Contemporary Issues

Dilemma with Avoidance Proceedings Post Corporate Insolvency Resolution Process

Leave a Comment / Contemporary Issues, Insolvency Law /

[By Mayank Bansal & Dev Bansal] The authors are students at the Dr B.R Ambedkar National Law University, Sonepat. Introduction For a successful insolvency regime, the prevention of fraudulent transactions made by the management of the corporate debtor in the hands of certain preferred creditors is crucial to uphold justice. Since these transactions are made prior to the initiation of the Corporate Insolvency Resolution Process (“CIRP”), they reduce the availability of funds for bona fide creditors and other stakeholders to get their dues equitably in the insolvency process. These are called “preferential” or “avoidable” transactions, and The Insolvency and Bankruptcy Code, 2016 (“IBC”) provides for their reversal. Though IBC empowers the Resolution Professional (“RP”) to initiate proceedings against such transfers before the National Company Law Tribunal (“NCLT”), it is silent on their completion period, and more importantly on a situation where the NCLT is not able to adjudicate on these transactions till the completion of CIRP. Recently, the High Court of Delhi (“H.C.”) in Venus Recruiters Private Limited v. Union of India while facing this issue ruled that avoidance proceedings must be adjudicated before or at the time of approval of the resolution plan, i.e., before the completion of CIRP and not after it, on account of limited jurisdiction of NCLT, finite nature of RP, and that no one seemed to be the beneficiary of the recovery.  This article seeks to highlight plausible pathways the HC could have followed in response to the encountered issues and assert that preferential transactions can continue beyond CIRP, for which the NCLT is the appropriate authority and RP should only continue with the proceedings. A distribution mechanism for the subsequent recovery has been propounded, and lastly, the question of litigation cost has also been dealt with. Current Conundrum With Proceedings Avoiding Preferential Transactions The H.C. in the above case quashed the avoidance proceedings post the approval of the resolution plan. This seems absolutely against the principles of justice since the lapse of time shouldn’t be an obstacle in undoing the unjust; the basic essence of such avoidances. As stated in the ICSI’s Statement of Best Practices, the avoidance proceedings aim to restore the unjust amount from the defrauding directors, promoters, and creditors, whereas CIRP relates to the resolution of the corporate debtor, and thus the two should be treated separately. Moreover, the Report of the Insolvency Law Committee (“ILC”) suggested that there shall be no prescriptive timelines for the completion of these proceedings, and they may continue beyond the period of CIRP. These proceedings may involve assessing multiple impugned transactions within the clawback period that may take longer than CIRP, and hence, these proceedings should have been allowed to pursue beyond CIRP. NCLT Should Continue The Adjudication The H.C. held that the NCLT can only adjudicate the avoidance transactions before or at the time of approval of the plan. However, as ILC suggested NCLT for deciding upon other related facets (such as the distribution of the recovery in such cases) even post CIRP, it is apparent that it may also adjudicate these transactions. Besides this, Rule 11 of the NCLT Rules, 2016 empowers the NCLT with “inherent powers” to pass orders as it may deem fit in given facts and circumstances to ensure equity and justice. Although Section 63 of the code bars a civil court to adjudicate any issue for which the NCLT is empowered, the stated judgment concluded in leaving the party to their civil remedies outside the IBC. Transferring jurisdiction to a civil court is blatantly against the provision and spirit of the code. Role Of Resolution Professional On the locus standi of the RP, the court strictly applied the principle laid down in Committee Of Creditors Of Essar and held that the role of RP is finite in nature and he can’t continue as “former RP” after the completion of the plan. However, ILC scrutinizing various alternatives suggested that the RP shall continue with the existing practice and remain the appropriate authority to carry on with the preferential transaction. IBC is a newly enacted code and numerous amendments are undertaken in pursuance of the committees’ recommendations and judicial decisions. Therefore, following the ILC’s recommendations, RP should have continued the proceedings. Distribution Of Recovery The H.C. was of the view that post plan’s approval by the Adjudicating Authority, proceeds from preferential transactions would thereafter neither go to the creditors nor the resolution applicant. However, this seems to be in stark contrast to the ILC’s recommendations on the distribution of the avoidance recovery suggesting the adoption of a flexible approach for the same and to leave to the prudence of the adjudicating authority whom to render the benefits, while explicitly mentioning the creditors and the successful resolution applicant among the beneficiaries and even suggesting a distribution mechanism for the former. At present, there are no concrete provisions on the distribution of such recoveries but recommended to be pursued based on facts and circumstances of the case. Inspired by the U.S. bankruptcy laws, below is an analysis of situations per the ILC’s recommendations. Creditors as Beneficiary The key aim of avoiding these transactions is to avoid unjust enrichment of certain creditors over others, which in effect means that creditors’ welfare is paramount in such situations. The bankruptcy laws of countries like the U.S. also advocate creditors’ benefit, either direct or indirect. While dealing with Section 550 of the U.S. bankruptcy code stating such recoveries to be for the “benefit of the estate”, the Court of Appeals has observed this phrase to articulate the creditors as beneficiary and that they must be ‘meaningfully and measurably benefitted’. In In re Centennial Industries, Inc., the Court of Appeals permitted the debtor to pursue avoidance actions even when the reorganization plan provided for the fixed payments to unsecured creditors over five years, stating that any such recovery will be additional security for the plan’s fulfilment and increase the likelihood of the creditors receiving their future payments.  Hence, the creditors could have been identified by the HC

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Refund Of Advance Is Not Operational Debt – The General Proposition & The Anomaly

Leave a Comment / Contemporary Issues, Insolvency Law /

[By Devansh Rathi] The author is a student at the Dr Ram Manohar Lohiya National Law University, Lucknow Introduction – Since the advent of the Insolvency and Bankruptcy Code of 2016 (“the Code”), the adjudicating and the appellate authority has relied upon and confined itself to the bare text of the Code to interpret the legislature’s intent to disentangle the numerous issues that have arisen. One peculiar concern that has surfaced was whether seeking a refund of an advance given to a corporate debtor would tantamount to an ‘operational debt’ as under Section 5(21) of the Code? The Adjudicating Authorities, in various instances, have answered the same in negative. The issue first arose in SHRM Biotechnologies Pvt. Ltd. v. VAB commercial Pvt. Ltd., where the NCLT held that since the appellant, which invoked section 9 of the Code, was not rendering any goods or services to the debtor, he would not be called an operational creditor. The bench also perused section 5(21) of the Code and carved out three important elements – (i) debt arising out of provision of goods; or (ii) services; or (iii) out of employment. Since the appellant was not falling within the ambit of any of these elements, the bench dismissed the application. Even the NCLT Mumbai in TATA Chemicals Ltd. v. Raj Process Equipments and Systems Pvt. Ltd., while rejecting the application held that the petitioner has not provided any goods/services to the debtor and his claim cannot be called an operational debt. Hence, the Adjudicating Authorities have adhered to the four corners of the definition as inscribed in the Code. However, the NCLAT in Overseas Infrastructure Alliance (India) Pvt. Ltd. v. Kay Bovet engineering Ltd. (“Kay Bovet”) has taken a different approach when perusing the same issue which happens to be the crux of this writing. The author doesn’t aim to criticize the judgement but to highlight the discrepancy and offer a viable reason of the Appellate Authority behind such a discrepancy. The Tripartite Agreement in Kay Bovet – A tripartite agreement was signed between the employer, the contractor (operational creditor/appellant), and the sub-contractor (corporate debtor/respondent). As per the agreement, the Respondent was engaged in designing, engineering, supplying, installing, testing, etc. of factory plant for the employer while Appellant was responsible for all activities pertaining to engineering, procurement and construction as EPC contractor and had to handover the project to the employer upon its completion. In an essence, the contractor was rendering services to the employer while the sub-contractor was rendering the services both to the employer and the contractor, with an objective to fulfil the needs of the employer. In pursuance of the same, the contractor advanced 10% of the contract value to the sub-contractor. However, due to some reason, the tripartite agreement was terminated and the contractor sought a refund of the amount advanced. The bench while looking through the terms of the agreement ruled that the agreement provided for the rendering of services and supply of goods and the contractor’s claim was in such respect. Hence, the contractor’s advance payment to the sub-contractor would make him an operational creditor. The bench also refuted the respondent’s claim of a pre-existing dispute which was sub-judice before the Hon’ble High Court. Analysis – An operational creditor is someone who supplies a good or renders a service, just like a financial creditor who is granting a financial loan. Even the person who is availing the financial loan won’t be a financial creditor even if due to the terms of the contract, further amounts are to be disbursed as the person who is taking the loan is not doing so for the time value of money or interest. The essential ingredient for an operational creditor is that the debt due to them has to have arisen because they have either given goods or rendered some services. Therefore, in ordinary circumstances, a refund of advanced money would not be an operational debt as the buyer is not owed any amount because he has not supplied any goods or services but the debt is actually due, as for some reason the contract could not be concluded. However, the NCLAT in Kay Bovet has taken a different stand but it suffers from certain discrepancies. Here, the sub-contractor was rendering services to the employer and the contractor; however, the contractor was not rendering any services to the sub-contractor but only to the employer. In light of the same, if we examine section 5(21) which says – “a claim in respect of the provision of goods and services….” The term ‘in respect of’ should here mean only pertaining to that particular provision of goods or rendering of services to that party and not to any other third person. But as per the facts, the contractor was not providing any goods or services to the sub-contractor. Here the claim of the contractor was pertaining to the provision of goods and services but those goods and services were rendered by the contractor to the employer and not to the sub-contractor. The stance taken by the NCLAT would have been appropriate if the contractor would have been rendering the services or providing goods to the sub-contractor. The facts of the case are silent on the same as the judgement doesn’t state anything explicitly. To buttress the decision taken by the NCLAT one would have to rely on the implicit logic that the contractor and subcontractor were rendering a service to each other to ultimately fulfil the needs of the employer. The Contractor advanced money to the subcontractor but the Contractor may also have been providing materials, services, etc. The judgment doesn’t reproduce the agreement. Sometimes, in the case of subcontracting, the contract may have provisions such as that certain material to be used for construction will be provided by the main contractor to the subcontractor. In such case, the NCLAT may have felt that the contractor was also to provide goods and services to the subcontractor. Since we don’t have access to the contract

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Capturing Data Privacy through the Lens of Competition Law

Leave a Comment / Competition Law, Contemporary Issues /

[By Taniya and Abhinav Singh Chauhan] The authors are students at the National Law University, Odisha. Amidst the informational age, companies, irrespective of their domains, have an eye on data and are investing significantly to get a hold of it. Therefore, data becomes an essential and scarce resource. Companies like Google and Facebook have a significant edge over their competitors due to their capacity to gather and process large amounts of data, enabling them to provide better facilities. The amount of innovation that a company can offer is directly proportional to the amount of data a company accumulates, as data empowers the company to analyse the consumer behaviour. Nevertheless, the more data a company possesses, the greater is the possibility of its abuse. It not only raises privacy concerns for the user but also antitrust concerns regarding the behaviour of such companies. It involves not just the data gathered by the companies but also the data gained by the companies during the merger and acquisition process of other companies. Thus it becomes imperative to ascertain how data can be regulated to mitigate any antitrust concerns regarding the considerable data accumulation by digital companies. Need for data regulation Data privacy concerns have always been there during data accumulation and transfer by large companies, but efforts have rarely been made to identify the anti-competitive consequences. New technologies and big data analytics have transformed the way data is processed and used. A company that collects data for a particular purpose may use the same data for some other purpose with the company’s changing needs. Thus, the future application of data cannot be decided when the consent of consumers for processing their data. The Indian Competition Act was enacted for the country’s economic development by preserving competition in the market and protecting the interests of consumers at the same time. The current antitrust regime concerns, in particular, predatory pricing, market denial, anti-competitive agreements, and other forms of abuse of dominant status that limit competition by driving away other firms. In digital business models, the primary goal is to expand the user base and encash the network effects that become a potential income source. Owing to the proliferation of data accumulation activities, large companies expand their customer base and earn income by leveraging that database to redirect ads to targeted groups of people, popularly called targeted advertising. Eventually, gaining a dominant position in the relevant market and keeping track of the industrial trend. This network control gives rise to anti-competitive practices like self-preferencing and other abusive practices. In one of its decisions, Germany’s competition regulation authority, Bundeskartellamt, prohibited the collection and processing of user data because Facebook was in a dominant position and could extensively manipulate user consent. It accredited the value to user consent for excluding them from Facebook services and its practice of gathering and combining data from different sources. Nevertheless, the decision prohibiting the data merger was based on the user’s privacy concerns, and neglected the antitrust regulations. Most data-driven companies remain non-profitable during the initial years of their operation, as they are focused on increasing the user base to exploit the network effects thereon. India’s overall legal system scrutinises mergers based on assets and turnover of companies involved or created. This system fails to include data-driven companies, even if they significantly impact the competition in the relevant market. Jurisdictions like Brazil and Ireland have exercised their residuary powers to scrutinise mergers falling below the threshold limits; however, the competition act does not provide any such residuary powers to CCI. The regulatory authorities in jurisdictions like Germany and Austria have tried to address the concerns raised by data accumulation through mergers and accusations by introducing deal value thresholds (DVT). DVTs empower authorities to assess data-driven companies’ mergers in which the monetary consideration surpasses the prescribed threshold limit. In India, the Competition Amendment Bill 2020 proposes to amend §5 of the act to enable the government to specify DVTs for mergers. Nevertheless, DVTs are a novel approach, and their effectiveness is yet to be determined. The introduction of DVTs in India must take a pragmatic approach to ascertain thresholds limit and nexus criteria to avoid unnecessary burden for the CCI and red-tapism for the parties. Though DVTs bring data-driven companies under the regulatory authorities for their probable anti-competitive practices, the data protection and privacy concerns remain as it is. How much data shall be regulated Companies like WhatsApp and Facebook do not charge their users monetary fees for their services; instead, they charge them in the form of their data. The imposition of stringent restrictions on the collection and processing of users’ data would limit the revenue of such companies. Moreover, it will also impede the creation of new services due to the unavailability of user data. While it can be claimed that data security and regulatory systems would benefit the consumers by preventing exploitation, but it can also reduce the competitive regime, as the innovation is mainly based on data. Potential competitors will first need to collect and analyse the data, which will increase the cost and required resources and ultimately dissuade new players from entering the market. Even if new players enter the market, they will not be able to compete with the already established players, since the new entrants with higher costs either have to offer services at a higher price or sustain losses. Since present laws are insufficient to seal the rift between the individual’s privacy and the anti-competitive behaviour of the firm, the same can be resolved on a case to case basis assessing the needs and demands of the economy and competition. For example, the concept of open banking allows third-party to access banking and other financial data of customers, for promoting new players to provide better services, eventually instilling competition in the field. Thus, privacy may have to part away to ensure healthy competition and consumer welfare. In India, the fundamental right to privacy is not absolute and can be restricted for greater social good.

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The Dichotomy Between Competition Law and IPR

Leave a Comment / Competition Law, Contemporary Issues /

[By Nipun Kumar] The author is a student at the ILS Law College, Pune. Competition law and Intellectual Property Rights (hereinafter “IPR”) are two policies that have a common objective of ‘consumer welfare’ and ‘efficient allocation of resources’. Modern understanding of these two disciplines is that both the laws work in conformity to each other in order to ‘bring new and better technologies, products, and services to the consumers at lower prices’. However, a conflict appears to arise between the two policies given their contradictory methods of achieving the common objective. IPR grants a degree of exclusivity by limiting access, whereas competition policy seeks to promote competition and facilitate access to the market. The Raghvan Committee in its report on competition law had opined that there exists a dichotomy between IPR and competition policy where the former ‘endangers competition while the latter engenders competition’. Owing to the fact that intellectual property rights confer exclusive rights upon their owners on one hand, whereas competition law strives at keeping the markets open on the other, it is easy to assume that there is an inherent tension between these two areas of law and policy.[i] This conflict, sometimes, takes a toll on healthy competition in the market which eventually defeats the objective of either of the laws. This article discusses the various instances of conflict between the two policies and how IPR is used as a shield to stifle competition in the market. Intellectual property owners provide licenses to generic manufacturers in the market so that they can exploit the intellectual property and pay a royalty to the license providers. This licensing can be misused in various ways by the intellectual property owners, which has the potential to restrict competition in the market. Some of them are discussed below: Territorial Exclusivity Some patents require such high level of investment that it becomes significantly risky for a licensee establishment to use the patent for business unless the licensee is given immunity from any competition arising out of the use of that patent. To overcome such competition, the licensor grants an exclusive right to manufacture and sell goods in a particular territory and agrees to avoid granting similar rights to another in that territory.[ii] Such licenses make sure that there is only one entity in a territory authorised to use the patent, thereby providing such entity with a territorial exclusivity. These licenses have the potential to raise competition concerns because these are aimed at eliminating competition by restricting the use of patents by other firms, which prima facie qualifies as an anti-competitive act. In the case of Nungesser v. Commission (Maize Seeds case), the Court of Justice of the European Union (hereinafter “the Court”) has given a robust interpretation of territorial exclusivity where it identified two types of exclusive licenses: ‘open exclusive license’ and ‘exclusive license’. In an open exclusive license, the exclusivity of the license relates solely to the contractual relationship between the owner of the right and the licensee, where the licensor agrees neither to license anyone else in the licensee’s territory nor to compete there itself. An exclusive license, on the contrary, aims at providing the licensee with absolute territorial protection so that all competition from the third parties, such as parallel importers and licenses for other territories, is eliminated. The Court concluded that the grant of an open exclusive license, that is to say, a license which does not affect the position of third parties as mentioned above is not anti-competitive. As regards the exclusive licensing, the Court reiterated its stance in Consten and Grundig v. Commission and held that absolute territorial protection granted to the licensee in order to enable parallel imports to be controlled and prevented results in the artificial maintenance of separate national markets, stands in contravention with the competition policy. The Maize Seeds case laid down that territorial exclusivity may not always be anti-competitive and it depends on whether the license is having any detrimental effect on competition in the market. After the case of Nungesser, the Court has adopted a somewhat liberal view regarding territorial exclusivity by holding that such licenses are not anti-competitive. In Coditel v. CinéVog Films, the Court has even stressed on the importance of the territorial exclusivity where it acknowledged that in certain cases the licensee may need absolute territorial protection. In Pronuptia de Paris v. Schillgalis, the Court held that where the licensee’s business name or symbol of the franchise is not well known, the grant of exclusive territorial protection may not infringe the competition policy. It can be concluded that territorial exclusivity may tend to raise competition issues in a market which has to be decided on factual points in a case; the only test is whether the license, by effect or by object, causes an appreciable adverse effect on the competition. Technology Pools The European Commission’s (hereinafter “the commission”) Technology Transfer Guidelines defines technology pools as arrangements whereby two or more parties assemble a package of technology which is licensed not only to contributors to the pool but also to third parties. Technology pools may be both pro-competitive as well as anti-competitive. Such pools are beneficial to competition because they allow for a one-stop licensing for the technologies required in the market, which reduces the transaction cost significantly whereas they may be detrimental to the competition when they establish a de facto industry standard which tends to reduce innovation by foreclosing alternative technologies from entering the market. The commission has determined the effects of pools in the case of substitute and complementary technologies. In the markets where the technologies pooled are substitutes, the royalties paid will be higher which may amount to price-fixing between the competitors. This makes pools of substitute technologies restrictive of competition, given that price-fixing is prima facie anti-competitive. In the case of complementary technologies, pooling amounts to lower royalties, and therefore, such pools are not restrictive of competition. The competition is affected in case of complementary technology pools when the licensee is forced to

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Unwrapping the Conundrum: The Vodafone-India Tax Saga

Leave a Comment / Arbitration Law, Contemporary Issues, Taxation Law /

[By Urja Dhapre and Chetan Saxena] The authors are students at the Institute of Law Nirma University. Introduction In an attempt to draw things to a close, the Permanent Court of Arbitration [PCA] has passed an award against India’s Income Tax Department, upholding Vodafone International Holding BV’s [VIH] claims to not pay the tax liability for a whopping $2.2 billion. The award holds the Indian Tax Department to be in violation of Article 4(1) of the Bilateral Investment Treaty [BIT] between India and the Netherland which elucidates the principle of fair and equitable treatment to the investors. VIH’s saga of a tax dispute in India dates back to the year 2007 wherein a tax liability was imposed on VIH by India’s Tax Department alleging VIH to have concluded its acquisition with Caymanian-based CGP Investments from Hutchison Telecommunications International Ltd [HTIL] based in Hong Kong as a colorable device to ultimately get a controlling interest in Hutchison Essar Ltd [HEL], an Indian company whose control was held by CGP Investments. While the Bombay High Court [BHC] ruled in favor of the tax department, the Supreme Court [SC] overturned the BHC’s judgment by clarifying that the transaction in contention was not related to the transfer of an asset but rather the transfer of a share. VIH’s resort to International arbitration rests on the grounds of a retrospective amendment in the Income Tax Act, 1961 [IT Act]by the government in 2012, such that it overturned the Supreme Court of India’s [SC] judgment, making VIH labile for tax dues. Offshore Indirect Transfers and their Taxation Aspects Offshore indirect transfers [‘OITs’] like the one of VIH-Hutch, are one such category of transactions that are viewed to have built to abuse the tax regulations of a country, such that the ownership and effective control of an asset is transferred without replacing its legal owner. The underlying asset does not change hands, so there is formally no capital gain directly realized. However, gains are made out of such underlying assets even though the primary ownership remains the same. The chargeability of such gains is thus contested due to its uncertainty in interpreting OITs and their taxation with no standard regulations set across the globe. In June 2020, the Platform for Collaboration on Tax [PCT] came up with a report concluding that location countries shall have the right tax OIT’s. However, an important deliberation was of the inclusion of specific provisions taxing the OIT’s. While the report transcripts the view that OITs shall be taxable where the underlying asset lies, it refrains from the applicability of such taxes retrospectively. The Retrospective Amendment and its Validity The amendment brought forward by the Government of India overturning the decision of the SC disrupts the entire affixed jurisprudence of tax statutes in India. The aspect of retrospectively amending tax clauses for the sole purposes of overturning the judgment has been questioned and its condemnation has been widely unveiled through a catena of judgments. In the case CIT v. NGC Networks (India) Pvt. Ltd., BHC applied the principle of lex non cogit ad impossibilia (the law does not compel a man to do what he cannot possibly perform) with respect to the contested retrospective amendment of Explanation 6 to Section 9(1)(vi) of the IT Act. Moreover, the Indian Tax Authority [ITAT] in the case of Cairn India Ltd &Ors. v. Government of India (post the Vodafone ruling) had held that the assessee cannot be burdened with the levy of interest where it could not have visualized its tax liability at the time of the transaction, and tacitly lent credence to the view that the indirect transfer provisions were new and did not previously exist. The approach of the SC with respect to retrospective amendments is also very unambiguous. In the case of Commissioner of IT, New Delhi v. Vatika Township Private Ltd the court observed that taxing principles should be construed in their strict interpretation, and ordinarily, a statute should not be held to have a retrospective effect. Anything contrary breaches the principles of natural justice along with it being violative of the right to carry trade under Article 19(1)(g) of the Constitution of India. Another bench of the SC, held on similar lines, clarifying “the Legislature cannot set at naught the judgments which have been pronounced by amending the law, not for the purpose of making corrections or removing anomalies but to bring in new provisions which did not exist earlier.” Principle of Fair and Equitable Treatment and Offshore Indirect Transfer The principle of fair and equitable treatment [FET] is one of the most accustomed provisions often found in Bilateral Investment Treaties [BITs], casting an obligation on the host countries to provide foreign investors with a fair and equitable treatment. A lot of discussion has evolved to interpret the minimum standard of the FETs as to whether it is a self-contained standard, referring to general International Law which has to be interpreted in each case by the arbitrators or it should be linked to customary international minimum standard. To resist a blurred and ambiguous situation, the tribunals have analyzed five categories of elements to be encompassed to interpret this principle: Obligation of vigilance and protection, Due process including non-denial of justice and lack of arbitrariness, Transparency, Good faith – which could include transparency and lack of arbitrariness and Autonomous fairness elements. Analyzing the tribunal’s decision to be against the fair and equitable principle accorded in Article 4(1) of the India-Netherlands BIT, the authors attempt to study in the light of international jurisprudence the approach that tribunals have undertaken in similar cases. One such remarkable case is of the Occidental Exploration and Production Company [OEPC] initiating arbitral proceedings against Ecuador for violating the FET provision of their BIT. The Tribunal interpreted the FET standard to require the “stability of legal and business framework” to be met with the transaction. It concluded that the framework, under which the investment had been made and operated, was altered to a crucial extent by amending its

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A Self Regulatory dharmsankat: An Outlook on The Future of Fintech Through RBI’s SRO Policy

Leave a Comment / Contemporary Issues /

[By Adarsh Vijayakumaran] The author is a student at the National University of Advanced Legal Studies, Kerala. In the last few years, financial technology (or FinTech) has revamped the working of finance in India’s evolving legal system. It has changed the landscape of traditional investment instruments and brought newer fleshier techier tools and varieties at the same time, making finance look simple and faster. While for sometime FinTech instrument remained people’s favorite romp, the news of alleged data leaks in Google Pay and the great Indian crypto Ponzi schemes have created a challenging picture for the working of FinTech, thereby, calling forth the regulators of all kinds to regulate these hagfishes to protect the innocent investors. It was in light of this huge stakeholder outcry that on October 22, 2020, the Reserve Bank of India (RBI) exercised its powers under the Payment and Settlements Act, 2007 to introduce a framework for the recognition of Self Regulatory Organization (SRO) for payment system operators. But a question that needs to be answered is if self-regulation, the most viable option for regulating FinTech? More so, if the RBI’s present policy (even though at its nascent stage) will adequately address the risks and concerns that FinTech since its inception possessed? And finally If not SRO, then what should be next? Self-regulation represents a social organization whose origin could be traced back to the ancient time of medieval guilds, and merchants were a group of men joined together to form a pact envisaging their rights and obligations. In today’s world, self-regulatory bodies exist in different fields including law, medicine, vendors’ guild and many other sectors. The primary reason for the existence of self-regulation has always been a challenge against the government monopoly created through complex asymmetrical informational flow. The introduction of SRO for FinTech in India was not completely blindsided. In fact, the formulation of SRO could be traced back to the report submitted by “Inter-Regulatory Working Group on Fintech and Digital Banking” dated November 2017, wherein the committee suggested that a body comprising of representatives of various FinTech companies should be formed for addressing the regulatory lacuna that it was posing. Further, this suggestion was reiterated by many other working groups until the RBI announced its intention to form such an organization in February 2020, and a policy was introduced in August for public comment in the same year. The present framework is based on the comments received after these public consultations. The RBI’s policy framework for SRO stipulates certain touchstones for making of an SRO body and details out the governance framework and functions of SRO. The policy states the SRO should find behavioral and professional standards in the sector and enforce them based on mutual agreements. It says that SRO is answerable to the RBI and should act as the representative voice of its members in consultations with the RBI. The SRO is also asked with the duty of providing RBI with periodic reports. And further, the SRO is expected to play a constructive role in supplementing and complementing the existing regulatory frameworks. Now, regarding the governance of the SRO, the RBI has specified that one-third of the board of SRO should be independent members and all memberships should be at the satisfaction of RBI based on the relevant-fit-and proper criteria prescribed by the former. The framework provides that the SRO will be financially viable for fulfilling its objectives, and each member will be required to pay a uniform fee for membership. Moreover, SRO will remain as a not for profit organization following a transparent practice for governance. The promoters of the idea of self-regulation in finance based market space consider the formation of SRO to be a significant advantage over the direct government regulation as it exemplifies a market environment that is responsive, flexible, informed, and targeted. They emphasize its potential to create shared values among private players, thereby cultivating a sense of ownership and participation in rulemaking. But the reality is often bleaker than what it seems. To evaluate a policy of an SRO in fintech, one must first understand the purpose and objectives of fintech. Fintech companies stand as a blend of technology and finance to improve and automate economic services. They fill a void in market space that legacy institutions like banks have created in catering to the needs of the wider audience at the expense of customer experience. The primary objective of fintech is to either disrupt the traditional economic space or replace it with a new financial model. On this note, self-regulation for fintech fundamentally means self-serving. Because giving the halters of the future of fintech legal space to private players indicate a transition of power from public interest to private lead. Thereby, making what one would call an illusion of regulation where the profit-seeking enterprise wanders the field as a feral maverick. The next question that poses a threat to the working of the SRO is whether the independent directors of the SRO will truly be independent? If one was to follow section 149 (6) of the companies, Act in both the letter and spirit an obvious conclusion that will flow from it is that most of the independent directors of the companies are not really independent. The Indian experience of the working of companies over the past several years has shown that most of the independent directors are not really independent and have only been onlookers nominated by the board to witness the tussle between industrial heads. This is true in the case of SRO as well. Even though the policy in its present form stipulates a one by third independent membership, the members will not be truly independent in taking policy decisions as their minority interests could easily be thwarted by the two-third majority held by the private players. Another significant problem faced in the working of SRO is its lack of power in enforcing policy decisions. Even though SRO will be formed under the supervision of the RBI, the policy stipulates

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Evaluating India’s Overseas Direct Investment Policy: A Call For Reform

Leave a Comment / Contemporary Issues /

[By Divyani Auti ] The author is a student at the Maharashtra National Law University, Nagpur. Introduction As the world enters into an era of financial austerity amidst an economic slowdown brought about by the Covid-19 pandemic, the restrictive regulatory stance of the Reserve Bank of India (RBI) in relation to cross-border flow of capital has been attracting considerable attention lately. In recent years, there has been an increase in Overseas Direct Investment (ODI) from India and consensus seems to be evolving in favour of liberalizing the current framework to facilitate such investments. At a broader level, such outflow of capital has been happening in two ways: first, expansion of business operations through cross border mergers and acquisitions to facilitate wider access to overseas markets (internationalisation); second and more commonly, incorporation of foreign holding companies by Indian entities to take advantage of favourable regulatory framework (externalisation). Against this backdrop, this post advocates the rationalisation of the regulatory framework governing such cross-border investment whilst highlighting the practical challenges associated with the current framework. In particular, this post shall examine the setting up of step-down subsidiaries overseas and critique the differential treatment meted out to resident individuals. It will then conclude by tracing the round-tripping concerns underlying the prevailing stance and suggest potential changes to help strengthen the framework. Overseas Direct Investment in India It is a known fact that investors look for ways to maximise their returns, while businesses look to raise capital from newer markets. This brings into sharp focus the need to find ways to overcome barriers to the cross-border flow of capital. There are many strategic incentives for internationalisation/externalisation, foremost of these being access to capital from global investors resulting in the diversification of investor base. This way, companies don’t have to solely rely on domestic investors who have typically shown less appetite for nascent companies. Also, establishing holding companies offshore provides for greater commercial certainty due to consistency in adjudication, mitigates tax risks, and protects against currency fluctuation. Here, it is pertinent to mention that Foreign Exchange Management Act, 1999 (FEMA) along with FEMA 120 Regulations govern the ODI framework in India. India’s Regulatory Approach And Impact On International Investors Recently, the RBI issued clarifications stating that under the FEMA 120 Regulations an Indian party is not permitted to acquire a stake in a foreign company that already has Foreign Direct Investment (FDI) in India. This observation is significant as it characterises even instances wherein an Indian Party doesn’t hold a controlling stake in the overseas company, which in turn has a downstream investment in India as a contravention of applicable law. To better understand the implications of this, let us consider the case of an individual (Indian Party) holding a single share, with no power to influence investment decisions in the overseas company (ODI approval route). Under the current framework, it is entirely plausible that even this would be considered as a joint venture (JV) and consequently, the liability imposed would be disproportionate and can have the effect of curbing entrepreneurial vision. Similarly, RBI also clarified that FDI in India through a foreign JV/wholly-owned subsidiary (WOS) in which an Indian Party has invested shall require specific approval of RBI. Again, this is crucial as even if it is a limited embargo it affects foreign investors looking to invest in India by increasing compliance costs. In fact, having such an onerous regulatory framework at a time when global supply chains are getting disrupted will not only be ill-suited but will also disincentivise businesses through FDI in India. Crucially, this being an insertion under Frequently Asked Questions (FAQ) and not a change in law, it can further have the effect of calling into question existing investment arrangements, which can lead to uncertainty. In view of these concerns, a High-Level Advisory Committee was constituted which recommended easing these restrictions to attract foreign investment. It emphasised the need to do away with RBI approval as long as the investments are routed through proper banking channels and are for legitimate business purposes. However, despite such strident calls for liberalisation, these measures have continued to elude the Indian framework. Overseas Direct Investments in Joint Venture/Wholly Owned Subsidiary The RBI’s restrictive stance towards ODI can be seen from its earlier embargo on ‘resident individuals’ from investing in overseas companies. Prior to the 2013 Amendment, the FEMA 120 Regulations only permitted an ‘Indian Party’ to invest overseas. While at first glance, this may be seemingly innocuous, however, it is crucial to note that the definition of ‘Indian Party’ did not extend its coverage to ‘resident individual’. Instead, only a company, statutory body and partnership firm were covered under this definition.[1] This predictably came with its own practical challenges as in contrast to FEMA 120 Regulations, the Liberalised Remittance Scheme (LRS) notwithstanding such embargo allowed individuals to get remittance for the purchase of securities. As a result of these divergent stances, it is not inconceivable that individuals already made remittances which resulted in the acquisition or setting up of businesses abroad. Therefore, the Kishori J. Udeshi Committee apprehending such a scenario characterised such restrictions as a ‘handicap’. It further observed that the provisions of then FEMA precluded resident individuals from acquiring the majority stake or establishing business outside India and consequently recommended liberalising the framework to achieve greater capital account convertibility. Thereafter, in a move affirming the Committee’s observations, the 2013 Amendment permitted resident individuals to invest in equity shares and compulsorily convertible preference shares (CCPS) of JV/WOS outside India.[2] The Amendment, although was welcomed by India Inc., was a fragmented effort at best. This was because the proposed framework whilst permitting the resident individual to set up JV/WOS abroad prohibited setting up or acquisition of a step-down subsidiary. In other words, the JV/WOS was only permitted to the extent that it was an operating entity and not a holding entity.[3] Further still, notwithstanding the 2013 Amendment which expanded the ‘Indian Party’ definition to include ‘resident individuals’ thereby permitting individuals to invest overseas, the

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The Liability of Cab Aggregators in India vis-à-vis their Consumers

Leave a Comment / Contemporary Issues, Contract Law /

[By Suyash Tiwari and Prakul Khera] Suyash is a student at the Hidayatullah National Law University, Raipur, and Prakul is a student at the Institute of Law Nirma University, Ahmedabad. The reputation of ride-hailing platforms like Uber has been marred with a plethora of cases involving sexual assault and negligence of its drivers. The case in the Indian context is no less different. These platforms are operating under such a regulatory grey area that they easily evade liability for the acts of drivers. The Motor Vehicles (Amendment) Act, 2019 introduced the term aggregator for these platforms which defines them as “digital intermediary or marketplace for a passenger to connect with a driver for the purpose of transportation”. This provision brought such platforms under the purview of the Motor Vehicles Act, 1988. However, the only body of law that governs the employment status of drivers engaged with these platforms is the terms and conditions of these aggregators. These terms and conditions that a user agrees to avail the services of these platforms provide that the drivers are independent third-party contractors and not employees of the company. Since the principle of vicarious liability doesn’t apply to independent contractors,[i] such clauses exempt the liability of these aggregators in case of any mishap. In the current article, the authors advocate for the liability of such aggregators for the acts of drivers.  Control test obsolete in the modern economy Under the control test, the employment status is determined not only through the control of the employer in directing what work is to be done but also through the control exercised over the manner of doing work. [ii]However, In Silver Jubilee Tailoring House v. Chief Inspector of Shops, the Supreme Court of India held that the control test can’t be treated as an exclusive one for distinguishing a ‘contract of service’ from ‘contract for service’ and it would be more reasonable to examine all the factors that constitute the case in hand. It was further opined that it would be unrealistic to apply the test of control in many skilled employments for determining the existence of a master-servant relationship. Therefore this test can’t be treated as a precise one for ascertaining the employment status of the drivers. A progressive test was propounded in Stevenson Jordan and Harrison Ltd. v. Macdonald and Evens. It was held that a person is under a contract of service when the work performed by him is an integral part of the business, whereas the person is under a contract for service when the work is ancillary to the main business. The rationale for using this test is that the functions which constitute a contract of service are the sole source of revenue for a corporation. Since transportation is an integral part of the business and constitutes a major source of revenue, the drivers should be treated as employees of the aggregators Position in other jurisdictions In 2015 a United States District Court for the District of Columbia in Erik Search v. Uber, where the driver had stabbed a rider, made Uber liable to pay damages. The court relied on the apparent agency theory which stems from the so-called duck test. According to this test, “if it walks like a duck, swims like a duck, and quacks like a duck, it’s a duck.” The rationale that stems from this test is that liability can be imputed to the principal if he, through his words whether written or spoken or any other conduct makes a third party believe that he has consented to the acts done on his behalf by the apparent agent. Hence the perception of a third party with respect to the agent’s authority is significant in determining the liability. Therefore, taking into account the way Uber functions, the court held that the riders were under a reasonable belief that the drivers were indeed the employees. Similarly, in Doe v. Uber Techs., Inc., where the driver had raped a consumer, the District Court for the Northern District of California held that drivers were employees and Uber was vicariously liable for their conduct. While holding so, the Court relied on a set of the factual matrix. These include, inter alia, the fact that the drivers can’t negotiate the fares and the same are set by Uber without any input from the driver. Further Uber has the authority to alter the amount being charged from customers if the driver takes a circuitous route. Thirdly, control over customer contact information lies with Uber. The drivers have to accept all rides requests when logged into the application or else they have to face disciplinary actions. Lastly Uber retains the right to terminate drivers at will. In Uber France v. M. A. X, the Court of Cassation (the highest court in France) classified the drivers as employees and not self-employed. The Court laid down a three-limb test to categorize a person as self-employed. Under this test, if the person can build his own client base, fix the tariff to be charged on his own, and set the terms and conditions for providing the service, only then, one can be classified as self-employed. Further, according to the Court, as the drivers were following orders from Uber, there was a relationship of subordination between the Company and the drivers. The High Court of Australia in Hollis v. Vabu Pvt. Ltd. held that persons employed as bicycle couriers by Courier Company under a ‘contract for service’ who owned their bicycles and also bore the expenses of running them, were employees. The court relied on the fact that their uniforms bore the logo of the company which represented to the general public that they were employees. As Lord Peace stated in Imperial Chemical Industries Ltd v Shatwell “the law of vicarious liability has evolved from social convenience and rough justice and not from any clear logical or legal principle.” Therefore, the Indian courts must take into consideration the principles evolved by the foreign courts as they reflect an approach

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Mediation in India- Challenges, Recommendations and Relevance in Post COVID Scenario

Leave a Comment / Contemporary Issues /

[By Krishnanunni U and Kessia E. Kuriakose] The authors are students at the NALSAR University of Law, Hyderabad. Introduction The outbreak of the COVID-19 pandemic has led to a sudden surge in the number of commercial disputes across the world. Most corporates have been inundated with unprecedented challenges arising out of delayed performance of contracts. At this juncture, the amicable restructuring of contracts to accommodate contemporary realities becomes ever pertinent. Hence, mediation being quicker and efficient than conventional modes of dispute resolution will automatically become the preferred option for businesses to tackle the predicament posed by COVID-19. Further, mediation will help in fostering relations by settling disputes amicably. In India, COVID-19 has brought about various developments that have set the stage for propelling mediation to the forefront. For example, insolvency proceedings have been terminated for a year and RERA has extended the timeline for completing projects by including COVID-19 as one of the force majeure conditions. Litigating disputes connected to COVID-19 will consume time, money, and effort. Mediation being cheap, quick, and confidential would be the most feasible solution to tackle the conundrum. However, blindly accepting mediation as the solution can have serious repercussions. Mediation in India is marred with a lot of problems, lack of legal sanctity being the primary concern. In this article, we seek to identify and provide recommendations to resolve the challenges faced by mediation in India by carefully analyzing the existing legal framework around mediation.  Existing Legal Provisions Mediation in India is primarily governed by two legislative acts viz. the Code of Civil Procedure, 1908 (“CPC”) and the Arbitration and Conciliation Act, 1996 (“ACA”). Section 89 of the CPC (added by way of amendment in 1996) gave courts the power to direct disputes to various ADR mechanisms including mediation for their settlement. Part II of the Civil Procedure – ADR Rules 2003 clearly defines the process of Mediation and specifies certain rules related to mediation (Mediation Rules). Further, Part III of ACA governs conciliation proceedings that courts have interpreted to be synonymous with the mediation process. In addition to that, several legislations like the Companies Act, 2013, and Commercial Courts Act, 2015 provide for mediation, but these rarely opt for dispute resolution. Hence, it is very apparent that laws governing mediation in India are in a rudimentary stage with no standardized process in place. Recently, the government has taken affirmative actions for promoting mediation but the absence of an overarching legislation will continuously pose impediments for the growth of mediation in India. Initial efforts to strengthen mediation can be traced back to 1988 where the 129th Law Commission Report recommended ‘Urban Legislation Mediation’ as an alternative to adjudication. Afterward, the judgment in Salem Bar Association v. Union of India held that all disputes coming to court need not necessarily be resolved by the courts and alternative dispute resolution mechanisms should be actively engaged. This prompted an amendment to the CPC and Section 89 was incorporated. Another major development was an amendment to the Commercial Courts Act, wherein Section 12A was introduced in 2018. This made it mandatory for parties to conduct mediation before instituting a commercial dispute. The constitution of the “The Mediation and Conciliation Project Committee” entrusted with discussing policy matters related to mediation has given further impetus to the development of mediation. In 2019, India signed the United Nations Convention on Mediation (the Singapore Convention), which made international commercial mediation agreements enforceable in India. However, the qualms regarding enforcement can be fully dismissed only when a new law concerning mediation is enacted. Challenges and Recommendations 1) Lack of Codification– In January 2020, the apex court in MR Krishna Murthi v. New India Assurance Co. Ltd pointed out the urgent need for enacting a uniform legislation for mediation in India. In furtherance to this, the court set up a committee to come up with a draft legislation that will help in conferring legal sanctity to disputes settled by mediation. A uniform statute governing mediation is the need of the hour. Such legislation should ideally aim at making mediation a mandatory exercise before approaching courts or arbitral tribunals. This would help in altering the current status of mediation from being a particular form of dispute resolution to the mandatory first stage of dispute resolution. A statute governing mediation will also address the enforceability concerns plaguing mediation in India. Even in the landmark Ayodhya case, the Supreme Court had initially directed the parties to mediation. However, the lack of a binding factor has deterred parties from acknowledging mediation, thereby vitiating mediation proceedings in India. An overarching legislation would confer legal sanctity and provide procedural guidance to parties. Just like how the ACA revolutionized the arbitration culture in India, a mediation specific law can instill confidence in parties to resolve their disputes through mediation. 2) Apprehension towards mediation & Lack of Awareness – Mediation has never garnered sufficient reception among the legal fraternity. In order to popularize mediation as a dispute resolution mechanism, training sessions and seminars should be conducted to familiarize judges with the benefits of mediation. This will help in creating a conducive environment for the growth of mediation in India. Further, public awareness related to mediation should also be increased.  A coordinated approach by the Judiciary and the Executive can help in disseminating information regarding the benefits of mediation to the public. Lawyers should also be encouraged to advise mediation to their clients. 3) Infrastructural Concerns and Quality Control– Improved emphasis on mediation will directly increase the workload on mediation centers which lack administrative strength. This can lead to the languishing of cases that go against the basic tenet of mediation i.e. fast resolution of disputes. To tackle this, the practice of mediation should be professionalized in India. People should be incentivized to become full-time mediators. The recent proposal of the Bar Council of India to compulsorily include mediation in the legal curriculum will definitely assist law students in taking up a career in mediation. Further, it is pertinent to supplement the growth of

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