Contemporary Issues Archives - Page 6 of 13

RBI’s One-Cap Rule on IPO Financing – Should it be for All?

[Mehak Jain and Aditi Ghosh] The authors are students of Hidayatullah National Law University, Raipur. Introduction Post Covid-19, there has been a regime shift in terms of investing in IPOs because of the frenzy created by newer investors in the market. IPO financing is a tool majorly used by High Networth Individuals (‘HNIs’) to leverage funds for a short-period of time for the purpose of investing in IPOs. The systemic risks posed by NBFCs have prominently been a concerning topic for the country’s financial regulators ever since their exponential growth in the sector. Amongst the issues, unregulated IPO financing by (‘NBFCs’) has been viewed as a significant problem majorly due to concerns of market volatility caused by it. With the aim of regulating this practice, the RBI through its Scale Based Regulations (‘SBR’) declared a cap limiting IPO financing by NBFCs at a value of Rs. 1 crore per investor. Understanding IPO Financing In IPO financing, NBFCs take a nominal margin amount (i.e., a collateral amount that the borrower themselves put in) from the HNIs in advance in exchange for providing funding for the purposes of investing in an IPO. The borrower is the one with the highest exposure, who repays the loan by realising their allotted shares post listing gains, which happens in a span of around 6 days from the close of the IPO. In cases where the closing price is less than the listing price, thereby resulting in a loss, HNIs are nevertheless personally liable for repayment of the borrowed funds with interest. In the HNI category, there are no limits on the amount one can bid and the shares are allocated proportionately. Thus, the entire process of investing large funds into this category results in huge profits for both the investors and the NBFCs. Taking advantage of this, funds in the range of hundreds of crores are loaned per investor under IPO financing with the NBFCs contributing around 90 times the amount being invested by the investors. Evidently, this leads to concerns of market volatility and financial instability in the market, along with jeopardizing the interests of genuine long-term investors and hindering fair price discovery. Accordingly, RBI by virtue of the SBR has capped IPO financing to Rs. 1 crore per borrower with the intent of preventing abuse of the system. Benefit to the NBFC sector: Smaller NBFCs set to gain By virtue of the capping on IPO financing, smaller players are set to gain and penetrate the Rs. 80,000 crore short-term funding market. For NBFCs, the financing options for on-lending to individuals for applying to IPOs are limited. Banks are prohibited from financing NBFCs for further lending to HNIs for the purposes of IPO financing. NBFCs resort to obtaining the requisite capital either via commercial papers or via Non-Chequable Debentures. Prior to the capping, individuals have sought as much as Rs. 250 crore for applying for one IPO (such as in the case of Nykaa), and financing such a large amount is something that smaller players are not equipped with to do. Until recently, wealthy investors borrowed huge sums of money from large and established NBFCs who in return charged higher rates of interest depending on demand. With a capping of Rs. 1 crore now set in place, would not have to compete with larger NBFCs for exorbitant amounts of funding. Additionally, smaller NBFCs with expertise and dedicated focus in capital markets shall be more likely to get in and expect increased business in this regard. Concomitantly, it is relevant to note that problems of fund mobilisation and rapid increase in the number of borrowers can pose an issue. Fund raising can be a major hiccup given that the costs for raising the same shall be higher than for bigger NBFCs such as IIFL and Bajaj Finance face. Increased number of borrowers also might pose operational risks. Thus, while the capping is inclusive in nature, addressal of these concerns is pertinent for observing substantial benefit to the sector. Benefit to the HNI investor sector: Long-term genuine HNIs set to gain Just as the capping benefits a part of the NBFC sector, it also benefits a part of HNI investors. For the ones bidding genuinely for amounts less than Rs. 50 lakhs, and with an aim of generating long-term wealth, they now have a better chance of allocations in the absence of obscene values of bidding. IPO financing for HNIs works differently than for retail investors. In cases of over-subscription, while allotment for retail investors follows a lottery system ensuring allocation of at least one slot, HNI’s are allotted proportionately to the amounts they bid. This results in excessive oversubscription, where IPOs are subscribed hundreds of times of the actual IPO size. For instance, the Paras Defence IPO was over-subscribed a whopping 928 times in the NII/HNI category. Owing to the capping, genuine investors shall have better chances at availing of allotment thus leading to the creation of long-term wealth, which is something that was amiss till now given the concentration of IPO funding. Reduction of oversubscription leading to fair price discovery The objective behind IPO financing is not to “invest” per se and reap investment returns, but to book hefty short-term gains by leveraging available funds and having a quick means of “entry” and “exit”. This leads to the concentration of funds in the hands of a few, with the IPO allotment process being turned in favour of these short-term players. Such extreme concentration leads to market volatility, which hinders fair price discovery. Given that IPO financing happens in a way where the investor is funded multiple times than what (s)he is putting in, there is huge leverage which inevitably leads to huge risk that is capable of leading to a downfall of the NBFC sector. Accordingly, IPO capping by reducing the oversubscription numbers shall be beneficial in determining the actual IPO price. Recommendations The business of IPO financing is a lucrative one for both the NBFC and the investor given the short listing

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Tata to Air India and Back: Analysing the Disinvestment Process

Leave a Comment / Contemporary Issues / CBCL

[By Medha Nagpal & Anushka Agarwal] The authors are students at the Jindal Global Law School. The quest to privatize Air India has come to an end with its takeover by Talace Private Limited, a wholly owned subsidiary of Tata Sons (“Talace”) after years of unsuccessful attempts. The third and final attempt to disinvest the national carrier airline was completed with the sale of 100% equity shares of Air India and Air India Express in addition to a 50% stake in Air India and Singapore airport terminal services (“AISATS”) on January 27, 2022. Out of the total debt of INR 61,560 crore attached to the loss-making airline, Talace will take over the amount of INR 15,300 crore while the rest will be allocated to Air India Assets Holding Ltd. (“AIAHL”), a special purpose vehicle created as per the disinvestment plan. This article aims to briefly discuss the umpteen number of unsuccessful efforts made by the government while analysing potential implications of this acquisition by Talace on the aviation industry, as well as taxpayers, amongst other stakeholders. Background The first effort to sell stakes in the airline began in 2001 when the NDA led cabinet aimed to sell 60% of its shares due to losses driven by competing low-cost carriers and poor hospitality. This attempt, however, was not a success and had to be withdrawn within two years. As per the 2013 report by the Centre for Aviation, the airline suffered from “low productivity, high costs, poor staff morale, significant unresolved human resource issues and an unviable business model” making it more pertinent than ever, to privatize. The second initiative to divest that took place in the year 2017-18 also failed due to the government’s proposal to retain a minority stake of 26%, while at the same time requiring the acquirer to take charge of a larger portion of the carrier’s debts. This combination of partial control and high debts did not bode well with the prospective bidders looking to make substantial changes in the working of the airline while towards profitability in a highly competitive market. The latest attempt which involves Talace has been predicted to be a successful one for various reasons, one of which being that the government has completely parted away with the control in the airline and has given the acquirer the flexibility to decide the level of debt they wish to take along with the airline. Understanding the nuances and impact of the disinvestment process With the successful completion of the disinvestment, the new owners will have to adhere to the new directions provided on Foreign Direct Investment, according to which, the stake of foreign investments (including that of foreign airlines) in Air India has been capped at 49%, via direct or indirect means. However, Non-Resident Indians who are Indian Nationals are allowed foreign investments under automatic route up to 100% stake as opposed to the 49% earlier. This exception was carved out to make the disinvestment process more attractive than its previous attempts. A press note by the Department for Promotion of Industry and Internal Trade has categorically stated that the “substantial ownership and effective control of M/s Air India Ltd. shall continue to be vested in Indian Nationals as stipulated in Aircraft Rules, 1937” which is to mean that while foreign investments are welcome, however, the airline can never be subsumed into a foreign entity. It can be argued that the handover of the loss-making airline to the Tatas who have prior airline management experience is a step in the right direction. At the end of March 2021, Air India’s accumulated losses stood at INR 83,916 crores, an amount which could have been invested in welfare and other economy boosting activities. With the prompt sale of the airline to Talace, further bleeding of taxpayer’s money is being prevented by the government which had been spending INR 20 crore daily to keep it afloat. The takeover, in its essence, highlights the faith reposed by the government in the private sector in addition to furthering the disinvestment goals highlighted in the 2021 budget. Disinvestment of the national carrier had become necessary due to the rate of return on the employed capital was running in negative numbers for years now. Further, in 2020-21, the nation’s widening fiscal deficit standing at 9.5% of the Gross Domestic Product can be financed by disinvestment of such public sector undertakings. In terms of benefits to the Tata Group, the transaction can add value to the company by providing lucrative flying routes which are not accessible to most competitors. It provides them with a push to be a substantial player as the airline offers its bilateral flying rights, hangars and trained personnel allowing the Tatas to undertake operations immediately. The merger of Air Asia with Air India Express would increase their market share to 27% which makes it the second largest in the domestic sector after Indigo which holds a market share of 52%. However, as one may assume scrutiny from the Competition Commission of India (“CCI”), the anti-monopoly watchdog has approved the acquisition. The CCI seems to have given approval as this acquisition does not have an appreciable adverse effect on competition. Furthermore, CCI usually adopts the point of origin/point of destination approach, similarly done in the Jet- Etihad acquisition, to examine airline mergers. In such instances, every combination of point of origin and point of destination is seen as a separate relevant market for the customer. If the CCI were to find competition concerns, it can impose a set of remedies. Though providing formidable benefits, the road ahead for the Tatas is fraught with challenges with many trying to quash this acquisition. Recently, a Public Interest Litigation (“PIL”) was filed by Member of Parliament, namely, Subramanian Swamy, seeking to quash the Air India disinvestment process on the grounds that the bidding process was “arbitrary, corrupt, against public interest and rigged in favor of Tata Group”. Swamy’s contention stated that there existed only one bidder since the second bidder consisted

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Dealing with Cross-Border Insolvencies: An Analysis of the Jet Airways saga

Leave a Comment / Contemporary Issues, Insolvency Law / CBCL

[By Shivam Bhattacharya & Naman Jain] The authors are students at the Gujarat National Law University. The recent order of the Mumbai Bench of the NCLT approving the resolution plan for the revival of Jet Airways has marked the end of one of the earliest cases of cross-border insolvency determined under the Insolvency and Bankruptcy Code, 2016 (hereinafter “Code”). The final determination by the Court has in addition to providing insights into the working of the Code, also laid bare some of its limitations for resolving cross-border insolvency disputes. In pursuance of this, the authors intend to examine the entire case in light of the recent judgment by presenting the facts, orders and judgments passed. This article will also analyze the limitations of the Code in this regard and elaborate on how adopting some of the provisions of the UNCITRAL Model Law could help in dealing with similar insolvency disputes. Background The present case begins with the initiation of ‘corporate insolvency proceedings’ against Jet Airways and concludes with the final approval of the resolution plan for its revival by the NCLT. It spans three different Court orders over a period of two years. Company Petition No. 2205 (IB)/MB/2019 in NCLT, Mumbai Bench Three petitions were filed against Jet Airways, the Corporate Debtor in this case, for the initiation of Corporate Insolvency Resolution Process (CIRP) against it for the huge outstanding debt is owed. During the first hearing, the NCLT Bench was apprised of the fact that insolvency proceedings against Jet Airways had already begun a month prior in theDistrict Court of Netherlands. The Bench in this regard opined that conducting concurrent proceedings in the same matter would cause delay and vitiate the proceedings in the case. The reasoning put forth was that the two sections, Section 234 and 235 in the CODE for recognizing the orders of a foreign jurisdiction, mandate the requirement of the Indian Government to have reciprocal arrangements with the foreign country. However, the Court noted that in the instant case there were no reciprocal arrangements were made with the Dutch authorities. Furthermore, the Bench also took into consideration that the registered office of ‘Jet Airways’ and their primary assets were located in India, and therefore the NCLT had the requisite jurisdiction in the instant matter. The Bench via its order dated 20th June 2019set aside the proceedings of the Dutch Court and declared it as a nullity. The initiation of the corporate insolvency resolution process in India against Jet Airways was accepted by the NCLT. Company Appeal (AT) (Insolvency) No. 707 of 2019 in NCLAT, Delhi The order passed by the NCLT bench on the aspect of non-recognition of the Dutch proceedings was challenged before the NCLAT by the Dutch Trustee. The NCLAT considered the appeal and directed the ‘Resolution Professional’(hereinafter “RP”), appointed on behalf of Jet Airways, to consider the feasibility of having a joint ‘corporate insolvency resolution process in coordination with the Dutch Trustee. The RP along with the Dutch trustee reached an agreement for facilitating the resolution process through a ‘Proposed Cooperation’model. Both the parties reached a final agreement on the proposed model and submitted it to the NCLAT for approval. The NCLAT accepted the model via its order dated 26th September. The Bench also allowed the Dutch Court Administration to attend the meetings of Jet Airways. Interlocutory Application No. 2081 of 2020 in NCLT, Mumbai Bench An application for the final approval of the ‘Resolution Plan’ was filed before the Mumbai Bench of the NCLT. The Bench via its order dated 22nd June 2021accepted the ‘Resolution plan’ on a majority of the points, and gave a time period of 90 days to the consortium for taking the necessary regulatory approvals and permissions from the DGCA. The Bench ordered the formation of a Monitoring Committee for overseeing the entire process. Though the final determination by the Benchmarked the end of India’s first cross-border insolvency case settled under the Code, however, it raised some key concerns regarding the inadequacy of insolvency provisions in the Code. Analysis and Suggestions With transnational business increasing at a rapid pace and big corporations setting up offices in multiple jurisdictions, this decision by the NCLT assumes much significance. The final order passed has revealed several lacunae present in the Code for dealing with insolvency cases involving foreign creditors or debtors. A major point of contention was the ‘non-recognition of the proceedings which took place in the Dutch Court by the NCLT in its earlier order. The subsequent confusion and delay caused, led to the increasing chorus for including uniform provisions within the ambit of the Code, for dealing with cross-jurisdictional insolvency cases. In pursuance of this, it can be inferred that a major drawback of the provisions within the Code for resolving cross-border disputes is that it mandates the formation of separate and individual bilateral agreements with other countries for enforcing the provisions of the Code. Such a type of arrangement would in addition to requiring a lot of time and negotiations also increase the probability of conflicting claims being made from both sides in connection with the judicial proceedings undertaken by their respective Courts. In light of the aforementioned discussion, the authors are of the opinion that adopting the provisions of the UNCITRAL Model Law would be integral for reducing instances of conflict between the insolvency laws of two or more different jurisdictions. The Model Law provides for three essential and inherent provisions which aim at placing both the national and the foreign creditors or debtors on an equal pedestal. Firstly, the principle of recognition in the Model Law provides for the recognition of the Court proceedings in a foreign jurisdiction, which ensures that no unnecessary time is lost and the dispute is resolved in an effective manner. It also allows proceedings to be conducted in a parallel and concurrent manner. Secondly, the ‘principle of access’ allows the foreign creditors and debtors to attend the Court proceedings taking place in a different jurisdiction. In essence this principle aids in bringing

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The Tale of Venture Capital Funds: A New Breeding Ground of Tax Evasion?

Leave a Comment / Contemporary Issues / CBCL

[By Aarushi Kapoor] The author is a fourth year student at the Hidayatullah National Law University. Introduction The Customs Excise and Service Tax Appellate Tribunal (hereinafter ‘Tribunal’), Bangalore bench, in ICICI Econet and Internet Technology Fund v. Commissioner of Central Tax, has recently confirmed the service tax liability on the expenses incurred by the venture capital fund (hereinafter ‘VCF’), as the consideration received towards the asset management services which are employed for the administration of funds. The VCFs are incorporated as trusts. Such incorporation in the form of the trusts is always a favourable mode of incorporation because of the application of the principle of mutuality. According to this principle, a trust is not separate from its beneficiaries and hence, the activities pursuant to such an institution cannot be taxed. However, this judgment has challenged this long age industrial practice. Pertinent Facts In the present case, ICICI Econet and Internet Technology Fund was a VCF created to make large investments in portfolio companies using the contributions received from a variety of investors. For the management of these contributions, an investment manager or the asset management companies was appointed to analyse the investments received in the form of contributions and decide the future course of actions in the form of investment and disinvestment. The contributories were referred to as unit holders. It is imperative to mention that in the present case, the asset management companies in addition to providing advisory services also contributed to the fund and hence, were entitled to the payments which included a payment equal to the capital invested plus a promised rate of return like the other unit holders. Issues which required consideration This return on investment paid to the asset management companies in this instance was much more than the quantum of the investment made by them. It is here, where the bone of contention appeared. The main question before the tribunal was whether the enhanced amount being paid to the asset management companies comprised of the operating expenses and carried interest in addition to the legitimate return of investment. It was to this question, that the tribunal actually answered in affirmative by concluding that payments included payments of carried interests being made to the asset management companies in the disguise of return on investment, and hence this amount attracted the service tax liability in the hands of asset management companies. Critical Analysis: An Insights into the Implications After having discussed the background of the issue at hand, it now becomes essential to discuss the implications that this decision is likely to have on the equity industry. VCF is no longer a trust The structure of the trust is based on the principle of mutuality. According to this doctrine, whenever there is an oneness of the contributors to the fund and the recipients from the fund and the fund has been constituted for the convenience and common benefits of the members backed by the impossibility that the contributors derive profit from such contributions, mutuality comes into play. As an implied conclusion, it follows that a person cannot make profit out of himself. Hence, this profit cannot be regarded as income and hence, it is not taxable. However, accordingly to the decision of the Tribunal, the VCFs which were traditionally incorporated as trusts, have been denied to continue applying doctrine of mutuality. Accordingly to the reasoning of the Tribunal, the VCFs breached the principles of mutuality by breaking the closed circuit within which only the trust and the beneficiaries used to interact. In contravention, the VCFs made an attempt to engage in pure commercial operations in order to provide a favourable return to the contributories. In other words, it could be said that the contributions received from the contributories were invested in the portfolio companies and arrangements were created in a manner to ensure that a profitable return at the end is distributed. This resulted in the collapse of the closed circuit within which the doctrine of mutuality operated. The tribunal instead warned that the structure of the VCF fund was a mere façade. The aim of such a foul play was to provide every opportunity and fortune to the investment management companies to avoid taxation. The intent was somehow to benefit themselves through earning performance fees in the form of carried interests. Fails to analyze the other factors One of the most critical analyses of the judgment rendered by the tribunal is the fact that the order is very case specific. It is important to keep in mind that while making a judgment that is likely to have an impact on the entire private equity industry, a holistic consideration of the facts and circumstances in required. However, the judgment fails to analyse the status quo on such considerations. For instance, the detailed list of payments which the VCFs are legally entitled to make to the asset management companies as a consideration for the services rendered. The Chapter 10 of the Master Circular on Mutual Funds explains list of fees, charges and expenses which can be ideally charged by the collective investment schemes pursuant to the regulations and approval of SEBI. However, under the same guidelines, there is a prohibition on the collective investment schemes like VCFs to charge the expenses related to the payment of performance or management fees to the investment management companies. So as a necessary corollary, it can be deduced that the logical reasoning of the tribunal is backed by the SEBI regulations and circulars.[1] However, what needs to be determined is the fact that whether the enhanced payment made to the asset management companies by the VCFs comprised of the lawful payments or the prohibited performance fees. The tribunal has failed to take into account the balance sheets of the VCFs and contractual arrangements between the VCFs and the asset management companies. Detrimental for Private Equity and Management Industry The above decision of the tribunal is likely to have a very detrimental impact on the private equity Industry especially in India.

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WhatsApp Privacy Case, Competition Law and Privacy- A Comment (Part 1)

Leave a Comment / Competition Law, Contemporary Issues / CBCL

[By Sharmita Sawant] The author is a student at King’s College, London. Introduction: Digital economies have posed complicated legal questions that mandate the expansion of legal ideologies and conceptions to assimilate the changing nature of businesses. The issues that we are faced with in these economies stand at the cusp of Data Protection, Consumer Protection, and Antitrust laws. The debate around using antitrust law to solve data-related issues has been a matter of discussion for a long time-pioneers being the Google/DoubleClick merger case in the US and EU[i]. A general progression is seen in the approach of regulating agencies and academia when it comes to addressing issues related to data markets. Maybe it is the fear of false positives, chilling effect on innovation, or the cultural lag; agencies are still squeamish about applying Antitrust rules to big data companies. Nevertheless, the scene is changing as a nuanced understanding of the sector is making business behaviour and theories of harm more prominent. One of the examples of this change is the WhatsApp and Facebook privacy policy case in Germany and India.[ii] The data sharing policy of Facebook and its subsidiary WhatsApp has come under the radar of the antitrust authorities for abusing its dominant position in the market and imposing unfair privacy conditions on its consumers. The critical point of discussion in both these cases has been the jurisdictional issue- whether privacy breaches fall under the jurisdiction of Antitrust and, if so, what is the correct forum for adjudication of this issue. This article will explore the Competition Law, Data Protection, and Privacy law interplay in the context of the WhatsApp privacy litigation in India. The first part of the article will outline the jurisdictional debate in the WhatsApp case, highlighting the various arguments put forth by the opposition and the Commission. Following this, the second part is dedicated to the current legal framework, which deals with privacy issues in India, its drawbacks, and its characteristics. Finally, the author looks at whether antitrust is the correct forum to answer privacy issues in the context of the WhatsApp decision. 1] WhatsApp Privacy Case 2021- An Overview: The Competition Commission of India took suo-motu cognizance of WhatsApp’s new Privacy policy with its order dated 24th March 2021. WhatsApp’s updated privacy policy included terms and conditions which allows it to share user data across all informational categories with other Facebook Companies. It notified its users to accept the new policy on a ‘take-it-or-leave-it basis to continue using the services of the App. CCI found that the new privacy policy violates Section 4 of the Competition Act, making a prima facie case for abuse of dominant position. Both WhatsApp and Facebook are made a party to the ongoing suit. CCI held that WhatsApp is a dominant player in the market for “over-the-top messaging apps through smartphones in India.” The Commission relied on its market analysis in the In Re Harshita Chawla and WhatsApp Inc. case to reaffirm that WhatsApp works on direct network effects, wherein, increase in the usage of a particular platform leads to an increase in its value for the other users[iii]. The network effects as well as lack of interoperability between various messaging platforms work in favour of WhatsApp. This makes it difficult for the users to switch apps easily, making the service provided by WhatsApp not substitutable.CCI noted that these conditions made WhatsApp is an entrenched entity which it is leveraging to impose unfair terms on its users. CCI observed that privacy is a crucial non-price factor when it comes to competition. It held that a reduction in consumer data protection and privacy is considered as a reduction in quality under the Competition Act. Lower privacy not only impacts consumer welfare but also has exclusionary effects.CCI opined that integration of consumer data reinforces the dominant player’s position in the market which it can use in neighbouring or unrelated markets to increase entry barriers. WhatsApp challenged this decision before the Delhi High Court.[iv] WhatsApp argued that CCI lacks jurisdiction in the matter due to the pending litigation before the Supreme Court, dealing with WhatsApp’s Privacy Policy under Article 21 of the Constitution. They also relied on the In Re Shri Vinod Kumar Gupta and WhatsAppjudgement wherein CCI had declined to look into WhatsApp’s privacy policy in 2016, stating that it was outside the purview of the Competition Act.[v]The court replied by clarifying that the scope of the CCI is vaster and is not confined to the issues raised before the High Court or the Supreme Court in this matter. The High Court also upheld CCI’s observation that data sharing between WhatsApp, Facebook, Facebook allied apps, or third-party apps has led to degradation of non-price factors of competitiveness, thus causing consumer harm. Stating these reasons, the court reiterated that the matter falls within the jurisdiction of CCI. It is interesting to see how CCI’s views have changed through the years on privacy and data protection. This is a welcomed change in the right direction, but with the chaos of privacy laws in India, the jurisdictional challenge is expected to get more complicated. Especially with the new Data Protection Bill, this debate is just in its nascent stages. 2] Where are we at-Privacy and Legal Framework in India: What happens when a data giant like Facebook or Amazon breaches its user’s privacy for monetary ends? What authorities does one approach, and what redressal does one have? Indian privacy and data protection laws at present are laid out in an overlapping patchwork fashion. Various laws, regulations, and guidelines govern a specific subset of data or a particular type of data protection breach. Privacy is a fundamental right and is a quintessential element of Article 21 of the Indian Constitution.SinceJustice K SPuttaswamyand Anr vs. Union of India, the right to privacy can be enforced by anyone as a fundamental right, irrespective of any sector-specific legislation[vi]. Besides, personal data protection is mandated under the IT Act, 2000- specifically under the Information Technology (Reasonable Security Practices and

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Draft E-commerce (Amendment) Rules: Unsettling CCI’s Regulatory Mandate

Leave a Comment / Competition Law, Contemporary Issues / CBCL

[By Sanchit Khandelwal & Amritesh Anand] The authors are students at the NALSAR University of Law, Hyderabad. E-commerce platforms and offline retailers and sellers on the e-commerce platforms have been at loggerheads for quite some time now. Various trade unions and industry groups have not shied away from utilising all available platforms, be it through legal battles or through electoral lobbying, to further their demand of tightening the strings on the market operation of ever bourgeoning e-commerce platforms. In response, the Government of India has recently been widening its regulatory oversight on the market practices of these platforms. The proposed amendments to the Consumer Protection (E-commerce) Rules, 2020 (hereinafter referred as “Draft Amendments”) by the Department of Consumer Affairs hints towards the State’s next attempt at tightening the noose on e-commerce platforms and absorb demands of groups voicing the interests of offline retailers and sellers on these platforms. The Draft Amendments, through the introduction of newer concepts and a stricter framework, seek to usher in transparency in the e-commerce platforms and further bolster the regulatory regime to curb the perceived unfair trade practices by ensuring that domestic manufacturers and suppliers get fair and equal treatment on e-commerce platforms. However, several provisions under the Rules proposed have a noticeable overlap with the settled domain of the Competition Commission of India (hereinafter referred to as “CCI”). This overreach is mirrored both in the form of explicit reiterations of sufficiently established antitrust concepts and imposition of restrictions that exclusively fall within the Competition law realm and are pending investigation before the CCI. The authors in this article argue that this attempt to over-reach the precincts of COPRA through over-lapping provisions of law would result in legislative ambiguity, which would then lead to unintended consequences in the form of forum shopping, enforcement failures, administrative inefficiency, enforcement overlaps and regulatory arbitrage. Rules sliding in the regulatory mandate of the CCI Abuse of dominance Rule 5(17) of the Draft Amendments proscribes an e-commerce entity from abusing its dominant position. For such assessment, the factors already laid down under the Competition Act are to be considered. This proposition is at best, redundant, and at worst, counterproductive. The Competition paradigm already provides a comprehensive framework to tackle issues stemming from abuse of dominance (u/s 4), which have been enshrined keeping in mind the CCI’s expertise in investigating complex market structures and unique challenges posed by violating entities. Although currently, the exact scope and intent behind the inclusion of this proposition remain unclear, the Draft Amendments do aim to lay down a complete code for regulating the e-commerce industry, thus engendering the possibility of misuse at the hands of the very entities that the amendments seemingly intend to target. Authorities under COPRA are ill-equipped to tackle instances of abuse of dominance since they lack sufficient know-how. These authorities have been designed keeping in mind the ultimate objective of COPRA i.e. protection of consumer interests, and not to get muddled with regulating anti-competitive behaviour. Moreover, since the Rule is a verbatim repetition of the concept as it exists under the Competition law framework and does not add the law to any extent, it serves no value addition to the current jurisprudence but only causes legislative ambiguity. However, the apparent jurisdictional overlap does provide e-commerce giants with the opportunity to engage in forum shopping and regulatory arbitrage in order to either circumvent or deliberately protract investigations and defeat the purpose of such proceedings. Businesses with deep pockets would have the capacity to leverage such intersections by filing multiple legal proceedings and delaying enforcement of orders, while newer and upcoming entities would be the ones to bear the brunt of such practices, as any delay in enforcement would be tantamount to extended persistence of the alleged anti-competitive behaviour. In light of the dynamic nature of markets and the need for swift correction, the ill-effects of such practices become even more pronounced. Even though Section 19(2) of the COPRA provides for referring a matter to another regulator after a preliminary inquiry is conducted, the concomitant extension of the investigation timeframe might diminish the efficacy of the ultimate order with regards to remedying the anticompetitive conduct. Since the Competition Act is sector agnostic, the law dealing with abuse of dominance is constant for all sectors. Ergo, no valid rationale exists for the inclusion of this proposition in the draft amendments. Ex-ante vs. Ex-post facto “The ultimate goal of competition policy is to enhance consumer well-being. Competition policy towards the supply side of the market aims to ensure that consumers have adequate and affordable choices.” Pursuant to this objective, the Competition framework in India employs a ‘rule of reason’ approach while examining alleged anti-competitive practices, wherein the assessment is undertaken on a case by case basis. This assessment takes into account anti-competitive effects emanating from the conduct under scrutiny on the one hand, and pro-competitive justifications of the restraints which enhance consumer welfare under Section 19(3)(d) of the Competition Act, on the other. The ensuing assessment aims to do a balancing act between the anti-competitive and pro-competitive effects, and the entity under scrutiny can be exonerated if the latter outweighs the former. This assessment mechanism is widely regarded as furthering the consumer’s best interest and has become a fundamental cornerstone of modern antitrust jurisprudence. In contradistinction, some of the proposed restrictions on the activities of e-commerce entities in the draft amendments have the effect of imposing ex-ante prohibitions, premised on the unfounded assumption that such activities result in consumer harm. Furthermore, no scope for rebuttal of such prohibitions has been provided. Rule 5(16) prohibits e-commerce entities from organizing ‘flash sales’. Flash sales for such purposes have been defined under Section 3(1)(e) of the COPRA as offering products at “significantly reduced prices, high discounts or any other such promotions or attractive offers for a predetermined period of time with an intent to draw large numbers to consumers”. The accompanying proviso restricts the application to instances of selling which involve “fraudulently intercepting the ordinary course of

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Keeping it Time Bound: Resolution Plans under IBC

Leave a Comment / Contemporary Issues, Insolvency Law / CBCL

[By Soham Chakraborty & Aaryan Wasnik] The authors are students at the NALSAR University of Law, Hyderabad. The 32nd Report by the Standing Committee on Finance submitted to the Parliament, has made many pertinent observations and recommendations with respect to the functioning of the Insolvency and Bankruptcy Code, 2016 (hereinafter “Code”). In the Section titled “Performance Review of the NCLT System,” the Standing Committee pointed out various reasons for delays in the resolution of insolvencies. In one such observation, the Standing Committee found that many times, prospective resolution applicants wait for the details of the highest bid to become public and only then come forward with better bids, often at the cost of adhering to the timelines provided for the submission of resolution plans. Following this observation, it made a recommendation that the Code should be amended so that no post hoc bids are allowed during the resolution process. This article first looks at the provisions under the Code which provide for a time-bound process with respect to submission of resolution plans and at judgments that have laid down authoritative points of law. Following this, the article engages with the observations made by the report of the Standing Committee and tries to offer some suggestions of its own. Sanctity of a Time-Bound Process under the Code Time-Bound Approval of a Resolution Plan: Provisions & Case Laws Regulation 40A of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (hereinafter “CIRP Regulations”) provides a model timeline for the corporate insolvency resolution process. According to the table provided in the regulation, the timeline for submission of the Committee of Creditors (hereinafter COC) approved resolution plan to the Adjudicating Authority is within 165 days from the commencement of CIRP. Resolution plans which are submitted to the Resolution Professional ( hereinafter RP) and which fulfil the requirements under Section 30(2) are required to be placed by the RP before the CoC for consideration. The CoC upon consideration of the resolution plans can further negotiate with the resolution applicants for better bids and can also authorize the RP to extend the deadline for submission of resolution plans in order to allow new resolution applicants to submit their resolution plans. Despite the entire process being a time-bound process, adherence to the deadlines has not been very strictly enforced under the Code. In the matter of RICOH India Limited, the RP on the authorization of the CoC had accepted two resolution plans after the expiry of the deadline for submission. Finally, the resolution plan of the consortium of Kalpraj Dharamshi & Rekha Jhunjhunwala, which was submitted after the deadline, was approved by the CoC. The NCLT allowing the actions of the RP held that the most attractive resolution plan was selected only after all the resolution applicants were granted the due opportunity by the CoC. The CoC had exercised its commercial wisdom judicially in this case and hence it did not warrant any interference by the Adjudicating Authority. Upon appeal the NCLAT, New Delhi held that the “alleged act of the Resolution Professional in accepting the Resolution Plan after the expiry of the deadline for submission of Resolution Plan is arbitrary, illegal and against the principle of natural justice and cannot be treated as an act within the commercial wisdom of the CoC.” It directed the CoC to consider the resolution plans submitted within the deadline and take a decision within 10 days from the date of the order. On further appeal, the Supreme Court held in Kalpraj Dharamshi v. Kotak Investment Advisors Limited (hereinafter “Kalpraj Dharamshi”), that the actions of the RP in accepting the resolution plans after the expiry of the deadline had the stamp of approval of the CoC. Following this observation, it went on to hold that “…that in view of the paramount importance given to the decision of CoC, which is to be taken on the basis of ‘commercial wisdom’, NCLAT was not correct in law in interfering with the commercial decision taken by CoC…”. In other words, the Supreme Court found that the decision of the CoC to accept resolution plans submitted beyond the deadline was an exercise of its commercial wisdom. After the Supreme Court judgment in the Kalpraj Dharamshi case, the NCLAT, New Delhi was faced with a similar fact scenario in Dwarkadhish Sakhar Karkhana Limited v. Pankaj Joshi. In this case, the CoC had in its 7th meeting refused to allow the resolution applicant from filing its expression of interest (hereinafter “EoI”) and resolution plan after the deadline. Following a change in the RP, the CoC in its 9th meeting decided to revisit its decision taken in the 7th meeting and allowed the resolution applicant to file its resolution plan. The NCLAT finding that the RP had misguided the CoC by suppressing material facts declined to hold that the decision of the CoC to revisit its decision taken in the 9th meeting was in the exercise of its commercial wisdom. Further, the NCLAT, differentiating this case with the decision of the Supreme Court in the Kalpraj Dharamshi, held that the actions of the RP in the latter had the required authorization of the CoC while in the present case, the RP had acted without any authorization from the CoC in allowing the resolution applicant to submit its EoI after the deadline. Striking a Balance: Time-Bound Resolution v. Value Maximisation From the case laws cited above, it is clear that the action of the RP, with the approval of the CoC, to accept resolution plans beyond the deadline for submission cannot be questioned in a Court of law as it falls within the ambit of the commercial wisdom of the Court. Considering the objective of Code of value maximization the CoC should be provided with the discretion to consider plans which are much better in comparison to existing resolution plans. However, extending the deadline of the Code indefinitely in order to consider newly submitted resolution plans, in the hope that they would provide

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Enforcement Period v. Claim Period: A Debate Settled by Delhi High Court

Leave a Comment / Contemporary Issues, Contract Law / CBCL

[By Ashutosh Kumar & Shambhavi Shani] The authors are students at the Hidayatullah National Law University. An inextricable knot between the limitation period and Exception 3 of Section 28 of the Indian Contract Act has time and again, been subjected to judicial and legislative scrutiny and is yet again in limelight after Justice Jayant Nath of Delhi High Court in the case of Larsen & Toubro Limited &Anr. V. Punjab National Bank and Anr., clarified that Exception 3 to Section 28 doesn’t deal with the “Claim Period” but with the “Enforcement Period” which was grossly misinterpreted by banks. Section 28 dictates that any contract which restricts any party from enforcing his rights under the contract or limits the period during which such recourse can be adopted is void to that extent. Exception 3 saves banks and financial institutions from getting hit by Section 28 for including a clause providing for “Enforcement Period” after which, if any suit is filed for the enforcement of guarantee will fall flat. Such enforcement period may be less than the limitation period as laid down in the Limitation Act but should not be less than one year. In this article, the authors analyze the detrimental effects of wrongful interpretation by banks, which violates rights of the principal debtors (PD) under Article 19(1)(g) of the Indian Constitution and the impacts following the course correction by the Court. BACKGROUND Under the contract of Bank Guarantee (BG), the beneficiary has the right to make the guarantor bank compensate for the default made by the PD by invoking the guarantee within the lifetime of BG i.e. the “Validity Period”. In cases of performance guarantees, it takes time to assess the performance of the PD and hence a “Claim Period” is negotiated between the PD and the creditor which provides for a grace period in addition to the validity period. Once such guarantee is invoked and if the bank dishonours the claim, the beneficiary has the right to bring an action before the relevant court/tribunal to enforce his right within the “Limitation Period/Enforcement Period” which is, by default, 3 years in case of private entities and 30 years in case of government entities. But, the 2013 Amendment to Section 28 inserted Exception 3 which shortened the minimum limitation period to one year instead of three or thirty years as the case may be. This one-year enforcement period was confused with the claim period by the Respondent, Bank Punjab National Bank (PNB) which issued a circular dated 18/08/2018 addressed to the Petitioner Larsen & Toubro (L&T) stating that a claim period of less than a year shall be void and the period will get increased to 3 years by default under the Limitation Act, 1963. Indian Banks Association (IBA) through a communication dated 05/12/2018 addressed to all the banks, fortified the above interpretation dictating that if any bank issues a BG with a claim period of less than one year, such BG will not get the benefit under Exception 3 of Section 28. Owing to this, L&T had to pay commission charges and maintain collateral security for an extended period which would have been shorter under the contract between PD and creditor. L&T contended that such an extended period affected their business as they could not enter into new contracts and hence infringed their fundamental right to do business under Article19(1)(g). OBSERVATIONS BY THE COURT The Court struck down the Circular issued by PNB to L&T and agreed with the contentions of L&T and held that PNB erroneously interpreted the minimum one year “Enforcement Period” under Exception 3 to be a one year mandatory “Claim Period”. It further observed that the one year clause under Exception 3 “deals with right of the creditor to enforce his rights under the bank guarantee in case of refusal by the guarantor to pay before an appropriate court or tribunal.” While adjudicating the matter, the Court thoroughly delved into the historical perspective to ascertain the legislative intent behind the enactment of such exception and it further dealt with the theory of relinquishment of right and remedy to conclude that such provision was grossly misused by the banks. The rationale behind the Verdict has been discussed below: Historical Perspectives Before 1997, the principle followed by the courts was that the rights and remedies accrued under a contract may be relinquished but only remedy cannot be relinquished. This was based on the reasoning that for a remedy to exist there must be rights which implied that once the rights are relinquished; the remedy would be automatically relinquished. The Law Commission observed the potential of misuse of such principle and stated in its 97th Law Commission Report that such a distinction between relinquishment of right and remedy was utopian but in practice, might lead to the misuse by parties in a dominant position who may create a law of prescription of their own by limiting the period of relinquishment of rights and in turn remedy. This resulted in the 1997 Amendment which included Clause (b) and the first two Exceptions to Section 28 which automatically increased the enforcement period to 3 or 30 years depending on the nature of the entity. Post such amendment, an expert committee headed by Sh.T.R.Andhyarujina was constituted which in its report cited the concerns of the banks who had to carry obligations, maintain liabilities and hold securities for 30 years affecting the issuance of fresh guarantees. According to the report, “this will pre-empt the available capital to meet the capital adequacy requirement and will also overstretch the exposure to the customers beyond acceptable levels.” This lead to the Amendment of 2013 which included Exception 3 to Section 28. Misinterpretation by PNB Much reliance was placed on a 2016 verdict of Union of India &Anr. v. Indusind Bank &Anr. by the Counsels appearing for PNB but the Court held that the ratio of the verdict was actually against the cause of PNB. Herein, two clauses were in question, which limited the period within which a claim may be raised by the creditor/beneficiary before the guarantor bank.

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Innovation and Data Privacy: Merger Review in Digital Markets: Part II

Leave a Comment / Competition Law, Contemporary Issues / CBCL

[By Tawishi Beria] The author is a student at the Jindal Global Law School. With the rise in digital activity across the globe, there has been a growth in the might of a select few companies in such digital markets. This has raised several concerns, including antitrust and privacy-related issues. Consequently, there has been increased discussion and debate on the need to alter how competition authorities conduct merger assessments in digital markets. One such proposition is the use of non-price parameters in the merger review process. This is the second part of a two-part piece that seeks to analyse two specific non-price parameters, namely, innovation and data privacy in merger review considerations in digital markets. Part I of this piece (available here) assessed the need to consider the parameters of innovation and data privacy independently. It also assessed the need for striking a balance between the two and briefly deliberated on how such a balance could potentially be achieved. This part of the piece assesses the application of the factors of innovation and data privacy in two deals involving Facebook, i.e., Facebook/WhatsApp and Facebook/Instagram given that these deals have been subject to intense debate. It concludes by highlighting the need for changes in the assessment of mergers on part of competition authorities. The Facebook Saga Facebook is one of the BigTech firms that has engaged in a significant amount of M&A activity, entering into deals with not just fairly well-known companies like WhatsApp but even targeting smaller start-ups. It has also been accused of hurting innovation by copying and killing off the acquired entities. Additionally, privacy concerns with the functioning of Facebook and its allied entities (like WhatsApp’s recently updated privacy policy) are no secret. Accordingly, an analysis of its M&A deals in hindsight is warranted. 1. Facebook/Instagram The Facebook/Instagram deal tilts towards innovation considerations in merger review generating significant debate on the issue. Concerns of privacy invasion were also raised when the deal was announced with many users removing their data (pictures) from and even quitting Instagram. In 2012, when the 1-billion-dollar deal was approved, neither the FTC, not the UK OFT raised any problems, opining that in the short run, Instagram would not be able to compete with Facebook. The harm to innovation caused by this deal was brought to the fore recently in the US congressional hearing on the dominance of BigTechs. Facebook’s internal emails revealed communications between CEO Mark Zuckerburg with CFO David Ebersman, stating that the purpose of M&A activity was the integration of products and neutralising the competitor. In terms of privacy concerns, before the acquisition, Instagram had privacy-protective policies with the company pledging to not disclose personally-identifying information, except to certain persons. However, Instagram’s privacy policy dealing with changes in ownership now allows the transfer of information of users to the new owner. Adverse impact on consumer welfare results from this. Had the innovation and data privacy parameters been considered by the authorities at the time the deal was cleared,it would have been conditionally cleared or even not approved at all owing to its evident anti-competitive purpose. The question of a balance between the two factors does not come in here since the deal essentially compromised both. However, even if the authorities did not foresee the loss of innovation at the time, the privacy concerns were largely overlooked, despite contentions that authorities paid more attention to the users’ side. 2. Facebook/WhatsApp The Facebook/WhatsApp deal, on the other hand, tilts towards data protection and privacy considerations and has generated significant debate on the issue. Despite indications of the privacy of users being compromised if the two companies were to match and link the data collected by each of them (user’s phone numbers through WhatsApp and identity through Facebook), this aspect was taken lightly at the time of approval. The innovation aspect was fairly minor since the underlying assumption was that consumers would merely switch to other service providers if the merged entity reduced innovation, possibly underestimating the operation of network effects. While Facebook had ensured the authorities that it would not alter WhatsApp’s privacy policies which were arguably superior pre-merger, two years after the deal went through, the policies were changed. These changes were made to improve the product offerings (possibly aiming for innovation and consumer welfare), but were, in reality, a direct effect of Facebook’s attempt to monetise its investment in WhatsApp. The Commission did assess the impact of network effects in the consumer communications app market, noting that services are often offered free to reach a critical mass and exploit such effects. However, the impact of an increase in market power arising from network effects, keeping consumers locked in, and reducing the incentive to innovate was arguably overlooked. In this case, aspects of innovation and privacy in terms of the potential to gain competitive advantage through big data and operation of network effects were looked at in some more detail than the Facebook/Instagram deal. While this may reflect an increased willingness on part of the authorities to undertake robust market analysis, dismissing the concerns that came up essentially brings the assessment back to square one. Had the closer focus been placed on the balance between the factors, the deal could have been conditionally approved or not cleared at all, instead of later imposing a fine on Facebook for providing misleading information. The way ahead While a trade-off between losing out on beneficial mergers and creation of more competition post-merger is often considered, that between factors looked at for merger review also warrants discussion. The reality post-merger is much different from what was anticipated while approving the deal; conglomerates have been seen as not becoming successful innovators as apprehended and compromising on user privacy by combining data obtained from individual companies. Facebook’s acquisition of Instagram and WhatsApp particularly appear to be horizontal mergers in hindsight, which should have undergone proper scrutiny by authorities. Several authors have suggested the need for changes in enforcement, proposing a shift from ex-ante regulation to ex-post regulation

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