insider (Section 2 (1)(g) of SEBI (Prohibition of Insider Trading) Regulations, 2015)’[9] or ‘what is UPSI’[11]: The subsequent announcements made should be the result of the leaked information. However, the inability to trace back the source is irrelevant in determining whether such information was UPSI. The evidence could not lead to the fact that the purported UPSI was a product of the field-based market information which is non-discriminately available in the public domain. The accused was a financially literate person who was well aware of the functioning of the securities market. Regardless of this, they were an instrument in the “chain of communication”. No alarm was raised by the accused, even when they found out that the circulated information matched the announced results accurately. When the SEBI applied the above facts to the settled legal positions, it found that accused were the insiders and the information was undoubtedly ‘UPSI’. In the end, the gist of the matter was the nature, possession, and a pattern of circulation of information. The Intricacy Of The Investigation: In various domains of law, we often observe an intersection between private rights of an individual and the decision making for the public interest at large[12] (in this case the investors). This creates a scenario where one cannot be achieved without disturbing the other. A similar encounter could be seen

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KMB v RBI: A Summary of a Decade Old Battle Over Ownership of Private Banks

Leave a Comment / Company Law, Contemporary Issues /

[By Rohan Aneja] The author is a student at Rizvi Law College, Mumbai The Reserve Bank of India (“RBI”) issued Guidelines for the entry of new banks in the Private Sector dated January 3, 2001 (“2001 Guidelines”) which required promoter contribution to be a minimum of 40% of the paid-up capital of the bank at any point of time with a 5 year lock-in period from the date of license; any excess of 40% had to be diluted within 1 year of commencing operations. The RBI revised the minimum promoter shareholding to 49% vide notification dated June 7, 2002. Pursuant to these guidelines, Kotak Mahindra Bank (“KMB”) was issued its license on February 6, 2003, with its promoter stake at 49%. Regulatory Dispute It is after this point that the RBI issue the Ownership and Governance Guidelines dated February 28, 2005, which capped the shareholding of any single / group of related entities to 10% of the paid-up capital and required any existing entity holding more than 10%. This was done to indicate a timetable for the reduction of the holding to the permissible level. KMB was asked to comply with the guidelines and it disputed the same on the grounds that it was contrary to the terms on which KMB’s license was granted. After several correspondences, KMB accepted RBI’s proposed timeline to reduce the promoter stake. Meanwhile, the RBI issued the revised Ownership and Governance Guidelines dated February 23, 2013 (“2013 Guidelines”) which provided that Promoter / Promoter Group will be permitted to set up a bank only through a wholly-owned Non-Operative Financial Holding Company (“NOFHC”). The restrictions on ownership were 40% of the total paid-up voting equity capital with a 5-year lock-in period, followed by a reduction of 20% within 10 years and 15% within 12 years from the commencement of operations. The RBI has also issued a Master Direction on Ownership in Private Sector Banks dated May 12, 2016, which permitted promoter/promoter group of all existing banks, shareholding in line with what has been permitted in 2013 Guidelines on licensing of universal banks, which is 15%. In 2016, KMB refused to comply with the above timeline since it merged with ING Vysya Bank, whereby its promoter shareholding reduced to 33.6%. Thus, the RBI extended the timeline to achieve a 30% reduction by June 30, 2017, 20% by December 31, 2018, and 15% by March 31, 2020. Issue of PNCPS On August 2, 2018, KMB, in an attempt to circumvent the RBI Guidelines, issued perpetual non-cumulative preference shares (“PNCPS”) worth INR 500 crore with a dividend of 8.10%, at which point its promoter shareholding which stood at 30% would be reduced to 19.7%.  The issue was pursuant to the Master Circular on Basel III Capital Regulations dated July 1, 2015, which classify PNCPS as Additional Tier 1 Capital that does not have any put options but does have a call option after 5 years with RBI approval. Thus, assuming the equity base remains the same after 5 years and KMB decided to use the call option, the promoter stake would revert to 30%. The purpose of diluting the promoter shareholding to 15% was to avoid concentration of control with the promoters and as such the issue of PNCPS did not meet the promoter holding dilution requirement. KMB argued that the shares were perpetual, non-convertible, non-redeemable preference shares which do not carry any voting rights and are non-cumulative, essentially a mid-way between debt and equity. Moreover, KMB obtained RBI permission to amend its Memorandum and Articles to issue the PNCPS. Legal Dispute and Settlement The RBI issued a Show Cause Notice (“SCN”) dated October 29, 2018, to KMB on the grounds that KMB has not submitted a proposed plan for reducing the promoter shareholding as per the timelines. KMB replied to the SCN vide letter dated November 2, 2018, stating that it is without jurisdiction and not maintainable in law. On December 10, 2018, KMB filed a Writ Petition against the RBI before the Bombay High Court challenging the SCN as well as the restrictions on promoter shareholding, contending that the terms on which the license was granted cannot be altered and any changes in the Guidelines run prospectively. KMB withdrew the Writ Petition on January 30, 2020. KMB and the RBI reached a settlement whereby the promoters voting rights will be capped at 20% of paid-up voting equity share capital until March 31, 2020, and at 15% from April 1, 2020, which aligns with the 2013 Guidelines as well as Section 12(1) of the Banking Regulation Act, 1949 (“BR Act”). Further, promoter shareholding would be diluted to 26% within 6 months and promoters will not purchase any further paid-up voting equity shares till the percentage of promoters’ shareholding reaches 15% or such higher percentage as the RBI may then permit. On June 2, 2020, Uday Kotak sold 56 million shares held by him in KMB for INR 6,900 crore through a block deal which reduced his stake from 28.93% to 26.1%. This leaves a dilution of the excess 0.01% stake to comply with the settlement. Conclusion Although the issue of PNCPS was well within the bounds of the RBI Guidelines and Section 12(1)(ii)(b) of the BR Act, it violated their spirit as the promoter control over KMB would not be effectively reduced. In the SCN, the RBI could only challenge the issue of PNCPS without submitting the roadmap to RBI, and not the issue itself. If KMB succeeded before the Bombay High Court, the RBI would have likely challenged the circumvention of the Guidelines before the Supreme Court. Thus, the cap of 15% on promoter voting rights and the dilution of Uday Kotak’s stake to 26% was an acceptable compromise.

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Assessing Competition and FDI Policy Concerns over Cloud Kitchens

Leave a Comment / Competition Law, Contemporary Issues /

[By Sanchit Khandelwal and Shreya Iyer] The authors are students at NALSAR University of Law. Over the past decade, Indian market landscape driving on the shoulders of technology and innovation has changed drastically. Convenience and comfort have now become an important consideration in the lives of people, especially millennials. Such alterations in the lifestyle of the society or part of the society have stimulated and pioneered the emergence of certain business opportunities like food deliveries. The advent of food aggregating platforms like Zomato, Swiggy, etc. has made food delivery service an intrinsic part of our lives and the restaurant industry. Hectic lifestyle, economical rates, promotional schemes and multiple cuisines have contributed to this growth. According to the CCI market study on e-commerce in India (hereinafter referred to as CCI’s study), growing at a rate of 12% annually, food deliveries today make for 29% of restaurant revenue and 78% of restaurants can be found online. High demand, coupled with increased purchase power is likely to ride the Indian online food delivery industry to touch $5Bn by the end of the year 2023. Banking on the promising prospects of the food delivery business, there has been an emergence of a distinct delivery only restaurant model known as ‘cloud kitchen.’ Cloud kitchens are delivery exclusive restaurants that do not offer dine-in facility. Lower fixed cost, variable cost and operating cost adds flexibility to the new model and enables rapid expansion into newer territories, which is evident from 80% growth in non-metro cities. Most of these cloud kitchens take orders through food aggregators. In the last 2-3 years, several food aggregators have invested significantly in cloud kitchens, and some have even launched their own private labels. Food aggregators like Swiggy and Zomato have promoted the inclusion of these cloud kitchens on their platforms. For example, Swiggy through its #SwiggyAccess service provides free real estate to select restaurants and bills them on a revenue sharing model per delivery. Such developments wherein the food aggregators (owning or having a stake in cloud kitchens) have assumed the dual role of the operator of the platform and the seller not only draws competition law related concerns but also seems to be at cross with the FDI policy of the country. Competition law related concerns The dual role assumed by the food aggregators as a platform sketches an inherent conflict of interest between the platform’s role as an intermediary between the consumer and the seller on the one hand and as a market participant on the other. The market outcome of platforms lacking neutrality is likely to be compromised by being under the influence of the food aggregators (marketplace) rather than being a result of pure competition based on merits. The absence of platform neutrality allows the food delivery platforms to establish their leverage in their favour through access to transactions data and ranking of search results. The food aggregators role as an intermediary platform provides them with competitively critical data such as price, quantities sold, demand patterns, etc. pertaining inter alia to each product, seller and geography. Access to such data allows the platforms, which are also the sellers, to enhance the sale of its preferred sellers and better target the introduction of their own private labels. As per the CCI’s study, several restaurant owners have alleged that with the cross usage of data, several food aggregators have launched their own cloud kitchens in high demand food categories in hyper-local markets. Seller’s interaction with customers on the platform depends upon the seller’s ranking on the platform in response to related search queries generated by customers. The organic search ranking which any restaurant obtains is generated by the platform’s algorithm. It is the platform that tunes the algorithm and is in control of the search parameters and results. The duality of the platform hints towards biases that may creep in search rankings, a critical determinant of consumer traffic that one can attract. Several respondents (restaurant owners) of the CCI’s study complained that platforms’ algorithms are devoid of transparency and cloud kitchens, in which platforms themselves have stakes, are placed better on the platforms. Such manipulation by platforms with search results, seller’s data and user reviews hamper the ability of independent restaurants to compete effectively with the vertically integrated entities or the platforms’ preferred entities. The European Commission in the Google shopping case charged Google with $2.7Bn fine for using its position as a search engine to push its own shopping comparison website to top of search results. In 2019, the CCI had fined Google $21 million for ‘search bias’ and abusing its dominant market position. In the Indian food aggregators marketplace, Zomato and Swiggy are the two major market leaders and after the acquisition of Ubereats by Zomato, Zomato is likely to become the dominant market leader in the relevant market. Unfortunately, the CCI unlike its foreign counterparts has disregarded the prospective and potential effects of such conduct on the existing as well as future competition. However, it seems that the new policy on FDI in e-commerce has come to the rescue, as it lays down general restrictions on the activities of the e-commerce in India. Do cloud kitchens flout FDI policy? The new FDI policy that came into effect in February, 2019 mandates business models of online players to realign themselves with the new guidelines. Additionally, the new policy restricts the sale of those goods by the platform in which they have an equity participation. The FDI policy identifies two types of e-commerce models, the marketplace model and the inventory model. According to the marketplace model, the e-commerce enterprise should solely act as a technology facilitator between buyers and sellers. Whereas, under the inventory model there exists no such restriction on the e-commerce enterprise to own goods and services that it trades on its platform. Further, up to 100% FDI is allowed under the marketplace model and none under the inventory model. Most of the food aggregators, if not all, are backed by FDIs and therefore, are

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Moody’s optimism turned sour: Need to review the FRBM Act, 2003

Leave a Comment / Contemporary Issues /

[By Dushyant Sharma and Sanskriti Shrimali] The authors are students at Nirma University, Institute of Law Introduction One of the premier rating agency, Moody’s has recently joined the league of other two rating agencies in downgrading India’s status to the lowest investment grade option. In its report dated 1st June 2020, the agency stated that it has downgraded India’s sovereign rating to Baa3 from Baa2 with a negative outlook which reflects deeper stresses in the economy and financial system of the country. The report also explicitly mentioned that this action has not been taken in the wake of pandemic and has not been affected by its implications. Key reasons highlighted for adopting this stand are worsening fiscal discipline, rising stress in the financial sector and prolonged period of slow growth compared to India’s potential. Further one more downgrade would lead India to ‘Junk’ rating. This action would seriously impair the country’s creditworthiness as it would become difficult to raise money from the international market coupled with higher interest rates. However, the agency maintained that this event is unlikely to happen in the next 24 months while citing caution that if the current economic scenario worsens and growth does not pick up then the junk bond rating would be suicidal for the government. It should be noted that it is the same Moody’s which had approved government’s institutional reforms back in November 2017. So, why the optimism of Moody’s turned sour towards India, and what reform policies should be adopted by the country to push the economy back on its track? Among the major reasons for downgrading India’s rating, lack of fiscal discipline continues to be the prominent one. Prudent management of public finances demands a comprehensive fiscal rule to be adopted by the country. For instance, a fiscal rule is a legislated cap being put on budgetary aggregate to maintain the fiscal discipline of the country.[i] The importance of maintaining a fiscal discipline is greatly emphasised by the developed and emerging economies. In line with the same, India also enacted Fiscal responsibility and Budget management Act (FRBM), 2003 to maintain the state of finances in the country. The act provides the fiscal deficit to be reduced steadily to 3% of gross domestic product (GDP) by 31st March, 2021. Despite the mandate, the government has been breaching its own fiscal target for the  past few years with the experts warning that the deficit numbers for FY 21 could be as high as 7% of GDP against the budgeted 3.5. A rise in the percentage of fiscal deficit is obvious this year as the first two months of FY21 has seen highly restricted economic activity leading to lower tax collection and increased spending of government due to COVID-19 pandemic. In budget session of 2020-21, the union government announced to spend around Rs. 30,42,230 crore this year and the shortfall of Rs.7,96,337 crore against the expenditure would be financed through borrowing, but the Corona crisis has completely disrupted this calculation. Amid this crisis, various economist believed that estimated revenues of the government would take a big hit due to stalled economy for nearly 2 months. The economic stimulus of Rs. 20 lakh crores, out of which actual spending is merely Rs. 1 lakh crore clearly shows the inability of the government to spend more. This clearly signifies that the past deviations from the fiscal targets is seriously impairing the ability of the government to spend more in times of serious economic crisis like the present one. To avoid free falling of the Indian economy due to such a gross negligence, it’s high time to take required reforms. In 2016 the government has realised this need and constituted a committee headed by N.K. Singh. Even after the report submission no major steps have been taken. Measures and recommendations Independent Fiscal Council In India lack of an independent institution is serious lacuna in securing compliance to the letter and spirit of fiscal rules.[ii] A sound fiscal policy is a key to maintain the overall macroeconomic stability of the country.  By 2014 more than 80 countries have adopted some or the other fiscal rules and 35 of them have constituted autonomous fiscal councils  to evaluate fiscal policies and performance of the government.[iii] As India is increasingly getting integrated with the world economy, the need for this council is indefeasible to foster the trust of international investors. This council may be tasked with the work to identify the best rule or combination of rules to be applied in India. For instance, there are four fiscal rules namely Budget Balance Rule, Debt rule, Expenditure rule and Revenue rule. Apart from this, the council would also oversee that the fiscal target of the government would not go off track and suggest measures for the same. At present all these activities are performed by various institutions like the Finance Commission, NSO and Office of CAG. An Integrated autonomous institution in the form of Fiscal Council must assume all these functions to cater to the emerging needs of the market. 14th  Finance Commission have also advocated for such an Independent body, tasked with maintenance of fiscal discipline in the country. Transparency provided by this council would help to deter discretionary shifts from the existing fiscal targets of the government. At present when the whole world is looking towards India as an alternative to China, the constitution of this council must be announced by the Union government in the next budget session of 2021. The existence of such independent council can be seen in developed economies like UK (Office of Budget responsibility) and USA (Congressional Budget Office). These councils provide budget analysis as well as evaluate that legislative actions do not result in breach of spending levels set by the budget resolutions. Debt-ceiling The rising public debt to GDP ratio of India is an area of concern. With an estimated 69% of public debt to GDP ratio, the country has been dampening fiscal prudence for the past 70 years. An obvious but often missed

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Revisiting the Competition Regulations for Big Data Based Economy

1 Comment / Competition Law, Contemporary Issues /

[Parth Tyagi and Achyutam S. Bhatnagar] The authors are third year students of the National Law Institute University, Bhopal and National Law University, Odisha respectively. Introduction In the month of April, social media giant Facebook invested over 40,000 crores, for a 9.9% stake in Jio Platforms, a unit of Reliance Industries[i]. The transaction brewed up the concerns for the possible abuse of data at the hand of these behemoths. The transaction stirred up the debate upon the lack of authority of the Competition Commission of India (“CCI”) in tackling big data-driven mergers. The article aims at addressing the inefficiencies in the current Competition act, by first defining what big data is, and how can big data give a competitive edge, following up with a discussion on the lacunas in the current merger standards. The last part of the article will lay out the different ways in which the current regulatory standards can be improved so as to cover big data-driven mergers. Big Data and its competitive advantage Big data is generally defined as ‘high-volume, high-velocity and high-variety information assets that determine cost-effective, innovative forms of information processing for enhanced insight and decision-making’.[ii] The potential misuse of data arises from such algorithmic use of datasets which the competitors in the market would not be able to duplicate. This leads to exclusivity of data, which is used to specifically target customers, who are more likely to use the company’s product/services. A perfect example of the possible abuse of the data obtained post-merger is the Google-Double Click[iii]merger. Regulatory gaps regarding data-driven mergers Section 5 and 6 of the Competition Act 2002 (“the Act”) read together, are the regulating provisions of combinations in the market. While Section 5 of the Act defines combinations, Section 6 of the Act provides for regulations of such combinations. However, Section 6 is applicable only to combinations in Section 5 of the Act, which means that CCI does not have the regulatory powers to review all kinds of combinations. Section 5 prescribes certain thresholds in terms of assets and turnovers to term certain mergers and acquisitions as combinations. The primary disability comes to light when data-driven mergers are on the rise in India. This is because big data is not considered as an asset in India, and digital companies tend not to have high turnover due to the provision of free services[iv]thus the scrutiny by the regulator is bypassed. The turnover based exemption is also a threat to privacy[v]. The acquisition of WhatsApp by Facebook is a good example[vi], wherein despite having a worldwide customer base, the acquisition eluded the CCI, while the acquisition met jurisdictional requirements in other countries and was reviewed.[vii] The traditional tools of analysis while have worked out so far[viii], but the digital economy is dynamic and a company with a huge data backing can effectively prevent the entry of new entrants in the market. Way forward Considering data as an asset Big Data in the present markets is undeniably an asset and one of the main reasons of investments, mergers and acquisitions. The future lies in data valuation programmes that can be performed which provide the framework for businesses to monetize, measure and manage information as an actual asset[ix] or through the application of infonomics.[x]      2. Introduction of alternate parameters The idea of novel parameters such as the value of transaction or deal size, which is also under consideration by CCI.[xi] The same was a key observation in the report[xii] of the Competition Law Review Committee. Additionally, network effects and control over consumers’ data prima facie appear to be sensible parameters.[xiii] The concept of big data also involves deliberations over privacy concerns, and what the authors view as a whole other debate. Competition concerns are related to privacy, but at the same time, the regulation of both cannot be a concern for a single body. Privacy in the competitive assessment muddles the goal of competition enforcement.[xiv] Adopting foreign competition regulations to tackle the Big Data-driven mergers The issue of tackling big data-driven mergers has plagued numerous countries and in response, there have been certain regulatory changes made by some countries. This section discusses the new regulatory norms for curbing big data-driven mergers adopted/proposed in different countries, which can be used to change the current regulatory standards in India. Redefining the relevant market or lowering the notification threshold The German federal cartel office, the national completion regulator of Germany, in taking a step towards combating the data-driven mergers,[xv] redefined the meaning of relevant market under section 18(2a) of the German Competition Act. The new provision tackles the free services offered by the digital platforms wherein it states that “the assumption of a market shall not be invalidated by the fact that a good or service is provided free of charge”.[xvi]  The competition regulator also added a new lower threshold for notification of merger under section 35(1)(a) of the Act. This resulted in the competition regulator being notified about the takeover of small companies by large platforms. Shifting the burden of notifying the Competition Regulator on the parties The competition act of Singapore under Section 55A(3), places the burden of notifying the competition regulator of a merger on the parties. The parties are to assess whether their merger has the potential of disrupting the competition in the future, and on the basis of this, they may or may not notify the competition regulator. If the parties do not notify the competition regulator of their merger, and subsequently the merger hampers the competition, then the competition regulator has the authority to take the appropriate action in order to restore market contestability. The provision invalidated the Grab-Uber[xvii] merger, wherein the merged entity had the potential of controlling 90% app-based taxi market. Applying the Public Interest Test A report by the House of Lords communications select committee[xviii]in 2019, recommended the adoption of a public interest test for determining the validity of the data-driven mergers. The committee suggested that such a test should be included in the

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