Contemporary Issues

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

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

[ By Paridhi Gaur] The author is a student at the University School of Law and Legal Studies, Guru Gobind Singh Indraprastha University. Introduction The enactment of the Insolvency and Bankruptcy Code (hereinafter, “IBC”) was a paradigm shift in resolving debt-ridden companies expediently and without compromising on the value maximization of assets. Remarkably, it put the creditors on a pedestal by giving them decision-making powers in the Corporate Insolvency Resolution Process (hereinafter, “CIRP”). Financial creditors and operational creditors are empowered to initiate CIRP against corporate debtors under Sections 7 and 9 of the IBC, respectively. In Innoventive Industries Ltd. vs. ICICI Bank (hereinafter, “Innoventive”), the apex court had laid down that the NCLT must admit these applications if they are defect-free and upon satisfying itself on the following two grounds: whether there is an existing debt which is due, and whether the corporate debtor has defaulted in making a payment towards such debt. However, through its recent ruling in Vidarbha Industries Power Ltd. vs. Axis Bank Ltd. (hereinafter, “Vidarbha”), the Court has diluted this twin test. The NCLT now has the discretion to reject an application by a financial creditor to initiate CIRP, despite the existence of debt, by accounting for certain factors like the financial health and viability of a company. Contrastingly, an application of the operational creditor in a similar situation is mandatorily to be accepted, unless there is a pre-existing dispute between the parties about the debt. In this article, the author seeks to analyse if the apex court was right in unsettling a settled law or if the same is an attempt to reinvent the wheel. Factual Matrix Vidarbha Industries Power Limited (hereinafter, “VIPL”) is a power generating company and its business is under the regulatory control of the Maharashtra Electricity Regulatory Commission (hereinafter, “MERC”). MERC determines the tariff chargeable by electricity generating companies. As a result of certain developments between 2003-2013, a dispute arose between VIPL and MERC on the amount of the final tariff. The Appellate Tribunal for Electricity (APTEL) decided in favor of VIPL, who claims that a sum of Rs. 1,730 crores is realizable by it in terms of this order. However, MERC appealed this decision before the Supreme Court and the same is pending. As of date, the apex court has not granted a stay on the APTEL order. In 2021, Axis Bank Private Limited, a financial creditor of Vidarbha, filed an application for commencing insolvency against VIPL and claimed that Rs. 553 crores are owed to it. VIPL sought a stay on these proceedings on the ground that the appeal by MERC is pending before the SC. They argued that since the receivable due to them exceeds the claim amount, initiating CIRP is not necessary. The NCLT found no merit in this submission and reasoned that pending decisions are extraneous matters and therefore, cannot have any bearing on an application under Sections 7 or 9 of the IBC. The NCLAT, in appeal, upheld the decision of the NCLT. Aggrieved, Vidarbha approached the SC. Decision of the Supreme Court VIPL roped in the rule of literal interpretation to assert that Section 7(5)(a) of the IBC is discretionary because the legislature has used the word “may” instead of “shall” while giving the NCLT the power to admit an application. It was pointed out that if the legislature meant to impose a compulsion, the word “shall” would have been used, like in the parallel provision of Section 9(5)(a).  Therefore, the NCLT may reject an application, despite there being a debt, to meet the ends of justice. VIPL’s fleshed-out submissions before the apex court compelled a judicial interpretation of the legislative intent through the terminologies used. The Court agreed that the legislature, by making the active choice of using “may” in Section 7(5)(a) and “shall” in Section 9(5)(a), sought to provide different levels of discretion to the NCLT under the two otherwise similar provisions. As such, an application by the operational creditor under Section 9 is mandatorily required to be admitted, if- The application is complete in all respects; The application complies with the requisites of the IBC; there is no payment of unpaid operational debt; notices of payment or invoices have been delivered to the corporate debtor; no notice of dispute has been received by the operational creditor. On the other hand, the existence of debt (and default in payment thereof) only gives financial creditors the right to file an application. Under Section 7(5)(a), it is up to the NCLT to decide whether to admit it or not. To crystallize the contours of this discretion, a test of expediency has been stipulated. It requires the NCLT to adjudge the feasibility of initiating a CIRP by accounting for the overall financial health and viability of a company and applying its mind to other relevant circumstances. While the Court refrained from chalking out what these “relevant circumstances” entail, it justified the need for this change in status quo on the premise that the question of insolvency only arises if the corporate debtor is under financial duress. Analysis The twin test used as a touchstone for initiating insolvency was, in a way, the creditors’ paradise since it provided them a hassle-free path to recover their dues. However, the test was extremely rigid in its ambit and side-lined the corporate debtors’ interests. Even in a situation wherein the corporate debtor is solvent, but unable to meet its liabilities for the time being due to genuine extraneous factors (for example, a favorable arbitral award being under challenge), it would be compelled to sound its death knell by undergoing CIRP. In this regard, the ruling in Vidarbha will prove to be a game-changer if properly implemented. It can help prevent futile insolvency proceedings by providing the corporate debtors with a fair say in the process. Besides, the financial creditors are not prevented from filing a subsequent application under Section 7 if their dues remain unpaid. This way, the IBC’s objectives of reviving the corporate debtor and protecting the interests of