Contemporary Issues Archives - Page 8 of 13

Bringing Artificial Intelligence to Boardroom

Leave a Comment / Company Law, Contemporary Issues / CBCL

[By Abhinav Gupta] The author is a student at the National Law University, Jodhpur. Introduction While discussing his book, 21 lessons for the 21st Century, Yuval Noah Harari points out that humans face existential crisis due to technological disruption. In his other book, Homo Deus: A brief history of tomorrow, he highlights the good and bad of artificial intelligence (AI). He believes that AI holds the potential to exterminate mankind. The emergence of cases where algorithms and AI have replaced humans has made this prophecy more increasingly daunting. Algorithms and AI are revolutionizing the way businesses operate. The disruptive effects of such technology have been felt across various business functions. These emerging technologies have the potential to create corporations that are completely autonomous and run by algorithms. At the same time, they can be used to just assist in increasing the efficacy of business operations. Business decisions require comprehending a variety of data and AI has proved its capability to process complex data to reach conclusions. The use of AI in boardrooms can help directors and benefit stakeholders by complementing them, if not substituting, in performing their functions. In this article, the author discusses how AI has the capability to revolutionize the functions of directors and what the operational and legal hurdles are in employing AI at the highest level in corporations. Artificial Intelligence AI has the ability to process huge amounts of data. While human intelligence can process only the seemingly important and related data, AI can process unrelated data as well, which might have a bearing on the decision. There are three kinds of AI, differentiated on basis of decision-making rights allocated to such AI, namely, assisted, augmented and autonomous. Under the assisted AI, the tech merely assists in the process of decision making and does not take decisions itself. The decision-making power continues to rest with the human. Augmented AI shares decision rights with humans and both learn from each other. On the other hand, autonomous AI completely replaces the human and operates independently of human intervention to take over all the decision rights. This distinction between different kinds of AI can be implemented in corporations in order to develop a robust technical environment. Using AI in Corporate Functioning The ability of AI, big data, and machine learning can be exploited to assist corporations in taking strategic decisions, managing risks and ensuring compliance. Moreover, humans are often faced by their cognitive biases which prevent them from considering certain relevant information or flip side of issues. AI, unlike humans, is free of these biases which can greatly affect the functioning of a corporation. AI would help directors in exercising ‘independent judgment’ and become appreciative of various views as each suggestion by AI will be based upon concrete data. AI can be used to channel contrarian views based on such data and reduce the occurrence of ‘groupthink’. Groupthink refers to a situation where an individual tends to agree with the viewpoint of the majority in order to form a consensus, irrespective of the validity or correctness of such viewpoint. Hence, directors will be able to convey dissent in boardrooms which is essential in order to ensure that decisions taken by the board are in the best interests of all the stakeholders rather than just the directors or a select group. AI can also be used for the selection of board members. With more and more information available about directors regarding their qualifications, past experiences, AI should be able to process this data to ascertain the future performance of the candidates in light of the objectives and future plans of the company. It would be easier for AI to comply with the law regarding the qualifications of directors. For instance, Section 149(6)(a) of the Companies Act, 2013 (the Act) provides that independent directors should have the relevant experience and expertise. Moreover, they should not have any pecuniary relationship with the company. Naturally, this would entail going through past transactions of the candidate as well as the company. An AI, which has all such data of transactions, would be much better equipped to determine if the candidate possesses such experience and expertise and whether they have any pecuniary relationship with the company, ultimately helping in compliance. The availability of data allows AI to foresee trends and at the same time handle the data of past and present, efficiently. Thus, AI can assist in the early detection of non-compliance, allowing the company to mitigate penalties and punishment associated with such non-compliance. It has been the approach of corporate law scholars that boards must be monitored in order to uphold the interests of shareholders and prevent self-serving directors from putting themselves before the corporation. The Indian regulator has conformed to such an approach by keeping checks on directors and providing for their duties (see Section 152; Section 166; Section 169; Section 171 of the Act). By keeping a record of all the transactions undertaken by the directors, AI allows keeping a tab on the functioning of the board to ensure compliance with the law. Be it reporting related party transactions (see Section 188 of the Act) or whether directors are complying with their duties under Section 166 of the Act or Schedule IV of the Act. Moreover, AI helps in handling the agency problem. The agency problem refers to the conflict of intentions of a principal and agent. Where the principal expects the agent to work in furtherance of his best interests, the agent would have certain interests of his own and might prioritise them over the principal’s interests. However, AI does not have any agenda of its own. It would operate on the basis of the available information and how it is employed by the directors. AI would act to the best of its capability in the best interests of the stakeholders rather than pursuing its own agenda. Directors authority and Duty to delegate to AI After affirming that AI has the capacity to make informed decisions, one must understand whether

Bringing Artificial Intelligence to Boardroom Read More »

Exploring The Dimension of Unvested Stock Options During Involuntary Termination

[By Pallavi Mishra] The author is a student at the Hidayatullah National Law University. In recent years, the concept of Employees’ Benefit Schemes in the form of Stock Options has gained popularity for paying compensation to the employees, while also giving them incentives to contribute towards the betterment of the company. The history of discussion on employment schemes in India dates back to 1997, wherein the JR Verma Committee suggested that the guiding principles for the administration of employment schemes in India would be “complete disclosure and shareholder approval.” Presently, the Employee Stock Options for listed companies in India are governed under the Companies Act, 2013 and SEBI (Share Based Employee Benefits) Regulations, 2014 (“SEBI SBEB Regulations”). While briefly discussing the procedure of grant of options, the author in this article delves into examining the bargaining position of an employee who has been involuntarily terminated from service leading to forfeiture of unvested stock options. The article also contemplates amendments that may be brought about in the functioning of the Compensation Committee, required to be constituted for the administration of employees’ stock options in India. Exercise, Grant and Vesting of Stock Options Stock options are usually offered to the employees at a price lower than that prevalent in the market. In order to convert the options into shares and exercise the rights granted, the employees are under an obligation to render their services to the company during the “vesting period”. As per Regulation 18, there is a statutory requirement of a minimum of one year within which none of the stock options can be exercised by an employee in India. It is important to note that in addition to this, a company usually imposes other time-and-performance based stipulations before the employees gain the right to convert options into shares of the company. A combined reading of Regulations 2(j), 2(zi) and 2(zj) lead to the inference that only once the vesting period and conditions are fulfilled can the employee exercise the stock options and receive benefits associated with the grant of shares under the scheme. [i] Unvested Stock Options and Involuntary Termination In the above-mentioned scenario, there may arise an unfair situation wherein an employee has been rendering services to the company for a fairly long period of time but is terminated from the service under unforeseen circumstances. Alternatively, an employee may also be terminated from service in bad faith shortly before the vesting period to deter him from receiving the benefits of his stock options. This scenario assumes immense importance in the current times as many companies across India have been laying off employees and reducing workforce to overcome the losses incurred due to the COVID-19 pandemic. As per Regulation 9, in case of voluntary or involuntary termination of an employee from the service, all unvested shares get forfeited while the employee retains the right to vested shares, which he may be forced to exercise prematurely under unfavorable market conditions. In light of this issue, it is necessary that fair and equitable caveat be introduced within the SEBI SBEB Regulations to improve the position of an employee who has worked hard under the expectation of gaining the right to ownership in the company. Way Forward It is suggested that mandatory provisions for pro-rata vesting be introduced as a proviso to Regulation 9(6) for situations wherein the employee is terminated unexpectedly and/or involuntarily. The theory of pro-rata vesting rests on the assumption that a stock option is a deferred form of compensation for the employee and every day the employee becomes entitled to some percentage of it. In cases of termination of an employee, the SEBI SBEB Regulations must also provide for review by the Compensation Committee (required to be appointed under Regulation 6 for the administration of employment benefit schemes) to assess whether the employee has completed “substantial performance” of the vesting conditions and the time period. The committee could take into consideration factors like whether the employee has performed his duties regularly, his contributions towards the growth of the company, and the time left for the unvested options to become vested. While there is a dearth of jurisprudence in relation to this issue in India, a parallel could be drawn from section 12 of the Specific Relief Act which states that “Where a party to a contract is unable to perform the whole of his part of it, but the part which must be left unperformed by only a small proportion to the whole in value and admits of compensation in money, the court may, at the suit of either party, direct the specific performance of so much of the contract as can be performed, and award compensation in money for the deficiency.” In the case of AL Parthasarthi Mudaliar v. Venkatah Kondiar Chettiah, observations in relation to the performance of a contract were made, wherein it was stated that equity demands specific performance of a contract, where the portion left unperformed in small. Thus, it is a settled principle in law that justice requires the remaining part of the contract to be performed rather than a negation of the entire contract. Assuming that the grant of stock options is a contract between the company and the employee, wherein the employee has performed the contract substantially, there is sufficient ground for him to claim pro-rata vesting of the shares in case of unforeseen and involuntary termination from employment. Reliance is also placed on the Californian jurisdiction case of Division of Labour Law Enforcement v. Ryan Aeronautical Company in which similar observations were made with regard to breach of stock option contract between the employer and the employee, wherein the Court while granting damages to the employee held that substantial compliance could be said to meet the requirements of the vesting obligations under the contract. It is also interesting to note that Rule 12 of the SEBI (Share Capital and Debentures) Rules, 2014 entails any company other than a listed company to comply with several conditions before it can

Exploring The Dimension of Unvested Stock Options During Involuntary Termination Read More »

Innovators Growth Platform: NASDAQ of India

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

[By Shubham Kumar Singh] The author is a student at Amity Law School Delhi. INTRODUCTION India boasts the third largest startup ecosystem in the world, with more than 50,000 startups, out of which more than 9,000 are technology-led startups. (i) India is also a host to more than 800 venture funds and 2,751 angel investors. (ii) In this thriving startup ecosystem, many unicorns like Flipkart, Zomato, Paytm, and its likes are planning for public listing in the near future, but their favourite destination, unfortunately, is not India but outside India. (iii) Given this thriving startup ecosystem, the Securities and Exchange Board of India (SEBI) decided to relax the terms of listing and to provide a different platform for these startups called Innovators Growth Platform (IGP). Experts of the industry have called it a step in making Nasdaq of India. They see a huge potential in IGP as it was there in NASDAQ back in the 1970s. WHAT IS NASDAQ? National Association of Securities Dealer Automated Quotation (Nasdaq) is a US-based global platform to trade securities in a completely computerized manner. In 1971, the National Association of Securities Dealers (NASD) was created to allow investors to buy and sell securities electronically. It was the first of its kind platform in the world for electronically trading securities. It provides a cutting-edge platform for high-tech and startup companies. Therefore almost all big tech giants like Facebook, Google, Apple, Amazon chose Nasdaq in their initial years. Nasdaq exchange boasts 3,800 companies that hold $11 trillion market capitalization, making it a large portion of the global equity market. (iv) INNOVATORS GROWTH PLATFORM (IGP) In the view of the emerging startup ecosystem in India, in 2015, SEBI established a new segment for listing companies besides the main board listing procedure named Institutional Trading platform (ITP). It was to attract startups listing, but it could not generate any result. Therefore in 2018, SEBI reviewed and modified the ITP and launched the modified version with a new name, Innovators Growth Platform (IGP). SEBI amended the SEBI (Issue of Capital and Disclosure Requirements) Regulation, 2018 to change the framework of ITP. Even after the modification, IGP failed to garner much interest among the startup community, and still, there are no companies listed on it. (v) SEBI EASES RULES TO ATTRACT STARTUPS LISTING Even after a complete revamp of ITP and the launch of IGP, startups were rather flying abroad to more attractive destinations like Nasdaq instead of IGP. To make IGP more attractive and competent to listing platforms like Nasdaq, SEBI decided to ease its various rules of listing. On 25th March 2021, SEBI, via its press release (PR no. 15/2021), disclosed the changed rules in the listing policy of the IGP.(vi) SEBI, to make the IGP platform more accessible to the startups, made the following changes to the listing norms via an amendment to the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018: 1) Listing Eligibility Reduced to One Year In the mainboard listing procedure, the Company that wanted to be listed needed to show a three-year record of operations, profits, assets, net worth, etc. Whereas under the IGP, the Eligible Investors of the Company were only required to hold 25% of the pre-issue paid-up capital for two years. Now it has been reduced to only one year. This will make a listing in India more lucrative than it was before. 2) Open Offer Requirement Increased to 25% Under the takeover code (The Substantial Acquisition of Shares and Takeover Regulations, 2011), no acquirer can acquire 25% or more shares/voting rights in a listed company without making a public announcement of an open offer. This requirement is to give an option to the existing shareholders to either exit their investment planning. Therefore SEBI has increased this cap to 49% for companies to be listed on IGP. This will give extra room for Startups to raise capital without the burden of an open offer as it is a costly and time-taking affair. Merger and Acquisition is one of the significant concerns of startups in India. Stringent post listing norms force these startups to shift their operation outside India. This amendment would simplify mergers and acquisitions for startups giving them enough flexibility to raise capital post listing. 3) Relaxed Mandatory Disclosures In the case of mainboard listed companies, whenever an acquirer acquires five per cent or more of the shares/voting rights in a target company it has to make some mandatory disclosures as per the takeover code. Furthermore, mandatory disclosure requirements have to be observed whenever there is a change of positive two per cent or a negative two per cent. (vii)These caps are not suitable for startups because their issue size is not that large as that of mainboard companies. Promoters of startups require more flexibility in these disclosure requirements as it is a costly and time taking affair. For the startup companies to be listed on IGP, the new norm has increased the threshold from five per cent to ten per cent and thereafter, fluctuations of 5% are the new threshold rather than the earlier 2 %. 4) Delisting Procedure Eased a) Approval On the mainboard, a company wishing to delist is required to have a two-thirds majority of the shareholders, but for the startups listed on IGP, the approval needed for delisting must be approved by only a majority of minority shareholders. b) Acquisition Cap On the mainboard, a company considering delisting needs to acquire 90% of the shareholding or voting rights in the company. A startup listed on the IGP only needs to acquire 75% of the total shareholdings or voting rights before considering delisting. c) Price A company wishing to delist from the mainboard needs to calculate the price of the shares through the reverse book building process. Whereas for a company listed on the IGP, the acquirer can quote a price with due justification. 5) Migration Requirements Down to 50% Earlier for a company listed on IGP wishing to migrate to the main

Innovators Growth Platform: NASDAQ of India Read More »

Corporate Social Responsibility: Choice or Coercion

Leave a Comment / Company Law, Contemporary Issues / CBCL

[By Anchal Bhatheja and Chaaru Gupta] Anchal is a student at the National Law School of India University, Bangalore and Chaaru is a student at the National Law University Jodhpur. Section 135 of the Companies Act 2013 (the “Act”) in India provides for mandatory Corporate Social Responsibility (CSR) by corporations. Prior to 31.07.2019, the provision required corporations to merely ‘comply or explain’, that is, if a company did not spend the earmarked CSR expenditure, it had to disclose the reasons in its board report. However, the 2019 Amendment to the Act turned Section 135 into a ‘comply or suffer’ provision. It went a step ahead and provided for a fine, ranging from 5,000 to 25 lakh or imprisonment for 3 years or both. The provisions pertaining to imprisonment had to be removed due to the backlash from companies. Nevertheless, mandatory CSR continues to remain intact. Interestingly, on 22nd March 2021, the Union Minister of State for Finance and Corporate Affairs in India, while responding during the question hour in the Lok Sabha, said that the policies of the central government were not being implemented using the (CSR) funds that come from the companies.. Article 12 of the Constitution of India provides that governance is the State’s responsibility which makes the validity of the question doubtful. In this article the authors aim to discuss the viability of making CSR mandatory in the Indian context, from the perspective of promoting innovation and growth of businesses as well as social justice. There are overwhelming rationales, rooted in law and economics, to shift from CSR to other ideas namely Corporate legal Responsibility (1), Corporate Social Incentives (2), Individual Social Responsibility (3), and Governmental Social Responsibility (4). This is because the burden of social justice cannot be put on the corporates and should be on the government. And if at all it is to be done by a non-governmental entity, it should be individuals who undertake it voluntarily and not out of compulsion. CLR- Corporate Legal Responsibility Milton Friedman argues that the only social responsibility of corporates is to maximize their profits while playing by the rules of the game. They should be made to comply with regulatory laws like the Environmental Protection Act, 1986, The Air (Prevention and Control of Pollution) Act, 1981, Tax laws, etc. while carrying out their businesses, rather than having to mandatorily comply with CSR requirements. Presently, the law is reflective of a paradox. For instance, on one hand, India loses10.3 Billion Dollars or 75,000 Crore Rupees due to tax evasion by corporates on an annual basis. On the other hand, the CSR regulations mandate these corporates to contribute towards Prime Minister’s Relief Fund, Rural Development Projects, skill development projects, and other such government initiatives under Schedule VII of the Act. The paradox in the data suggests the State invests its limited administrative resources in making the businesses run legally before it makes them run ethically. Furthermore, better legal enforcement will lead to more voluntary compliance and would, consequently, increase investor confidence. This would also reduce disputes and litigation in the realm of company law, which presently puts a burden on state resources as well as hampers the growth of businesses. CSI- Corporate Social Incentive Mandatory philanthropy is an oxymoron. Mandating donations defeats the very purpose of philanthropy or CSR. Furthermore, coercing the corporates to engage in CSR will hamper innovation and corporates will allocate funds just out of fear of penalty. This was in fact witnessed when a lot of corporates invested in the construction of the statue of the popular Indian Leader Sardar Vallabhbhai Patel, dubbed the Statue of Unity, to stay in the good books of the government. It is better to positively incentivize corporates to take initiative on their own accord in the sector they are working, instead of coercing them to work in areas that they do not deal in. This will lead to more efficient outcomes as they would have expertise in those specific areas. Further, from a business perspective – it will also help them in improving their image and market base. For example, incentivizing a software company to build accessible software for the differently-abled is more logical and economical than forcing them to build toilets in a nearby village. Therefore, towards this end, the state can offer benefits like preferential clearances and tax abates to the corporates that act upon corporate social incentives in charity, instead of penalizing them for not being “charitable”. ISL -Individual Social Responsibility If CSR is not mandatory, the individual shareholders’ earnings will increase as the expenditure of the company decreases. This encourages the shareholders to engage in charity on an individual level, for a cause that aligns with their idea of social responsibility. Even if elimination of the expenditure of the company which goes into CSR investments does not lead to an increase in the income of an individual, they will be naturally more inclined to engage in charitable activities as compared to a situation where they know that their company is already investing enough of its resources in CSR and there is no need for them to engage in charity on a personal basis. Further, the decisions regarding the areas in which a company will invest, to fulfill its CSR requirements are taken by the Board of Directors (BoD) on the recommendations of the CSR committee which comprises two directors and one independent director. However, it does not mean that the opinion of the BoD necessarily aligns with the opinion of the shareholders. If the law omits the requirement of this coerced social responsibility on the corporates, the shareholders on their personal level will be able to have a free dialogue with their ideas of what social justice means to them and will be able to decide the areas they would want to engage with as philanthropists. Thus, the resultant satisfaction of the transaction will be much higher for the individuals. In fact, EdelGive Hurun India Philanthropy List 2020 suggests that individual philanthropy has just been

Corporate Social Responsibility: Choice or Coercion Read More »

Locating Data Protection and Privacy Concerns Within Antitrust Analysis

Leave a Comment / Competition Law, Contemporary Issues / CBCL

[By Anam Chowdhary] The author is a student at the National Law School of India University, Bangalore. In today’s world of the digital economy, it would not be wrong to suggest that consumer data indeed holds a high position. We cannot ignore the fact that data indeed has gained much more important than ever before when it comes to online transactions with or on big firms like Facebook, Amazon, etc. Data accumulated by these companies helps them not only analyze consumer patterns but also create demands and enhances their business.. In such a scenario where data is becoming the ‘new currency’, it is inevitable that concerns regarding data protection will rise. While such concerns seem to be within the jurisdiction of data privacy regulations like only, time and again links have been identified between privacy concerns and antitrust laws. In simpler terms, unregulated flow and processing of consumer data by dominant data-driven firms are said to have huge implications on the competition in the digital economy, thus explaining the need for antitrust analysis of the same. The connection between these areas has been identified by various jurisdictions including India where the Competition Commission initiated a suo-moto proceeding against the change in the WhatsApp privacy policy of 2021 (WhatsApp case), based on the fact that in a data-driven economy, implications of data accumulation on thcompetition cannot be ignored. Exemplary fine levied by the Federal Trade Commission on tech-giant Facebook for violating consumers’ privacy, is another example of this connection. Thus, in today’s digital economy, data protection and privacy concerns cannot be left outside of the purview of competition analysis as that amounts to taking a very narrow approach towards the understanding of the implications that lack of data protection brings forth in the market.” Connecting Data Protection to Competition Law In most jurisdictions, competition law has some basic goals- enhancing consumer welfare, maintaining healthy competition in the market, and economic efficiency. Data protection can enter this realm if it impacts one or all of these aspects of antitrust law. It is argued that data protection impacts consumer welfare and has an adverse impact on non-dominant firms in the market. Impact on Consumer Welfare It would not be wrong to state that consumers are now concerned about how much of their data is accessible to companies and how this data is being processed The uproar after WhatsApp updated its privacy policy in 2021, the reaction to the Cambridge Analytica scandal can be examples of it. Thus, it can be stated that privacy is the new determinant of consumer welfare. In the Google-Doubleclick merger case before the FTC, a link was established between data protection and quality of service. Lowering of data protection was seen as lowering of the quality of service. Thus, when a dominant firm like Google keeps acquiring data, in a scenario of no competition (which shall be explained below), it can lower privacy standards for this data which in turn can impact consumer welfare as this reduction in privacy can be construed as a reduction in quality of service even in the WhatsApp case, this degradation of quality was taken into account to initiate investigations in the aspect of data sharing between WhatsApp and Facebook. Now, of course the question arises that if consumers are so concerned about their privacy, then why do they not shift to other competitors? This query can be answered by analysing the impact that excess data collection has on competition in the market, especially on non-dominant firms or new entrants. Impact on Competition in the Market – Wiping out the Competition Section 4 of the Competition Act, 2002 states that no firm shall abuse its dominant position. It has to be understood that the majority of the cases assessed by antitrust authorities with respect to privacy and competition have involved firms which are dominant in their relevant markets. Such domination in the market means that the particular firm has a large consumer base and thus a large data set at its disposal. These firms can process this data and create better services attracting more consumers and thus more data. Therefore, there is a cycle at play in the process where consumers give you data, and this data gives you more consumers. This basically helps in generating a network effect which keeps the consumers stuck with a particular service provider as there would be higher switching costs or even worse, no worthwhile competitors. The dominant position of firms like Facebook gives them access to such data bases which help in targeted advertising and come across as good service providers. But, this also means that having set their foot in the market with huge data sets and the consequent network effects, they pose an obstruction to the entry of new comers in the market. Thus, competition is eventually wiped out. Network effect based on services provided by data accumulation, can lead to such a creation of domination in the market that dominant firms can put forth ‘take-it-or leave-it’ conditions on consumers where the consumers are compelled to compromise their data in return of the services provided. As an example, the terms and conditions in the Whatsapp privacy policy update of 2021 provided for a ‘take-it-or-leave-it’ mechanism which the Competition Commission of India construed as one of the grounds for initiation of ‘abuse of dominant position’ proceedings against the company. It is worth mentioning here that privacy is now being put forth as a non-price competition. This was affirmed in the Facebook/WhatsApp merger decision and the Microsoft/LinkedIn merger decision by the EC. This position is also being accepted in India as is evident from the recent report of CCI on Telecom sector where reference has been made to privacy being a ‘non-price competition’. Thus, it can also be stated that dominance generated in the market on the basis of data accumulation can lead to a complete disregard of privacy as a non-price competition when there is no competition in the market (much like raising prices

Locating Data Protection and Privacy Concerns Within Antitrust Analysis Read More »

Enlarging the Judicial Blanket: Analysis of the Consumer Protection Act 2019

Leave a Comment / Contemporary Issues / CBCL

[By Varda Saxena] The author is a student at the Jindal Global Law School. Introduction The Consumer Protection Act (CPA) of 1986 was established to fulfill the obligations entailed under the General Assembly’s resolution[i] to adopt consumer protection regulations across signatory countries. Certain amendments to the Act were being deliberated in the parliament since 2014, and it was only in 2020 that the amendment bill came into force.[ii] The Act entails eight chapters covering the provisions related to consumer rights, consumer protection councils, central consumer protection authority, consumer dispute redressal commission, mediation, product liability, offenses and penalties, and powers of Central Government and State Government to make rules and powers of the Central Authority and National Commission to make regulations. The new Act decreases the threshold for sellers and has emphasized caveat venditor. However, various conundrums arise as to the applicability of the provisions on healthcare and the legal profession. Even though the Act does not negate the relevance of the judicial enunciations in Indian Medical Association v V.P. Shantha, the article analyses the repercussions of the amendments and the possible benefits which can be accrued from the same. New Changes in the Act One of the much-needed benefits which a complainant seeks is expeditious redressal of complaints. Section 13 (3A) of the Act provides for disposal of cases within 90 days where no analysis or lab testing of the products is required. Where testing of products is needed, the disposal of the case can be done in 150 days. In reality, cases run for many years, and this clause is often breached. According to the Consumer Protection Act amendment in 2002, adjournments should be allowed in exceptional circumstances, and if given, the court should record the reasons for it in writing and justify it.[iii] The table presented in Kapoor’s research entails a lack of presiding officers and disposal of cases in the previous years. By expanding each commission’s jurisdiction, it is apprehended that a significant loosening will be witnessed in the redressal system. The Act increases the pecuniary jurisdiction of District commissions from 20 lakhs to Rs. 1 crore, State Commission’s jurisdiction from Rs. 1 Crore to 10 Crores, and the National Commission’s jurisdiction above Rs. 10 Crore, according to Sections 34, 47, and 58 of the Act. The insertion of these provisions clarifies the ambiguity created by the case of Ambrish Kumar Shukla v. Ferrous Infrastructure. The judgment stated that the jurisdiction must be determined based on the aggregate value of goods and services and used an illustration to buttress the same. The court stated that if an apartment costing Rs. 1 crore has defects worth Rs. 5 Lakhs only, then the value allocated will be Rs. 1 Crore and not Rs. 5 lakh for labeling the jurisdiction. However, this judgment allowed complainants to skip stages of various forums which resided in conflict with Section 14 of the CPA. The Section envisages that the Central Authority has powers to monitor procedures for transaction of its business and allocate such business to the Chief Commissioner and other such Commissioners. Further, the Chief Commissioner has the powers to delegate work related to the administration of the Central Authority and is responsible for matters of general superintendence. Therefore, the computation of goods’ value has to be based on defects only, not their aggregate value.[iv] Further, the case would have proved to be a better precedent if a reference was made to Section 8 of the Suits Valuation Act, according to which the value of the suit is determined according to the court fees. Section 7 of the Court Fees Act and Section 34 of the CPC would have aided the bench in setting out the interest amount. However, the new law is based on the consideration paid and not the aggregate value of goods, clearing the confusion surrounding pecuniary jurisdictions. Protection from Puffery The amendments introduced in the Act of 2019 also include a widened definition of a consumer, e-filing of complaints, establishment of central consumer protection authority, safeguards upholding privacy, alternate dispute redressal mechanisms, and penalties for misleading advertisements. Recently, the manufacturers of Dhathri Hair Oil and actor Anoop Menon were penalized for advertising that the hair oil guarantees hair growth within six weeks of usage of this oil.[v] A comparison can be drawn with Carbolic Smoke Ball Company’s case. It was held that such a statement would not amount to a puff, but a valid offer, which, if accepted by any individual, would bind the offeror. In cases such as these, the Act has envisaged a provision for class action suits as well, within Section 18 and 19 of the Act. Apart from tricking consumers in the garb of puffs, the Act also ensures protection against differential or discriminatory pricing done by e-commerce websites. To bolster the Act, Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (NDI Rules), also prohibit such differential pricing under S. No. 15.2.3 of Schedule 1 of the NDI Rules. The Enforcement Directorate registered the case of Telecom Watchdog v Union of India against Amazon and Flipkart due to the same, and such differential pricing could also be adjudicated under Section 3 of the Competition Act, 2002. Rule 4(11) of the e-commerce Rules should be read alongside Section 2 (41) of the Consumer Protection Act as differential pricing and discriminatory behavior is a restricted trade practice under the Act. The Act has made the usage of a customer’s electronic footprint to charge different costs[vi] an offense under the Act. However, profiling to monitor behavioral patterns for customized advertising and product display has not been interfered with. Such profiling techniques are used by tech giants such as Instagram and Facebook to compile metadata and prepare efficient algorithms for mapping user experience and commodifying the time spent by them using the application.[vii] Increased Threshold for Practitioners The CPA may have avoided the issue of profiling but has overall intended to be overtly and covertly consumer-friendly. Such a statute has also increased the threshold of the standard of

Enlarging the Judicial Blanket: Analysis of the Consumer Protection Act 2019 Read More »

The Billion Dollar Mistake: An Insight into the Citibank Wire Transfer Case

Leave a Comment / Contemporary Issues / CBCL

[By Raj Shekhar and Krati GuptaI] Raj is a student at the National University of Study and Research in Law, Ranchi and Krati is a student at the Rajiv Gandhi National University of Law, Punjab. The US District Court in the Southern District of New York on 16th February 2021 declared that In the Re Citibank Wire Transfers case, the “discharge-for-value” principle stands applicable and the defendants (the lenders for Revlon Inc.) in the case were entitled to retain funds sent by the plaintiff (Citibank) under a credit facility to which the defendants were a party. The present judgment finds its roots in the precedent established in the 1991 case of Banque Worms v. Bank America International[i] which also involved a similar question of a wire transfer worth $2 million. However, a lot of hue and cry surrounds the matter as the overall reasoning behind the judgment and the potential impact are unclear to the public at large. In light of the above judgment, this article tries to analyze the questions of law involved, the reasoning behind the judgment, and its potential impact on the banking industry wherein the principles deliberated upon in the case are expected to set precedents. The Citibank Case: Background and Factual Matrix In August 2020, Citibank (“the bank”) acted as an administrative agent for a syndicated term loan taken by Revlon, Inc. had intended to wire $7.8 million in interest payments to Revlon’s lenders. However, owing to a human error, the bank not only wired the $7.8 million which constituted Revlon’s interest but along with it the bank also wired an additional amount of nine hundred million dollars ($900 million) of its own money as well. Co-incidentally, the total amount received as a result of such wire transfer was equivalent to the total amount (principal and the incurred interest) which Revlon owed to its lenders. The bank put on the defence that the money was transferred as a result of human error and believing it, some lenders co-operated by returning the money. However, one of the lenders believed that the transfer was intentional and hence, declined to return the money wired to them by the bank. Aggrieved by the denial to return the wired funds, the bank approached the New York Court which to the bank’s dismay ruled in the favour of the lenders. Justifying its stance, the court held that the amount wired “by mistake” was to be held as “final and complete transactions, not subject to revocation” and under no condition can be returned as it was barred under the principle of “discharge-for-value-defence“, which provides that in case of accidental transfers, the lenders can keep the money if it discharges an existing liability and they didn’t know it was an accidental transfer. The New York Court’s Ruling: Understanding ‘discharge-for-value’ Principle The discharge-for-value principle that was used in the case is generally operational in cases where a claim for unjustified enrichment has been made. It discharges the liability of returning the mistaken credit when the beneficiary receives money to which it is entitled, in this case, the principal plus the incurred interest on money lent to Revlon amounted to the wired sum, and hence, has a bonafide belief that it is entitled to such amount and should retain the funds. The beneficiary should not be expected to consider what has to be done with the funds but is expected to consider the transfer of funds as a final transaction. This principle finds its roots in the case of Banque Worms v Bank America. Along with this, Citibank, a leading financial institution in the world, could make a mistake of billions was quoted by the court to be borderline irrational to assume and so the lender cannot be held liable for handling the money with a mala fide intent. The “Unjust Enrichment” Conundrum: What do the Indian Laws Say? As per Section 72 of the India Contract Act, a person to whom a commodity has been delivered or money has been paid by mistake is bound to repay or return it to the person who transferred it mistakenly. In the famous case of Kelly v. Solari[ii], it was held that in cases where the money is paid to another under a mistake of fact that made the transferor believe that the transferee was entitled to the money and the same would not have been paid if the transferor would have known that the fact was a mistaken belief, then there would be a legally valid ground for instituting a suit towards the recovery of such amount as it would be against conscience as well as the law to retain it. In such cases, however careless the party paying may have been, omitting due diligence to inquire into the fact a valid ground for recovery of such money would still stand true. The same precedent was followed in the case of the Imperial Bank of Canada v. Bank of Hamilton[iii]. Further, in the case of Kleinwort v. Dunlop Rubber Co[iv], it was held that if money is paid under a mistake of fact and is re-demanded from the person who received it the same shall be payable to the person demanding such a refund. The Calcutta High Court in Jagdish Prosad Pannalal v. Produce Exchange Corporation[v] had clarified the stance and stated that even though the sum paid under the mistake of fact is recoverable, the same is not true for all cases. In some cases owing to circumstances, a plaintiff may be disentitled by estoppel or other related factors. In other cases of mistaken credit like Union Bank of India v. Surana Bangles, S. Kotrabasappa v. Indian Bank[vi], Ganesh Cotton Traders v. General Manager[vii], UCO Bank, etc. the courts have always ruled in the favour of returning the mistaken credit. However, there has been an exception, and in the case of Metro Exporters (P.) Ltd. v. State Bank of India[viii], where the Apex Court even though it appreciated the right to recover the money

The Billion Dollar Mistake: An Insight into the Citibank Wire Transfer Case Read More »

SEBI Stewardship Code: The Way Ahead

Leave a Comment / Contemporary Issues, Corporate Governance / CBCL

[By Hansaja Pandya] The author is a student at the Gujarat National Law University. Stewardship is defined as the art of conducting, supervising, or managing of something entrusted to one’s care. The Stewards of commercial markets are institutional investors like the pension funds, mutual funds, insurance companies, asset management companies, investment advisors etc. They shoulder a responsibility to exercise their rights as shareholders of investee companies in order to ensure that their client’s money invested in various companies yields beneficial returns and the investee company does not mis-handle the money. Hence, Securities and Exchange Board of India (SEBI) recently promulgated the Stewardship Code, 20191 (SEBI Code) for institutional investors in India. It sets out the principles that enhance investor engagement and transparency and define their ownership and governance responsibilities. It is expected that the SEBI Code will automatically check and balance the system of corporate governance and allow institutional investors to engage with the investee company in circumstances of poor financial performance of the company, corporate governance related practices, remuneration, strategy, risks, leadership issues and litigation. But these ambitious goal might not see the light of the day, because the SEBI Code is completely based on the United Kingdom Stewardship Regime. India has straightaway transposed the UK style Stewardship Code2 without giving much thought about the difference in the corporate structures and motivations behind ensuring good governance practices. India has a concentrated shareholding structure wherein majority stakes are held by the promoters and their family members. UK on the other hand has a dispersed shareholding structure which allows institutional investors to hold significant share ina company and participate in corporate governance measures. In india, however, due to insignificant holding of institutional investors, their voices will be seldom heard. Furthermore, the stewardship goals of India and UK are very different. UK law focuses on Enhancing Shareholder Value (ESV Principle)3 stating that the ultimate objective of shouldering stewardship responsibilities is to ensure protection of the interests of the ultimate beneficiaries of institutional investors and thereby ensure ultimate prosperity and welfare. Transposition of such a UK-style stewardship model is not suitable in India because India has a pluralistic corporate structure that focuses on interest of all stakeholders and not only the beneficiaries of institutional investors. For instance, the Indian regulatory and legislative practices resonate a broader and more inclusive corporate environment as provided under section 166 of the Companies Act, 2013 which emphasizes on the fiduciary duties of the director4 to, “act in good faith promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of environment.” Further the provisions of Corporate Social Responsibility (CSR) in the Companies Act, 2013 suggests heavy inclination towards the inclusive stakeholder approach that aims to benefit the society at large and not only the beneficiaries of institutional investors. It can be said that the Indian stewardship regime, “…mistakenly concentrates monitoring in the hands of shareholders, where other stakeholders may have greater incentive to monitor, thereby unnecessarily relegating the importance of other stakeholders…”5 In an attempt to imitate UK Stewardship regime, the SEBI Stewardship Code has wrongly laid emphasis on benefiting the beneficiaries of institutional investors, without giving a second thought about the inconsistencies it would produce in the Indian corporate governance scenario. Given these hesitations in the successful implementation of the SEBI Stewardship Code, 2019, the author has attempted to collate together some of the best stewardship practices from across the world that could be an inspiration for the Indian Stewardship Regime: A. Netherland Stewardship Code: India is a jurisdiction that follows a stakeholder approach where the final aim of good governance is to benefit corporate economy as a whole. But our Stewardship Code does not reflect this broader stakeholder concern. An answer to this problem lies within the Netherland stewardship Code which provides for responsible use of share rights because, “it is key to creating long term value for the company and each one of its stakeholders, including shareholders”6. Netherland, just like India is a jurisdiction that invests heavily into the broader stakeholder approach and the same is reflected in its stewardship regime. India could broaden the Stewardship principles to reflect this broader approach aimed at benefitting the society at large and not just the clients of institutional investors. B. The South-African & Hongkong Stewardship Codes: It is now an established fact that it is quintessential to integrate Environmental, Social and Governance (ESG) factors while making any investment decision in order to predict financial performance more reliably.7 The SEBI Stewardship Code fails to put enough emphasis on the ESG factors. Presently, the SEBI Consultation paper8 and the National Guidelines on Responsible Business Conduct makes it mandatory to disclose compliance with ESG norms. But these measures lacks the force required for proper adherence and implementation of ESG factors, because no penalty for disobedience is prescribed. South African Stewardship regime provides a solution to this lacuna. They have put the requirement to comply with ESG norm as a part of their hard law under their Pension Funds Act, 1956. Regulation 28 issued by the South-African Minister of Finance under their Pension Funds Act now states in the preamble itself that, “prudent investing should give appropriate consideration to any factor which can materially affect the sustainable long-term performance of a fund’s assets, including factors of an environmental, social and governance character.”9 Hongkong Code also puts heavy emphasis on the adoption of ESG norms in its Stewardship Code by devoting an entire principle highlighting the importance that ESG norms have on companies goodwill, reputation and performance.10 Both these countries make non-compliance with ESG norms punishable. India could adopt a similar method and instead of just making a passing reference at the ESG norm in a “Code”, they could be incorporated as a hard law in the SEBI Rules and Regulations, violation of which would attract penalty. ESG norms is of utmost importance to the Indian scenario

SEBI Stewardship Code: The Way Ahead Read More »

Anatomisation Of Substantive Consolidation Vis-A-Vis The Re Owens Case

Leave a Comment / Contemporary Issues, Insolvency Law / CBCL

[By Nikshetaa Jain] The author is a 2nd Year student at The National Law University, Odisha. 1. Introduction Corporate groups have grown immensely due to the various legal, tax and business benefits they provide to the owners. However, the structure of corporate groups is very complex, and it is often difficult to make clear distinctions between the ownership and management patterns. This difficulty becomes more pertinent when two or more companies belonging to the same corporate group go into liquidation since there are no provisions in the Indian Bankruptcy Code (hereinafter “IBC”), providing for combined liquidation of such companies. This lacuna in the IBC became more visible during the resolution proceedings of Videocon, Amtek, Adel, Aircel and Jaypee. Thus, there was a need to develop a framework for group insolvency in India. For this purpose, the Working Group on Group Insolvency was constituted, and it submitted its recommendations in the form of a report in 2019. The report suggested several mechanisms which could be used for group insolvency. One of the suggestions of the report was that provisions for substantive consolidation might be developed but at a later stage. However, the Court had applied the doctrine of substantive consolidation in the Videocon case. Since there is no legislative framework in the IBC for applying the doctrine, the courts have a broad discretion to apply the doctrine. Thus, there is a need to develop a framework for the application of this doctrine. While formulating a framework for substantive consolidation, guidance can be taken from foreign jurisdictions as group insolvency is a relatively new concept in India. In this article, the author tries to analyse the doctrine of substantive consolidation in light of the themes discussed in the landmark judgment of Owens Corning. 2. Meaning of Substantive Consolidation Substantive consolidation is a process wherein the assets and liabilities of two companies belonging to the same corporate group are combined so that the companies are treated as a single entity. The results of this process is similar to a merger as creditors of the distinct entities now become the creditors of the consolidated estate of the entire corporate group. 3. Substantive Consolidation in light of the themes of Owens Corning Case Since there are no provisions for group insolvency in India, reliance is placed on foreign jurisdictions where substantive consolidation has been used commonly in group insolvency cases. In USA, substantive consolidation has been developed due to judicial interpretation. Owens Corning case has majorly contributed to the jurisprudence on substantive consolidation. The themes laid down in the case of Owens Corning are one of the most important principles which govern the application of this doctrine in the USA. In October, 2005 Owens Corning, a corporation and its subsidiaries filed for reorganization under the US Bankruptcy Code and subsequently developed a reorganization plan based on substantive consolidation of all the subsidiaries. The District Court granted a motion for substantive consolidation considering the administrative efficiencies of the doctrine. However, on appeal, the Third Circuit reversed the District Court’s decision and laid down the five themes which must be given due consideration while applying the doctrine of substantive consolidation. The first theme is to respect the rule of entity separateness and to use the doctrine of substantive consolidation only in exceptional cases. Limited liability and entity separateness are the most fundamental principles of corporate law. The structure of corporate groups has become the most preferred due to the fundamental principles of limited liability and separateness of entity, forming the core of the business operations. The principles of limited liability and entity separateness cannot be violated merely because it is difficult to untangle the financial affairs of various companies in the corporate group. The Courts are more reluctant to use this doctrine when a country follows the entity theory. The entity theory presumes that one entity of the corporate group cannot be liable for the debts of the other members of the same group. English laws follow the principle of entity theory,[i] and since most of the Indian laws are based primarily on the English laws, it is safe to assume that India also follows the entity approach. The Working Group also suggests that the doctrine of substantive consolidation, if adopted in the Indian insolvency law, should be applicable in a limited manner. Thus, the first theme can be applied in India as well. The second theme is that substantive consolidation is a remedy for those harms caused by the shareholders who have abused the principles of separateness. The doctrine of substantive consolidation was developed as a remedy for the creditors who had suffered harm due to abuses of the corporate form. Majority of the harms are caused to the creditors due to the fraudulent activities undertaken by an entity under the garb of corporate law principles. If the principles of corporate law would lead to fraud or injustice, then the equitable principle will apply in the form of substantive consolidation. This theme is in consonance with ‘creditor in possession’, an objective of the Indian insolvency law, as substantive consolidation places the creditors in control of the assets of all the companies of the corporate group in case of abuse of corporate law principles. Substantive consolidation is suitable where an entity completely controls or dominates the corporate group of entities and transfers money between different entities as if the entities are mere departments of the group. The third theme is that mere benefit in the administration of a case cannot be the sole ground for applying the doctrine of substantive consolidation. Substantive consolidation cannot be granted merely on the ground that it is necessary for formation of a reorganization plan. Since any decision to consolidate the assets and liabilities of two or more entities of a corporate group affects the rights of both the debtors and the creditors, substantive consolidation should be applied only after a detailed examination of the rights and interests of the parties involved.[ii] In India, substantive consolidation was used for the first

Anatomisation Of Substantive Consolidation Vis-A-Vis The Re Owens Case Read More »