The Corporate & Commercial Law Society Blog, HNLU

Author: HNLU CCLS

Section 68 of FERA: Liability Of Directors For Offences Committed By Companies

BY RISHABH KUMAR, FOURTH-YEAR STUDENT AT NATIONAL LAW UNIVERSITY, JODHPUR

The Liability of people acting on behalf of companies, for offences committed by companies, has been a very widely debated topic under the law of corporate governance. The general rule in the cases involving criminal liability stands against vicarious liability. This means that no one can be held criminally liable for offences committed by others. However, this general rule is overridden by specific provisions, provided by statutes, extending liability to others. An example of one of such provisions can be found under the Foreign Exchange Regulation Act, 1973 (‘FERA’). Section 68(1) of FERA provides that, in case of contravention of any of the provisions of the act by a company, a person in charge of, and responsible to the company for, the conduct of the business of the company has to be deemed guilty. Recently,in the case of Shailendra Swarup v. The Deputy Director, Enforcement Directorate, a bench of the Hon’ble Supreme Court dealt with the question of liability for offences under FERA, committed by a company, and the procedure for attributing such liability to persons acting on behalf of the company.

Facts

A show cause notice was issued by the Enforcement Directorate against all the directors of a company named Modi Xerox Ltd. (‘MXL‘) for alleged violation of FERA provisions. The appellant, Mr.Shailendra Swarup was a practising advocate of the Supreme Court and only a part-time non-executive director of MXL. He replied to the show cause notice stating that he was a part-time non- executive director for MXL and that he was not in the employment of the company nor he played any role in conducting the affairs of the company. Irrespective of this, the Enforcement Directorate went on to conduct a hearing, implicating the appellant and imposed a fine of Rs. 1,00,000/- on all the directors including the appellant. On appeal, this order was upheld by the appellate tribunal as well as the High Court resulting in an appeal before the Supreme Court.

Judgment

It was held by the court that, the adjudicating officer was wrong in imposing a penalty on the appellant and, the same was wrongly upheld by the appellate tribunal as well as the High Court. Moving further on, the court held that, for holding a person liable under the provisions of FERA, the active involvement of such person in company affairs must be looked into rather than just superficially taking into consideration the designation they are accorded. The court, to come to this conclusion, heavily relied on the ratio of judgments involving section 141 of the Negotiable Instruments Act, 1881 (“NIA”).

Ratio

The court said that, section 68(1) of FERA contains a legal fiction, i.e. “shall be deemed to be guilty” which is qualified by certain conditions that have to be fulfilled in order to establish liability under the provision. The conditions as mentioned in the provision require a person to be in charge of, and responsible to the company for, the conduct of the business of the company for them to be liable for any contravention of the section. In N. Rangacharivs. Bharat Sanchar Nigam Limited, the apex court had observed that, although a person in the commercial world transacting with a company is entitled to presume that the directors of the company are in charge of the affairs of the company, the court has held that such a presumption is rebuttable. The provision cannot be interpreted in a manner so as to implicate each and every person who was a director of the company at the time the offence was committed. Therefore, if a person is to be proceeded against and punished for any contravention, necessary ingredients as required by section 68 have to be fulfilled.

Since the appellant was just a part-time non-executive director and was neither in charge of nor responsible for the conduct of the business of the company, the ingredients under Section 68 are not fulfilled in order to hold him liable for the contravention.

Relevance of Section 141 of the Negotiable Instruments Act, 1881

In view of the court, section 68 of FERA is pari materia to Section 141 of NIA, 1881. Section 141 of NIA imposes the liability of a company, for the dishonour of cheques, on a person who at the time of such dishonour was in charge of and responsible for the conduct of the business of the company. Therefore, the ratio of judgments involving liability under section 141 of the NIA, 1881 are of considerable importance while interpreting section 68 of FERA.

The ratio of the following two judgments have been referred by the court, while deliberating upon the present case:

S.M.S Pharmaceuticals Ltd. vs. Neeta Bhalla and another

Since section 141 of the NIA creates criminal liability, the conditions provided thereunder have to be strictly complied with. What is required is that the persons who are sought to be criminally liable under section 141 should be, at the time the offence was committed, in charge of and responsible to the company for the conduct of the business of the company. The condition requires so because a person in charge of and responsible for the conduct of the business of the company is supposed to know the purpose behind the issuing of a cheque and the reasons for its dishonour. Furthermore, a complaint under section 141 must contain specific averments disclosing the facts that fulfil the conditions under the provision. If facts making a person liable under the provision are missing from the complaint, the conditions as required by the provision cannot be said to have been satisfied.

N. Rangchari vs. Bharat Sanchar Nigam Limited

Reiterating the principle given in Neeta Bhalla (supra), the court held that, besides mentioning in the complaint that the person implicated is a director of the company, it is important to specifically allege that they were in charge of and responsible for the conduct of the business of the company at the time of the commission of the offence. Otherwise, a complaint may be found unsustainable.

Referring to the above mentioned case laws, the court has laid down a due procedure for proceeding against a director under section 68 of FERA.

Due procedure for conducting proceedings under the FERA

The court has laid down that, even though FERA is silent on filing of written complaints, while proceeding under section 51, the person who has to be proceeded against shall be informed of the contravention for which penalty proceedings are to be initiated against them. This flows from section 51 which imposes an obligation on the adjudicating officer to give a reasonable opportunity to a person to be proceeded with for making a representation in the matter. The requirement under section 51 envisages due communication of the allegations of contravention and requires fulfilment of the ingredients of the offence under section 68. If this due procedure is not followed, the reasonable opportunity, as contemplated by section 51, cannot be said to have been given to the person to make representation in the matter. After a reasonable opportunity to make representation is granted in true sense, the adjudicating officer shall hold an inquiry and if on such inquiry he finds the person guilty of the alleged contravention he may impose the requisite penalty in accordance with section 50.

Conclusion

The general notion that persists in the corporate world about non-executive directors is that, they are not involved in the day to day affairs of the company, i.e. they are not in charge of, or responsible for the conduct of the business of the company. Although, by virtue of this, they may not be held liable for various offences or contraventions committed by the company, it doesn’t provide them with blanket immunity. As held in Chaitan M. Maniar vs. State of Maharashtra, they can still be held liable for those contraventions in which their active involvement is shown. The judgment in the present case has furthered this standing. While settling the law as to the liability of directors under FERA, it has also laid down a due procedure for establishing such liability. Moreover, the court, by widening the scope of the phrase “reasonable opportunity for making representation” under section 51, has ensured that the principle of audi alteram partem is duly adhered to under FERA. The judgment shall act as a good precedent, while determining the corporate criminal liability of directors of companies in future.

October 1, 2020
Whatsapp Pay: A Dicey Neophyte In UPI Market

BY SWIKRUTI MOHANTY AND TUSHAR CHITLANGIA, SECOND YEAR STUDENTS AT NLU, ODISHA

Introduction

The long wait of WhatsApp to enter into the Unified Payment Interface (‘UPI’) enabled digital market in India has finally come to an end. In an order dated 18 August 2020 in Harshita Chawla v WhatsApp, the Competition Commission of India (‘Commission’) has allowed WhatsApp to launch its payment service termed WhatsApp Pay. Additionally, National Payment Corporation of India has also assented to WhatsApp Pay’s data localisation compliance and gave permission for it to go live. WhatsApp Pay is a UPI based payment service and will undoubtedly come out to be a massive winner in the digital payments market as WhatsApp already has the largest user base in India with 400 active million users; hence attracting users will not be a problem. However, this may lead to WhatsApp abusing its dominant position, which the post discusses further. The post also discusses why Big Data, which WhatsApp can abuse after the launch of WhatsApp Pay, should come under the Commission’s ambit. The post also lays down the ways which the Commission can consider to bring Big Data under its jurisdiction to prevent possible problems.

Issues Raised and the Judgement

In the instant case, Harshita Chawla, the informant, has alleged that WhatsApp is taking the leverage of its predominance in one market (market of OTT messaging apps through smartphones) to enter into another market (UPI enabled digital market) by authorising pre-instalment of WhatsApp Pay on WhatsApp, and bundling WhatsApp with WhatsApp Pay. Therefore, she contended that WhatsApp is abusing its dominant position under section4(2)(d), and 4(2)(e) of the Competition Act, 2002 (‘the Act’). She also pointed out that UPI enabled digital payment apps dealt with Big Data which are essentially vast chunks of personal data which have characteristics like that of high volume, variety, value, and velocity and are available to corporations, which use it for targeted advertising.. With a given volume of such data, WhatsApp might adversely affect the integrity of personal data and national security in the future. Hence, Harshita Chawla prayed for the cease and desist order of the anti-competitive operations.

Despite the acknowledgement of WhatsApp’s dominance in the market of over-the-top (‘OTT’) messaging Apps through smartphones in India, the Commission was of the view that pre-instalment of WhatsApp Pay did not appear to be in contravention of section 4(2)(d) and 4(2)(e). Users will still have a choice to utilise any other UPI based apps which might be already downloaded on their smartphones, and there will be no express or implied encumbrance which can take away this liberty. Further, the Commission added that UPI enabled digital market is already established with eminent players competing enthusiastically, and it appeared improbable that WhatsApp Pay will consequently claim a more vital position only on account of its pre-installation. The Commission also noticed that WhatsApp which managed Big Data was prone to abuse and it can raise a potential anti-trust concern. However, the Commission held that it could not examine the matter of misuse of sensitive due to lack of concrete evidence. Hence, the Commission ordered the closing of the case under section 26(2) of the Act as it found no prima facie case arising from the issues raised by Harshita Chawla.

Critical Analysis

Abuse of Dominant Position by WhatsApp

The Commission examined the matter of tying under section 4(2) (d) in detail. It laid down four conditions which have to be satisfied to determine a case of tying. The first two conditions were met, as WhatsApp and WhatsApp Pay were separate products, and WhatsApp was dominant in the market for tying product. However, the Commission opined that the last two conditions, namely: iii) a complete restriction to only obtain a tying product without tied product, and iv) tying capable of hampering the competition in the market, was not met by WhatsApp. On the contrary, authors opine that last two conditions were also met as WhatsApp Pay feature came embedded with the WhatsApp and thus essentially the tying product (WhatsApp) cannot be obtained without tied product (WhatsApp Pay). The last condition is also met as WhatsApp Pay is capable of hampering the competition in relevant market due to huge existing user base of WhatsApp. The Commission refuted the fourth condition on the basis of it being premature but instead the Commission could have taken Dynamic Analysis approach in which future outcomes are predicted using the real time data.

The Commission further observed that the mere existence of an app on the phone does not necessarily guarantee the usage and hence the allegation cannot be scrutinised under the purview of section 4(e) However, the Commission possibly ignored the fact that if WhatsApp introduces its own UPI app, it does have an undue advantage since the user base of WhatsApp is practically being served on a silver platter to the upcoming app. Therefore, WhatsApp can use its dominant position in one market to enter into another and thus contravening section 4(2) (d).

Further, the Commission held in Re Biocon Limited v Hoffmann-La Roche AG that even a partial denial of the market access, which deprives the competitors to compete effectively violates section 4 of the Act. The fact that these third-party payment apps have meagre margin and the prime factor for these apps to sustain in the market is to keep their users engaged through different tactics cannot possibly be taken out of consideration. In this manner, user-base shapes one of the major facets of driving competition among all market players.

Additionally, the Commission was of the view that in the UPI enabled digital market, the competitors compete enthusiastically, and in such a scenario, it is difficult that WhatsApp will amass a market share solely owing to its pre-installation and a dominant position. However, in the case of Shri Vinod Kumar Gupta v. WhatsApp Inc. & Ors., the Commission observed that even if an app held a dominant position in the relevant market, once a new alternative app is installed on a device, users can quickly switch to the alternative app. In the instant case, WhatsApp Pay is the new alternative and pre-existing players like Google Pay, and Phone Pe are in the dominant position, the chances of WhatsApp taking over these apps within a short period does not seem all that improbable provided its gigantic existing user base of. Hence, WhatsApp can abuse its dominant position with the launch of WhatsApp Pay.

Additionally, it is worth mentioning that South Africa Reserve Bank (‘SARB’), the Central Bank of South Africa, also suspended digital payment operations of WhatsApp shortly after it started in South Africa to “preserve an adequate competitive environment”.

Big Data Conundrum

The Commission once again got a chance to analyse the anti-trust concerns surrounding Big Data in the instant case, long after an unsuccessful stint in Vinod Kumar Gupta v WhatsApp Inc. & Ors. However, yet again, it failed to lay a definitive decision on the same. Big Data is useful to some extent; however, wrongful use of this user data can lead to wiping out of competitions in the market as the choices of the consumers remain only known to the data collecting entity and not to other competitors.

The Commission in the present case has dismissed the possibility of looking into the issues surrounding big data stating there is no concrete evidence to support the claim by Harshita Chawla. However, it was held in the case of Registrar of Restrictive Trade Agreements v. W. H. Smith and Sons that entities which combine “will not put anything into writing nor even into words” and will only hint in the slightest way possible. This implies that finding concrete data alleging violation of anti-trust rules is difficult. In such cases, The Commission should consider extending its reaches to include any wrongful use of big data as an anti-competitive activity and include it under the realm of its jurisdiction.

To bring Big Data under its jurisdiction in cases of mergers, the Commission may treat Big Data as assets (precisely intangible assets) under section 5 of the Act. Due to this, mergers of kinds which involve Big Data transfers would be under the ambit of the Commission by virtue of section 6 of the Act. Section 6 states that combinations should not cause an appreciable adverse effect (e.g., barriers to entry) in the relevant market.

Another, route which the Commission can take is that it should assign Big Data a relevant market. Relevant market refers to the market where the competition takes place. Defining the relevant market is the initial step of any anti-trust analysis. One of the major issues why big data has not come under the radar of Competition Tribunals around the world is that Big Data could not be assigned a relevant market as online providers use data as an input in their service and not as product being sold to consumers. The European Commission review of the merger of WhatsApp/ Facebook also declined to define the relevant market for Big Data. Some scholarly work suggests that ‘Big Data Relevant Market’ (‘BDRM’) should be the relevant market for Big Data. Companies use data for gaining a competitive advantage and thereby also showing an indication of exclusionary practice. Hence, demarcating a separate market for Big Data would encourage better identification of anti-trust issues like market power, entry barriers, and abuse of dominant position in BDRM.

Concluding Remarks

Although the launch of WhatsApp Pay will be a big rejoice for the users, it comes with a resounding blow to the anti-trust regulations in the country. In this tech-upgrade saga, the chances are high that consumers would be at a losing end as the market will not have any competitor to provide them with different and innovative services other than WhatsApp. This may also lead to the problems of Big Data usage by WhatsApp as there is no law in India to govern big data and the Commission is yet to acknowledge the misuse of big data as a competition concern.. Also, incidents like that of Pegasus spyware in 2019 adds onto the vulnerabilities of privacy and data security in hands of WhatsApp. Therefore, to prevent such issues, the Commission must include Big Data under its jurisdiction, so that a check can be put on digital mammoths like that of WhatsApp.

September 29, 2020
Protection of IP Rights in Abuse of Dominance Cases: Is it needed?

BY MOHIT KAR, A fourth-year student At mnlu, aurangabad

On 20^th February, 2020, The Ministry of Corporate Affairs came up with the Draft Competition (Amendment) Bill, 2020 (“the Bill”) on recommendations of the Competition Law Review Committee (“CLRC”). The Bill, amongst other changes, has proposed for addition of Section 4A to widen the scope of protection accorded to Intellectual Property (“IP”) holders in Abuse of Dominance (“AoD”) cases. Section 4A acts as an exception to Section 3 (prohibiting anti-competitive agreements) and Section 4 (cases of AoD) and allows the IP holders the rights to safeguard themselves from infringement and impose reasonable restrictions to protect their rights under existing IP statutes. It is pertinent to note that a similar provision is already in existence in the form Section 3(5) of the Competition Act and the new section merely adds the protection to the AoD cases.

Intersection of Abuse of Dominant Position and protection of Intellectual Property: Jurisprudence in India

The Bombay High Court in the case of Aamir Khan Productions Pvt Ltd v Union of India held that the Competition Commission of India (“CCI”) had the jurisdiction to hear competition cases involving IPR. Subsequent to that decision, the CCI has dealt with a multiple of cases involving competition law and intellectual property. Most of the cases deal with the ‘refusal to license’ issue. In the case of Shri SamsherKataria v. Honda Siel Cars &Ors, the CCI held that the refusal to license the diagnostic tools and spare parts essential in the manufacturing of automobiles constituted an abuse of dominant position. This was the first case CCI took a significant look at the potentialities of competition abuse with the help of IP rights.

In the case of Justickets Pvt. Ltd v. BigTree Internet Pvt. Ltd. & Another, CCI took a cautious approach while dealing with a delayed licensing conundrum. Justickets, an online movie ticket booking website, had alleged that BigTree, another online movie ticket booking portal, along with Vista Entertainment were misusing their dominant position by denying access to Vista’s Application Programming Interface (“API”) whose access was essential for ticket booking portals to smoothly transfer data from their website to Vista screens at theaters. After the DG investigation, CCI found that, although delayed, the access to the API was duly given by BigTree and Vista. CCI held that the delay in licensing was justified and as every business entity has a right to protect itself against threats of reverse engineering and protect its business interest, especially IPR before committing to licensing deals. In quite contrary to its position in the Samsher Kataria case, the CCI took the side of the IP holder in the present case and it was rightfully so. A mere delay in allowing a license cannot be considered as AoD since every party has a right to perform a due diligence and take the stock of the situation before entering into any licensing agreement with the other party.

A key conflict between IP rights and competition law lies in the licensing of Standard Essential Patents (“SEP”). In the case of Telefonaktiebolaget LM Ericsson (PUBL) v. Intex Technologies (India) Ltd, the Delhi High Court while deciding about this conflict laid down certain guidelines for the holders of SEPs and the potential licensees to abide by so as to avoid AoD. This intricate balance between the SEP holder and licensees also exists in the EU to create an equilibrium between the rights of a holder of a patent that is essential for a standard and ensuring that said right does not allow it to hold a dominant position in the market.

Analysis of Section 4A from an EU perspective

As mentioned before, the added protection provided to IP holders that has been suggested by the Bill is not all together new and was previously in existing Section 3(5) of the Competition Act. The proposed section 4A merely extends the protection to cases of AoD under Section 4. Although the provision seems like a blanket protection to IP holders, a key aspect of it lies in the wordings of “reasonable conditions”. It states that the IP holders can make use of their rights under certain restrictions to ensure fair play and promote competition. The CLRC while drafting the provision have stated that the provision should be interpreted in a narrow sense so as to bring it in line with international jurisprudence.

AoD in the EU is regulated under the Article 102 of the Treaty on the Functioning of the European Union (“TFEU”) which states that: “Any abuse by one or more undertakings of a dominant position within the internal market or in a substantial part of it shall be prohibited as incompatible with the internal market in so far as it may affect trade between Member States”. The EU courts have faced a number of cases on the question of whether use of intellectual property to facilitate market exploitation results in violation of Article 102. In the cases of AB Volvo v Erik Veng (UK) Ltd. and CICRA & Another v. Renault with regards to design rights of automobile parts, the European Court of Justice (“ECJ”) held that refusal to license the design rights could not amount to AoD as it was part of the exclusivity given by IP rights. Further in the case of Parke, Davis and Co. v. Probel, Reese, Beintema-Interpharm and Centrafarmthe ECJ had maintained that use of IPR to gain foothold in a market does not necessarily amount to AoD as there may be a significant amount of substitutes available in the market. However, the ECJ changed its stance moving forward, evidenced in the cases of Radio Telefis Eireann (RTE) & Independent Television Publications Ltd. (ITP)v. Commission and IMS Health GmbH & Co. OHG v. NDC Health GmbH & Co. KG wherein it held that a refusal to license IP rights would constitute AoD only in “exceptional circumstances”. It laid down the exceptional circumstances in a “narrow” sense as: (a) the IP is a necessity to compete in the market; (b) the refusal is no objective justification; (c) the refusal would hand over a secondary market to the IP owner without any competition; (d) the licensee offers to produce such products which is not in the inventory of the IP holder. In a different case involving Microsoft, the European Commission took a different stand and stated that licensing could be made compulsory under the following circumstances: (a) the IP right is a necessity for the competitor to stay viable in the market; (b) the refusal to license would reduce disclosures; (c) there exists a “risk” of elimination of competition in the secondary market; (d) the refusal to supply could end up stifling innovation; (e) the refusal to supply would not be objectively justified as it could lead a lack of balance between the incentives to innovation for the IP holders and the incentives to innovate for the market as a whole. This interpretation in the Microsoft case was very broad. It mandated access to licenses very strictly and led to situations where in the courts would find refusal to license as abusive when in fact they were not. Such a strict interpretation reduced consumer welfare and led to an overall lack of social welfare.

Given the similarities between Section 4A, the CLRC recommendations and the aforementioned constructions laid down by the ECJ, it is expected that CCI is expected to refer to ECJ cases whenever it is faced with questions related to Section 4A. It would prove beneficial if CCI follows a similar route of the “narrow” construction while dealing with the issue. The CCI would also need to take a similar path when dealing with the SEP licensing cases so as to ensure that the SEP holders do not stifle competition while ensuring that they get the necessary freedom to enforce their IP rights.

Conclusion

The provision of Section 4A is a very adventurous step that has been recommended by the CRLC, given it’s a road not taken by other jurisdictions. It does come with certain flaws as it may lead to lengthy implementations and trials. But on an overall basis, it is quite positive and a move worth welcoming, as it could bring some much-needed clarity to the “conditions” under which the dominant IP holder can enforce its rights. It could also nudge CCI to refer much-appreciated interpretation made by ECJ in its narrow construction with regards to refusal to license cases and could bring about larger welfare for the society.

September 24, 2020
COVID-19 and M&A: Reshaping The Deal Making Process

BY HARSH KUMRA AND HARSH MITTAL, FIFTH-YEAR STUDENTS AT AMITY LAW SCHOOL, DELHI (GGS IP UNIVERSITY)

COVID-19 has strongly affected the M&A scenario in India. Corporates are facing difficulties in going through deals due to various factors led by economic deterioration by lockdown. Some of the thrusting factors for business decisions regarding such transactions are changes in business sentiment, valuation concerns as well as liquidity constraints due to reduced lending by banks especially after suspension of IBC. For April 2020, Grant Thornton India’s deal tracker reported a 37% fall in aggregate M&A volumes and 22% fall in aggregate Private Equity deals compared to April 2019 and March 2020. However, the deal activity across different industries such as Telecommunications, Healthcare and Consumer Staples has carried on despite lockdown restrictions and COVID-19 will give rise to more opportunities in M&A sector.

This article addresses certain key issues and concerns that the companies have had to focus on due to the ongoing pandemic and it looks at the future of deal making process.

Deal Considerations

An important concern here would be to decide the kind of deal the companies are willing to enter into. Several factors will play a role in coming to this decision – valuation concerns, lending ability of banks and financial institutions, liquidity crunch faced by the company etc. In India, it is the inveterate mindset of companies to opt for a cash deal, given the fact that they are easier and offer lesser hurdles as compared to its counterpart. However, the times have changed substantially, and on this verge, companies have had to use their cash reserves on a number of other operations and to keep their business going. While cash-rich companies have been able to enter-into M&A transactions easily, the same has not been the case for most companies who require external financing. Additionally, in light of the recent changes and amendments, the lending capacity of banks and financial institutions has been impaired to some extent. The Insolvency and Bankruptcy Code, 2016 has been suspended and the RBI announced a special COVID-19 Regulatory Package through which – it allowed rescheduling of payments; lenders have been permitted to defer the recovery of interest in respect of cash credit and overdraft facilities and lenders were allowed to give a three month moratorium on term loans.

With this being said, the companies would try to rely more on stock deals and the buyer would be able to keep its cash reserves for other operations. This will also help the companies and its shareholders in saving the tax component in the sense that they may save on payment of transfer taxes. Companies might also consider investing using hybrid instruments featuring both cash and stock. The market is likely to see new forms of hybrid instruments. In the deal of JSW Energy, acquisition of Jindal Steel and Power witnessed such a structure combining both asset sale and share acquisition. However, the deal was called off by JSW Energy before it could be closed. A report published by the International Financial Law Review states that such hybrid structures provide the necessary balance between the regulatory constraints and commercial objectives.

Further, some companies might prefer slump sale to avoid the extra hassles of due diligence and approvals from minority shareholders. This could be beneficial for buyers as the exposure to unknown liabilities is comparatively lesser and hence, the buyer need not expend much time on due diligence.

Regulatory Framework

With the ongoing pandemic still in place, India has seen regulators stepping in time and again to do their best to limit its impact on the economy. If we look at the measures that have been taken, we could say that the regulatory environment of our country is trying to facilitate the deal making process.

The regulators such as Securities and Exchange Board of India (‘SEBI’), Ministry of Corporate Affairs (‘MCA’), Reserve Bank of India (‘RBI’) and Competition Commission of India (‘CCI’)have made relaxations and exemptions in terms of compliances and taxations. They have stepped up to facilitate e-filing procedures of applications, ultimately easing the transaction process for companies.

As a major relief for corporates, the MCA has eased the rules with respect to the way the Board Meetings are conducted. In March, an amendment was introduced to the Companies (Meeting of Board and its Powers) Rules, 2014 and directors of the companies were allowed to participate in the Board meetings through video conferencing or other audio-visual means, for issues such as Approval of the matters relating to amalgamation, merger, demerger, acquisition and takeover. Additionally, it also allowed companies to hold Annual General Meetings through video conferencing for the entire year.

Apart from this, SEBI asked all listed companies to make endeavors to ensure that investors are provided with timely and adequate information with respect to the impact of the pandemic on the company’s financial statements under SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. This will help the investors in making decisions in terms of company’s financials and will give the right valuation of the companies.

Valuation

The pandemic has created an atmosphere of uncertainty and volatility, leading to ambiguities in terms of company valuations. For deals that were initiated before the COVID-19 outbreak, buyers and sellers are back to the negotiation tables to deliberate upon the valuation of the buyer. For the companies who just began negotiating the deal, they are likely to face difficulties in reaching at an appropriate valuation. In the former case, buyers would try to reconsider and renegotiate the valuation, while in the latter; they would attempt to leverage the lower valuation of the target company. Additionally, both the parties would want to bridge the time gap between signing and closing the deal in order to lessen the impact of volatility on the deal.

Due Diligence & Representation and Warranties

This aspect of transaction is going to face deviations since there is a lesser scope of physical inspection and more reliance on virtual due diligence and video conferences for discussions on Seller’s financial statements and analysis of all material aspects to search for financial risk indicators and compliance lapses, operating results and cash flows, seller’s default on key contracts and leases, termination rights under various contracts, data protection concerns etc. The Representation and warranties (R&Ws) hold the seller to the confirmation provided regarding the Buyer’s due diligence findings, audited and unaudited financial statements, seller’s liabilities & obligations, and material contracts. If the R&Ws are misleading, the buyer may terminate the acquisition and may even entitle them to post-closing indemnities. Although it is impossible to predict the long-term effects of the pandemic, due diligence process could be altered in such a way that it facilitates quicker transactions rather than causing hindrance through engaging advisors as early as possible, preparing for the reality of dealing with more unknown factors than usual and appropriate measures in planning.

Mitigation and Allocation of Risks

Once the Memorandum of Understanding (‘MOU’)/ letter of intent, term sheet, Non-Disclosure Agreement (‘NDA’) and other non-binding preliminary agreements are entered, the next step is to work towards a definitive agreement. Pandemic driven provisions should be added to address closing risk and closing certainty. Although each agreement is specifically tailored to transaction’s structure, several clauses can be common such as R&Ws, covenants, and conditions which mutually address the allocation of risk in such transactions. R&Ws regarding ownership, contractual arrangements of Intellectual Property (‘IP’) as well as non-infringement of IP rights are some of the most significant clauses.

Material Adverse Change (‘MAC’) is another important clause which now includes the events such as pandemics, lockdowns, and interruption of international trade in the transaction and functions between the signing of acquisition agreement and closing of the deal. This clause transfers the risk to the seller and therefore they push for a lenient MAC clause. Furthermore, the central government declared the COVID-19 outbreak as a “natural calamity” and directed that delays on account of the pandemic be treated as Force Majeure; however the direct effect of this on private contracts is absent. Although, the Force Majeure clause is common in conventional commercial contracts, the same cannot be said in case of M&A transactions as this provision is relatively rare in such agreements. Considering that the courts have expansively interpreted Force Majeure clauses and are not going to apply the defenses available outside of the terms of contract, the Force Majeure clauses could be included and tweaked to specifically address the threshold for invocation, methods of invocation, list of included events and consequences thereof.

Conclusion

While the world economy has taken a hit due to the pandemic, it has affected all the sectors in a very different manner. The deal making as a process is likely to see a new face and will emerge in a very different shape and manner. There are sectors like hospitality and tourism, that are fighting to keep their place, and then there are sectors like e-commerce and e-pharmacy that have shown ample amount of growth. It is most likely that in each sector, fewer players will survive. We will see an enormous amount of M&A with the buy side being influenced by ambition and the sell side by its stress and survival instincts.

This being said, India is going to experience a fundamental shift in the M&A landscape. The companies will have to adjust with certain realities that have become the new normal for the country. The unpredictable nature of COVID-19 has made it difficult for companies to evaluate the targets accurately and they will have to come up with ways to make adjustments accordingly.

The companies would want to go for acquisition as the mode of structure instead of schemes of compromise or arrangement, since they require NCLT approvals which are bound to delay the process further. Additionally, the time taken to complete the entire process might also get prolonged due to various other unresolved regulatory and technical hurdles.

September 15, 2020
Amendment in Takeover Offer Norms: A Formal Route to “Squeeze Out” Minority Shareholders
By Arushi Gupta, a Fifth-Year Student at DES Law COllege, Pune

On February 3^rd, 2020 the Ministry of Corporate Affairs notified the coming into force of Sub-section (11) and (12) of Section 230 of the Companies Act, 2013 (‘Act’) which deals with the takeover offers in case of any restructuring of a company. The Ministry also notified the Companies (Compromises, Arrangements and Amalgamations) Amendment Rules, 2020 (‘CAA Rules’), which added Sub-rule (5) and (6) to Rule 3 in the original rules of 2016, along with the National Company Law Tribunal (Amendment) Rules, 2020 (‘NCLT Rules’) adding Rule 80 A to the principal rules of 2016.

Section 230(11) of the Companies Act, 2013 deals with the takeover offers in case of unlisted companies. It is broad enough to include various types of restructuring like mergers, amalgamations, compromises, etc. Section 230(12) provides for the redressal of grievances concerning the takeover offers of companies other than a listed company, wherein the aggrieved party may make an application to the National Company Law Tribunal (‘NCLT’), which may pass an order as deemed fit. Rule 3(5) of the CAA Rules provides that a member of a company holding at least 75% of the shares along with any other member in the company shall make an application before the NCLT for an arrangement in terms of a takeover offer under Section 230(11) of the Act, acquiring remaining shares of the company. Furthermore, Sub-rule (6) of Rule 3 provides for a report of a registered valuer to be filed along with the application, disclosing the details of the value of the shares proposed to be acquired. Such valuation of the shares shall be made considering the following factors:
1. The highest price offered for the acquisition of those shares during the last 12 months.
2. The fair price must be determined by the registered valuer after considering parameters like return on net worth, the book value of shares, earning per share, price earning multiple vis-a-vis the industry average, etc.
Sub-rule (6) also stipulates that the member proposing the acquisition shall open a bank account and provide the details of the same in the report, wherein 50% of the consideration of the total takeover offer must be deposited. The NCLT Rules, 2020 provides for the form in which application for grievances can be made under Sub-Section (12) of Section 230 of the Act.

This article draws a detailed picture of how these norms can be utilized to force the exit of minority shareholders at a lower consideration, negatively impacting their interests.

Applicability

The newly notified Sub-section (11) of Section 230 of the Act applies to the takeover offer in the case of unlisted companies. The proviso to this sub-section specifies that the takeover offer in the case of listed companies is governed by the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011 which require the acquirer to make an open offer to acquire such shares. Explanation 1 to Rule 3(5) of the CAA Rules defines “shares” as any equity shares which carry voting rights. Therefore, shares can include securities like depository receipts which entitle the holder to exercise voting rights. However, Explanation 2 to the same rule provides that these rules do not apply to the transfer of shares made through a contract, arrangement, or succession or in pursuance of any statutory or regulatory requirement. Hence, only voluntary arrangements, which are not predetermined come into the scope of the new rules.

An Overlap with Section 236 of the Act

Section 236(1) of the Act provides for the purchase of minority shareholdings under an amalgamation, share exchange, conversion of securities or for any other reason wherein a person who is a registered holder of 90% or more of the equity share capital of a company notifies the company of their intention to buy the remaining of the equity shares. This creates an overlap with Rule 3(5) of the CAA Rules, which provides for a scheme or arrangement in terms of takeover offer to acquire the remaining shares, enabling only 75% of the total shareholders to apply directly to the NCLT, without having to engage in procreated negotiations with the minority shareholders. This creates a confusion as to which provision would apply when it comes down to the purchase of minority shareholding. The direct approach to the NCLT with a takeover offer may eliminate the role of votes of or meetings with the minority shareholders in such arrangements, resulting in the “squeeze out” of such shareholders and sidelining their interests.

Furthermore, Section 236(9) of the Act provides that in case the majority equity shareholder fails to acquire any of the minority shareholders, then the provisions of Section 236 would still continue to apply to the residual shareholdings, which have not been acquired. This means that the provisions of Section 236 do not explicitly cast an obligation on the minority shareholders to sell their shares. However, the amended CAA Rules are silent upon the question of whether the minority shareholders would compulsorily have to give up their shares in a “compromise” or “arrangement” under Section 230 of the Act or not. This may affect the interests of the minority shareholders as they would have no inherent rights to retain their shares in the face of fair consideration. While some shareholders may be prepared to sell their shares for a lower consideration, others may prefer to hold. They may have a better grasp of the true value of their shares.

Valuation of Minority Shares

Considering the complexity and diversity of business carried out by the companies, the calculation of the fair value of minority shares as required under Sub-rule (6) of Rule 3 of the CAA Rules could be a subject of controversy. This may raise an issue for both the acquirer as well as the minority shareholders. This method of computation may be detrimental to the acquirer as the price offered to certain minuscule number of shares during the last 12 months may be higher than their original value. This would result in the acquirer having to pay more than what they were actual worth. On the other hand, there may be uncertainties while computation and some minority shareholders may be unrepresented, resulting in a financial loss to certain individuals.

Furthermore, the rules do not provide explicitly the minimum amount that a takeover offer should be, unlike the SEBI Takeover Regulations which clearly state the minimum price at which shares can be acquired under an open offer. This may cause the exploitation of these provisions to squeeze out minority shareholders at a lower price than their initial investment when the company is at a low value, even if it is transitionary.

Deposit of Funds

Unlike Section 236(4) of the Act, which stipulates that the majority shareholders shall deposit an amount equal to the value of the shares to be acquired by them, Sub-rule 6(6) of CAA Rules requires only 50% of the consideration to be deposited in the bank account. Section 236(4) of the Act also stipulates that such amount shall be dispersed within 60 days. However, the amended CAA Rules do not stipulate the time limit for the distribution of consideration to the minority shareholders. This may lead to frozen money in the bank account until the completion of compromise or arrangement, preventing the minority shareholders from quick exit thus, blocking them into the new structure.

Redressal of Grievance

Another anomaly that may be observed in the recent amendment is that there is no basis for the valuation of grievances by the NCLT provided in the grievance redressal mechanism under Section 230(12). In the case of Ramesh B. Desai v. Bipin Vadilal Mehta, the Supreme Court approved that the question of purchase of minority shareholdings is a domestic affair to be decided by the majority. The court also stated that in the absence of serious allegations regarding the bona fides of the proposed scheme, the courts are hesitant to interfere with the decisions of the majority, who the court believes are in the best position to know the interests of the company concerned. This puts an onus on the minority to prove that the offer is unjust and unreasonable, which is difficult for the minority shareholders.

Conclusion

The recent amendment is brought in to facilitate efficient and time-saving procedures to purchase the minority shares. However, there seems to be an inclination towards the benefit of the majority shareholders, at the expense of the interests of the minority shareholders. These regulations can be easily manipulated by the company management to pursue objectives that are different from enhancing shareholders’ value. Thus, there should be a system which maintains a balance between the right of majority as well as the minority shareholders.
September 11, 2020
Has Indian Supreme Court Raised the Question on the Established Practice of International Commercial Arbitration? A Critical Analysis of Judicial Contradictions within its Precedent

By Anchit Jain, fourth-year student at ICFAI University, Dehradun and Advocate Sanket Jha, Legal Practitioner at High Court, Mumbai

Introduction

Supreme Court felt trapped in its reasoning and unwillingly landed on a point that might have raised a global question on the approach of the Arbitration system of dispute resolution.

In the case of Perkins Eastman Architects DPC & Anr v. HSCC (India) Ltd, it was provided in the agreement’s clause 24.1(ii) that the Chairman & Managing Director (‘CMD’) will possess the exclusive power to appoint the sole arbitrator on the behalf of both the parties. Moreover, this exclusion clause barred another party from choosing the arbitrator. Applicants challenged the abovementioned clause before the Supreme Court u/s 11(6) of The Arbitration & Conciliation Act, 1996 (hereinafter referred to as ‘Act’) believing the agreed procedure in non-compliance with the Act and prayed for the appointment of a sole arbitrator.

The Court found self-interest as a biased element and reasoned it behind the disqualification of CMD. Court referred to its judgment in TRF Limited v Energo Engineering Projects Limited, where it was held that as per Section 12(5) of the Act, an ‘Managing Director’ cannot act as an arbitrator because of his ‘self-interest’ in the outcome of the award. Self-interest disfigures the credibility of an Arbitrator by questioning his ‘Impartiality and Independency’.

Thus, the Court held that a party can neither act as nor can nominate an arbitrator.

This piece will discuss, how this reasoning:

1. May have raised a global debate in appointment procedure of arbitration;

2. Is not settling amongst the various features of the Arbitration mechanism;

3. Is (or not) in consonance with other jurisdictions.

Tossing a Universal Debate

The Court raised the question on the objective of Arbitration, which if not answered then might have raised a global debate. Party Autonomy in Arbitration is the prima facie reason behind its objective of speedy dispute resolution. Parties have the liberty to customize their procedure as per their convenience. They can freely choose their arbitrator. Curtailing their right on the ground of self-interest has not only challenged the basic feature of arbitration but will also question all those agreements, in which parties have provided for the appointment of arbitrator(s) by their choice. In Perkins’s Judgment, the Court realized that self-interest, as reasoning, will ‘disentitle’ the cases of similar nature.

This question would be extended to every agreement where parties have provided to nominate a panel of 3 arbitrators as well. Autonomy is a privilege in arbitration for choosing an arbitrator. If self-interest will bar the parties from nomination, then a party can never choose an arbitrator, because, directly or indirectly, every party has an interest in the outcome. Autonomy is the privilege of choosing this mechanism.

However, the Court (paragraph 16) referred again to TRF for handling this possible chaos. The Court read that balancing the powers between the parties is the ideal situation through which parties can mutually appoint an arbitrator. The court believed this equilibrium as a solution, although it looks like a self-contradictory statement.

If a party is barred from choosing an arbitrator on the ground of self-interest for eliminating biases, then the question is how parties choosing the arbitrator will ensure the exclusion of biases. On the contrary, the table may get more biased and raise a question on impartiality & independence of the Arbitrators. In this case, only the umpire might be a reasonable and fair person. Court, instead of resolving the dispute, made it more self-contradictory. This problem gets bigger in the case of the sole arbitrator, where both the parties look unsettled over the appointment.

Encouraging Judicial Interferences

Notably, all of this is contentiously ending up with parties seeking the Court’s intervention in the alleged dispute of Impartiality & Independence of Arbitrator. E.g. the case of Bharat Broadband Network Limited v. United Telecom Limited, where the Court upheld the appellant’s argument that as per Section 12(5)’s reasoning from the TRF’s judgment, the appointment made by the CMD stands void.

Arbitration ensures honest practices so that parties can rely on their arrangements and accept the award as a result of their logic and convenience. If parties have to approach the Court for an arbitrator’s appointment, so that the arbitration can commence, then it defeats the aim of a speedy resolution. Moreover, parties already have the right to appeal before the Court. This will never help the Courts in distressing the docket explosion, rather will increase the burden. This is breaching the Arbitration’s objective of minimising judicial interference.

Character of Arbitrator

Supreme Court quoted the 246th Law Commission Report which reads, “Party Autonomy cannot be stretched up to a point where it negates the very basic feature of Arbitrator’s Impartial and Independent character.” If the Court’s reasoning of ‘Tit for Tat’ by balancing the powers amongst the parties will be considered then it will weaken the Commission’s recommendations for ethical procedures. The report emphasizes on not appointing a party or its nominee as the arbitrator even if the same has been agreed between the parties. The reason is to ensure the Impartial & Independent character of the Arbitrator.

Court referred the judgment of Voestapline Schienen Gmbh v. Delhi Metro Rail Corpn. Ltd, which declared Impartiality and Independency as the hallmarks of an arbitration Proceeding. Court, in both the cases, referred to the UK’s Supreme Court’s decision in Jivraj v. Hashwani which backed the ‘Impartial’ character in an Arbitrator and agreed that an arbitrator’s contract for personal service does not ask him for anyone’s personal service. The Indian judgments, also quoted the Cour de Cassation, France’s judgment, delivered in 1972 in Consorts Ury which focused on the ‘Independent’ character of the Arbitrator and held that an independent mind is the essential quality of an arbitrator for exercising judicial power. These Foreign Judgments of the respective apex Courts allow a party to appoint an arbitrator, but both of them have asked to ensure the Impartial and Independent character of an arbitrator.

Asymmetrical Arbitration Clause

Interestingly, International Arbitration validates the Asymmetrical Arbitration Clause. India’s dissent to this global practice has again weakened its ambition of becoming a global hub of arbitration. This difference with the international approach will be another reason in the list where India as a seat to any International Commercial Arbitration will disappoint the parties on the global standards. The Case of Perkins falls under the jurisdiction of International Commercial Arbitration, where the appellant, the foreign party took the advantage of Indian precedents, against the settled principle of the Asymmetrical Arbitration Clause, despite its prior consent on the Agreement.

Inadequate Reasoning

The Court disqualified the party from making a nomination based on ‘qui facit per alium facit per se’ (what one does through another is done by oneself) from the case of Firm of Pratapchand Nopaji v. Firm of Kotrike Venkata Setty & Sons, but it is pertinent that this case was neither of arbitration nor dealt with any similar issue around the present case. It appears inappropriate to bar the objectives of the Act, through which the referred case was decided. The Court disqualified the party, on whom a pendulum of self-interest swung and did not lay, who is eligible to make the appointment on the party’s behalf. This inadequacy in precedent will take the parties before the court for further clarification which will again breach the arbitration’s objective of minimum court’s intervention.

Test of Arbitrator

The US Court in the case of Rosenberg v. Merrill Lynch, Pierce, Fenner & Smith, Inc held that the parties must have equal rights to participate in the selection process of the arbitrators. Thus, it is important to ascertain the rationality status of arbitrators.

However, besides the reasoning of the Indian Court, (i) ‘Complying with the concept of Asymmetrical Arbitration Clause and stimulating it with the Indian public policy’ or (ii) ‘Defining a test of Impartial and Independent Arbitrator for a fair arbitration’, seems as few suitable alternatives.

In the current case, the Agreement was mutually agreed between the parties, all that was required to be ensured was the hallmarks of Impartiality and Independence of Arbitrator. This can be tested through Schedule V and VII or by the received information under Schedule VI of the Act. The same test can allow parties to appoint the arbitrator, as strict emphasis on the abovementioned Schedule will keep the parties cautious about their decision on the fair appointment of an arbitrator.

Conclusion

Supreme Court lacked in complying with the pervasive values i.e. limiting the party’s autonomy and the asymmetrical arbitration clause weakened the objective of minimum judicial intervention. All of this will somewhere damage India’s goal of becoming a global hub of Arbitration. Self-interest is debatable, but this precedent questions the functioning of Arbitration like Party Autonomy and the Court’s intervention. The jurisprudence of Arbitration relies on the UNCITRAL’s Model law which is convenient because of its pervasive uniformity. It is established that all the states operate with the model law and less than the whole have ratified the New York Convention. Thus, it will be suitable for the judicial bodies across the globe to interpret the precedents in a universally accepted version. All that has to be cared about are the public policies of the respective states, which should also be tried to be updated with the prevailing developments. If Arbitration has to comfort the Judiciary then alike Tax or Finance, regular legislative amendments in Arbitration has to be given due attention. Till then, all that can be done is the precedential inclination towards the pervasive schemes.

September 5, 2020
Employees’ Rights Arising Out Of Mergers & Acquisitions: The Indian Judiciary’s Perspective

By Shauree Gaikwad, fourth-year student at MNLU, AURANGABAD

Introduction

Merger and Acquisition (‘M&A’) is an activity undertaken as part of the restructuring of a company. With such M&A activity, the resources which get impacted the most are the human resources of the firm, i.e. the employees of the company. In order to cope up with the M&A activity and see towards it that the company follows fair practices, specific provisions have been laid down by the legislation addressing the rights of the employees. This article shall be discussing the impact of M&A on employees as well as the employees’ rights arising from an M&A.

Types of Mergers & Acquisitions and its Impact on Employees

Mergers and Acquisitions are denoted as “combinations” under the Competition Act, 2002 and denoted as “amalgamations” the Companies Act, 2013.

The Impact of Horizontal Amalgamations on Employees

When an amalgamation takes place between rival businesses, it is known as a ‘horizontal amalgamation’. As a horizontal amalgamation takes place within the same industry, it is strictly assessed by the Competition Commission of India (“CCI”) under section 6 (1) of the Competition Act, 2002 as the amalgamation of two rival industries narrows down the competition in an industry’s market and reaches closer towards having a monopoly in that industry.

A result of a horizontal amalgamation is the amalgamation resulting in twin departments, i.e. the same type of department or team is present in both businesses as they are from rivalling industries. A possible negative effect of a horizontal amalgamation on the employees of that amalgamated entity is that they risk losing their jobs if the amalgamated entity decides to only keep either one of the two twin departments. It also increases the stress on the employees to work harder in order to be better than the employee’s counterpart in order to save themselves from being terminated. The answer regarding whether employees shall be terminated after an amalgamation lies in the vision of the company. If it is envisioned by the amalgamated company to increase its volume of work it takes on, it will undertake the corporate strategy of integrating the twin departments with each other so that they can work seamlessly with each other and also towards the goal of the company. This vision is often reflected in the proposed amalgamation plan, which needs to be mandatorily approved by the necessary authorities before it is implemented.

The Impact of Vertical Amalgamations on Employees

When an amalgamation takes place between unrelated businesses which do not belong to the same industry, then it is known as a ‘vertical amalgamation’. An example of a vertical amalgamation would be wherein one entity is into the business of making pencils, and another entity would be into the business of making the lead. An amalgamation of these two entities would result in ‘vertical amalgamation’. In horizontal amalgamations, the same kinds of roles or departments are doubled, and hence, in most of these cases, there is a likely chance that the extra set of employees are fired on the basis of select criteria such as preferred branch, experience, adaptability to the amalgamation. The case is not the same in case of vertical mergers wherein two businesses playing different roles in the supply chain amalgamate because there are no overlaps in roles or departments of the businesses. Rather, departments of the businesses would complement each other and the Board of the amalgamated company would work on a corporate strategy integration of all employees to work towards the amalgamated company’s business goals.

Employees’ Rights arising out of Mergers & Acquisitions: The Judiciary’s Perspective

In the United States, a federal act, known as the the Worker Adjustment and Retraining Notification Act (‘WARN Act’), 1988, mandates an employer to provide a two month notice to employees if the employer is going to either lay off more than fifty employees or shut down. Therefore, if an amalgamation results in fifty or more employees’ employment to be terminated, a US company shall be obligated to inform the employees two months in advance under the WARN Act. However, there are no other obligations of the employer to inform the employees regarding a merger if the thresholds under the WARN Act are not met.

In the United Kingdom, the Transfer of Undertaking (Protection of Employees) Regulations, 2006, (‘TUPE Regulations’) mandates the employers to retain all employees during an amalgamation, inform the employees prior to the amalgamation, and also provides the employees a choice to terminate their employment in case the employee objects to being employed by the transferee company. Therefore, the TUPE Regulations in an employee friendly law which aims to safeguard the rights of employees and lay out the obligations of employers during an amalgamation.

Meanwhile in India, only one section of the Industrial Disputes Act, 1947 deals with employees’ rights coincidental to an amalgamation. According to section 25FF of the Industrial Disputes Act, 1947, in case the employee is transferred to another company due to an amalgamation resulting in the transfer of management and ownership, then the employee shall be entitled to notice of change and compensation provided that the employee has been working for at least one year, his employment has not become any less favourable than it was earlier, and his services have not been interrupted.

It should be noted that section 25FF did not originally feature a compensation clause. It was the landmark judgement ofHariprasad Shivshankar Shukla vs. A.D. Divikar in 1956 which led to section 25FF being replaced by a new section altogether by The Industrial Disputes (Amendment) Act, 1957 (Act. 81 of 1957). The amended section 25FF is the one that is still into effect till date. This amended section included the provision of compensation to a worker in case his employment is terminated as a result of a transfer in ownership or management.

In Maruti Udyog Ltd. v. Ram Lal & Ors., the Supreme Court clarified that “..Section 25FF envisages payments of compensation to a workman in case of transfer of undertakings, the quantum whereof is to be determined in accordance with the provisions contained in Section 25F, as if the workman had been retrenched…”

In Bombay Garage Ltd. v. Industrial Tribunal, the Bombay High Court held that the employer of the transferee company is bound to recognise and make the payment of gratuity for the services rendered by employees while they were employed by the transferor company.

When it comes to employees’ consent to an amalgamation, in Sunil Kr. Ghosh vs. K. Ram Chandran, the Supreme Court, held that in case of a transfer of employees as a result of an amalgamation, the old employer needs to take the consent of employees to be transferred to the new employer. In case of employees’ lack of consent to being transferred, he is entitled to compensation under section 25FF of the Industrial Disputes Act, 1947.

In Gurmail Singh and Ors. vs. State of Punjab and Ors., the Supreme Court interpreted Section 25FF of the Industrial Disputes Act, 1947 as a guarantee to the employees of either compensation from their former employees after termination of their employment, or continuity of service after his transfer, but not both. The Supreme Court stated that “The industrial law, however, safeguarded his interests by inserting Section 25FF and giving him a right to compensation against his former employer on the basis of a notional retrenchment except in cases where the successor, under the contract of the transfer itself, adequately safeguarded them by assuring them of continuity of service and of employment terms and conditions. In the result, he can get compensation or continuity but not both.”

The Supreme Court’s judgement in the Gurmail Singh case was upheld by the Bombay High Court in Air India Aircraft Engineers’ Association and Ors. vs. Air India Ltd. and Ors. wherein it also reiterated the fact that, in case of an amalgamation, an employee is entitled to compensation or continuity of employment, but not more.

Conclusion

As highlighted earlier, unlike the US and the UK, in India, when it comes to mergers and acquisitions, the employees are largely left to have one right given by section 25FF of the Industrial Disputes Act, 1947 and two choices given under it – to get compensation or to get guaranteed continued employment after transfer resulting from an amalgamation. The Judiciary’s verdicts make it clear that an employee can only choose either of the two options provided under section 25FF and not both of them. However, the Supreme Court has affirmed that no employee can be forced to be transferred and the employee’s consent is necessary even if there are no changes to the work environment and responsibilities of the employee as a result of the employee’s transfer. Therefore, a logical step to getting an employee’s consent to transfer would be a notice of change that needs to be given to the employee at least 21 days in advance of the estimated transfer date under section 9A of the Industrial Disputes Act, 1947. Therefore, given the drastic rise of M&A in India and the lack of a law addressing the rights and responsibilities of employees and employers during an amalgamation, a national law similar to the TUPE Regulations of the UK, should be considered to be made by either the Ministry of Corporate Affairs or the Parliament of India.

September 4, 2020
Outsourcing Equity: The Multi-Faceted Implications of Overseas Listing
BY VARUN PANDEY, FIFTH-YEAR STUDENT AT UPES DEHRADUN

The Indian FDI regime has been vying for an enhanced investment environment over the last few decades. Recent measures such as codification of Insolvency and Bankruptcy Laws, taxation incentives for foreign investors and alleviating construction permits in the infrastructure space, among other reforms had elicited a significant rise within the global ease of doing business rankings. Unfortunately, this surge was short-lived and in a bid to revive the Covid 19-ridden distressed economy, the Ministry of Finance via the 5th stimulus package permitted direct overseas listing of Indian companies. This article analyzes the impact of overseas listing on Indian companies and dwells on the various regulatory roadblocks required to be overcome in order to facilitate such measure, and finally examines the consequent pay-off for Indian Investors.

I. What is Overseas Listing?

Direct Overseas Listing would allow companies registered in India to list their equity shares in foreign jurisdictions and gain liquidity. Currently, Indian companies have limited access to foreign capital markets in the form of American Depository Receipts (ADR’s) and Global Depository Receipts (GDR’s). Indian companies can avail Foreign Currency Exchangeable Bonds (FCCB’s) only for issuing debt securities, whereas foreign companies can access the Indian Capital Markets by the Indian Depository Receipts (DR’s) Scheme, 2014 .

Interestingly, the Central Government had been mulling the said listing reforms way back since 2018. A SEBI Committee Report was published which evaluated various economic, legal and taxation aspects pertinent to foreign listing. One of the primary objectives for enabling direct listing is to expand the investment opportunities for Indian companies by attracting foreign capital and encourage them to compete on a global footing, facilitating their growth will also lead to an improved environment for ease-of-doing business in India. The recent Companies (Amendment) Bill, 2020 further incorporated the provision approving overseas listing of Indian Companies.

II. Regulatory Overhauls

The current laws and regulations dealing with listing of companies would require significant changes to facilitate overseas market access for Indian companies.
- Companies Act, 2013
Section 23 of the Act deals with public offer and private placement of shares, whereas Chapter III of the Act deals with the prerequisites for allotment of securities altogether. However, neither provisions explicitly permit overseas listing and are limited to listing of companies within the Indian securities markets only, accordingly, an exception will have to be carved out for the companies listing in approved foreign securities markets by way of an amendment within Section 23 or via a MOF circular/ notification . Furthermore, Section 88(3) of the Act mandates a company to maintain a registry of security holders in correspondence with Section 11 of Depositories Act. Thus, in the event of overseas listing of equities, a common ground is required to be attained between the inter-linked provisions with reference to Section 88(4) that permits a company to maintain the details of shareholders residing outside India.
- Foreign Exchange Management Act, 1999 and Regulations
Following the repeal of FEMA 20R Regulations and subsequent enactment of FEMA (Non-Debt Instruments) Regulations, 2019, changes will have to be incorporated within the provisions of Schedule II as it regulates FPI investments. These adjustments will have to be made by taking into account the various sectoral caps which persisted during the FEMA 20R era, where FDI was permitted via automatic route and government approval route. Additionally, retention of profits and other receipts of transactions will have to be regulated in a mechanism that mirrors the ADR/GDR framework currently in place.
- SEBI Regulations
SEBI is the sole regulatory authority that overlooks the Indian Capital Markets and the companies listed on domestic exchanges. In order to streamline the process of equity listings on foreign exchanges, it will have to construct a mechanism that is on par with the various pre-listing obligations of the recognized foreign stock exchange, for instance, provisions in tune with the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 to secure the interests of foreign investors. This obligation extends to the listing company as well who will be mandated to issue their equities in compliance with the mutual laws and regulations.

Until now, the only Indian debt instrument which are listed on a foreign exchange are Masala Bonds. They are supervised via the SEBI (International Financial Services Centers) Guidelines, 2015 but there exists a lack of regulatory oversight with regards to equities listed by and Indian Corporation. Therefore, the definition of Permissible Securities under Section 7 of the guidelines can be amended to include such class of equities by virtue of the powers conferred to SEBI under Section 11 of the SEBI Act, 1992.

III. Indian Entities and Investors

There are glaring queries in the face of benefits accruing to Indian investors by this move, since neither the Companies (Amendment) Bill, 2020 nor the SEBI Report explicitly discuss the consequences in their preliminary disclosures permitting overseas listings. At first glance, it is apparent that Indian entities that will opt for direct listing on overseas platforms will get first-hand exposure to multiple sources of capital from Alternate Investment Funds (AIF’s) and foreign industry-exclusive investor classes that were initially prevented from diversifying their investments to Indian entities due to their respective investment laws and regulations. However, uncertainty regarding authorization of Indian investors subscribing to such entities listed on overseas stock exchanges is sustained, as there are neither any sectoral caps identified on class of shares, nor any clarification about whether the Indian investors will be able to subscribe to equity under the automatic route or the government approval route.

IV. Relevant Concerns

In order to facilitate direct overseas listing, there are multiple areas that could prove to be a challenge for the entities as well as the regulators and will need to be rectified.

Firstly, the SEBI Report identified 12 permissible jurisdictions for overseas listing of Indian companies including the NASDAQ, London Stock Exchange, Euronext Paris etc. To ensure swift listing of equities, Indian entities will be required to coordinate with the local listing regulations under the permissible jurisdictions along with the SEBI framework that shall govern overseas listings, which could hand a double-blow for the Indian corporations due to multiplicity of norms. For instance, an Indian corporation directly listing on the LSE, in order to prohibit insider trading, will have to figure out a mutual ground between SEBI (Prohibition of Insider Trading) Regulations, 2015 and the Financial Services and Markets Act 2000 (Market Abuse) Regulations 2016 of the UK to prevent any potential conflicts which may arise in between their provisions. Similar issues extend to corporate governance norms that may not be unequivocal with the permissible jurisdiction’s regulations.

Secondly, if a conflict does arise between the regulators, there is a need for a swift dispute resolution mechanism that is relatively quicker than traditional arbitration. Furthermore, since the primary accountability will rest with SEBI, it is imperative that its extra-territorial powers are expanded to encompass any such disputes relating to the Indian equities listed on overseas stock exchanges, also to ascertain that SEBI shall exercise exclusive authority in dealing with corporate offences that may arise on the permissible jurisdiction. Although, the current KYC norms for Indian investors form a reliable frame of reference to curb such occurrences, pairing up with countries which are members of the Financial Action Task Force (FATF) would significantly prevent any large-scale economic offences such as money laundering through these channels.

Finally, even prior to the legislative amendments, there is an immediate need to strengthen the infrastructural capacity of the Indian Depositories framework and the concerned registrars of Indian securities. A lack of stable gridwork could potentially affect the inter-links between Indian registrars and their foreign counterparts, consequently hampering the efficient trading of equities on the foreign permissible jurisdiction.

V. Conclusion

It is admitted that a plethora of concerns related to overseas listing will be clarified once SEBI releases an elaborated framework, yet there are still issues that would require detailed elucidations. For instance, whether overseas listing would grant an exemption to the corporations involved within the prohibited sectors under FDI regime; or what would be the process of subscription to such equities, and which sectors would fall under the government approval route and whether there will be sectoral caps? etc. These are just a few queries that would have to be resolved prior to any Indian entity’s first IPO on foreign soil.

It is also to be noted that just like much of the reforms announced under the stimulus, overseas listing was already in consideration and might have mitigated the strain on Indian companies had it been already enforced and was functioning. Nevertheless, the move to allow direct listing to overseas exchanges should be welcomed by cash-strapped Indian entities which would now be able to tackle the liquidity-crunch arising from Covid-19 by accessing foreign investors and capital. Furthermore, this leaves the door open for foreign entities to directly list on Indian markets as well, that may allow Indian investors to diversify their stock portfolio as well.
September 1, 2020
Consumer Protection Rules, 2020: A Conceptual Framework Towards Transparency In Digital Market

BY ANURAG MOHAN BHATNAGAR AND AMIYA UPADHYAY, THIRD-YEAR STUDENTS AT NLU, ODISHA

Introduction

With a vision to impede unjust trade practices in the e-commerce industry, immediate selling, and to safeguard the interest and the rights of the consumers, the Central Government has come up with Consumer Protection (E-commerce) Rules, 2020 (‘the Rules’). The Central Government has the authority to take certain actions to avert unfair trade practices in the e-commerce industry as under section 94 of the Consumer Protection Act 2019 (‘the Act’). The rules concerned, have been worked out as under the powers provided in section 101 (1) (zg) of the Act. One of the basic definitions that have come up under the new rules, include “e-commerce entity” that is, “any person who owns, operates or manages digital or electronic facility or platform for electronic commerce, but does not include a seller offering his goods or services for sale on a marketplace e-commerce entity”.

Furthermore, the Central Government has also replaced a three-decade-old (1986) act with a new Consumer Protection Act 2019 which came into effect in July 2020. The present piece seeks to present a detailed analysis of the Rules including certain loopholes within the same, and the similarities or differences between competition laws (antitrust laws) and consumer protection laws. Further, the authors have also formulated a cross-jurisdictional analysis with USA and the European Union (EU).

Critical Analysis

The replaced Act lacked the vision to provide justice to the consumers and was time-consuming. As per the new Rules, the seller has to mandatorily show details such as price, information about refund/exchange, delivery, and shipment, grievance redressal, etc. The Rules also mention that the sellers cannot make unjustified profits by manipulating the price of the goods (rule 4(11) (a)).In the case of M/S Cargo Tarpaulin Industries vs Sri Mallikarjun B.Kori, the National Consumer Disputes Redressal Commission held that it is an offence to sell any good at a price higher than the current retail price of that good.

While, the report given by the Competition Commission of India (‘market study’) covered most of the difficulties faced by the consumers, it only comprised of objective facts with the end goal of research and did not establish an authoritative or a binding legal obligation. On the other hand, these rules not only legally bind the e-commerce platforms but also deal with major issues present in the market study such as platform neutrality and search rankings (rule 5 (3)(f)). Regulatory authorities have been strict about search rankings ever since they found Google liable in Matrimony.com Ltd v. Google LLC and Ors.

Platform neutrality means that e-commerce platforms cannot discriminate in favour of their services. For instance, Flipkart could not favour its products in the search rankings on its marketplace while demoting the other retailers on the platform. Thus, a platform cannot act as both a marketplace and a competitor on that marketplace. In Re: All India Online Vendors Association, Flipkart was alleged for leveraging its position as a marketplace to extend preferential treatment to WS Retail on its platform. Preferential treatment is accorded by numerous e-commerce players in India by marketing and selling products of their own subsidiaries, related parties or others. By doing so, the undertaking imposes dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at competitive disadvantage. Under rule 5(3), marketplace e-commerce entities are required to disclose any differentiated treatment which it is / maybe extending to goods, services or sellers of the same category. As such, the e-commerce platforms will need to disclose descriptions of practices like premium/preferred listing, skewed search results, sponsored deals etc. in the terms and conditions governing the relationship with the sellers on the platform. This will help in curbing such discriminatory profit-making practices.

Further, the Act aims to establish a Central Consumer Protection Authority (‘CAPA’), Disputes Redressal Commission, Central Consumer Protection Council. These bodies shall carry out investigations in certain matters about misleading advertisements, product liability, and unfair trade practices.

The Rules have also mapped out a grievance redressal system for complaints. Under the Rules, grievance is classified as any complaint with respect to violations of the Act or the Rules, made to any e-commerce entity. The Rules have made it essential for every e-commerce entity to appoint a nodal grievance officer, whose designation and contact information has to be displayed on its website. Further, it is essential for every e-commerce entity to certify that the appointed officer acknowledges the receipt of the complaint in 48 hours and furnish rectification of the same within 1 month from the receipt date. From the perspective of a consumer, the clause of “acknowledging the receipt” of the complaint will act as improving the transparency in the redressal system and obviously, a time-bound dispute redressal system will qualify as a righteous move.

Inter alia, other relevant duties of the e-commerce platforms include non-imposition of cancellation charges, explicit consent of consumers and effective refunding. According to the clauses under rule 7, e-commerce entities will not impose cancellation charges on consumers who cancel after confirming the purchase, unless the e-commerce entity is also bearing similar charges. Furthermore, the consent acquired from the customer while purchasing must be express and voluntary. In this way, the e-commerce entities will not under any conditions include pre-ticked boxes in consent forms. In addition, products and services will be taken back and refunds shall be given if there is an occurrence of defective, inadequate or bogus and counterfeit, or not at standard with or not of the characteristics advertised or when delivered late from the schedule, except if brought about by force majeure.

Relationship between Antitrust and Consumer Protection: Under One Umbrella

Prima facie, the objectives of both the legislations are quite similar as both deal contortions in the market place, which is driven by supply and demand. While the Competition Law ensures access to goods and services at competitive prices for consumers and averts illicit activities which could hamper an environment of healthy competition, Consumer Protection on the other hand, aims to safeguard the basic right of the consumers to be guaranteed access to diverse goods and services at competitive prices.

The relation between both the laws can be expressly witnessed in the Competition Act itself, as under section 4, “where an enterprise or a group shall be termed as abusing its dominant position if it limits technical development relating to goods or services to the prejudice of consumers”. A similar reference can also be seen in section 18 of the Competition Act whereby the “interest of consumers must be protected”. Thus, it can be reasonably argued that both the legislations ultimately support one another as two parts of an overarching unity, and that overarching unity is consumer sovereignty.

Loopholes and Criticism of the Rules

Rule 2 states that the Rules does not apply to a natural person where the activities are being carried out in personal capacity. The Rules should have included all the stakeholders within its purview to be qualified as an extensive piece of legislation. Secondly, the Rules could have mapped out a detailed rate list of the delivery charges, which the sellers charge on the e-market, which are often unnecessarily higher than what a common man would be willing to fork out. Thirdly, the malpractice of drip pricing has not been addressed. Drip pricing is an act where the seller consistently increases the price of the goods at different stages of online shopping till the final stage of payment. Lastly, the rules have surprisingly not included any legal structure other than a company, such as a limited liability partnership (‘LLP‘). This preclusion would definitely hamper many e-commerce entities which are functioning under different legal structure.

Furthermore, there are certain terms in the Rules which might create confusion or conflict such as “unjustified prices”, “arbitrary classification” and “unreasonable profits”. Arguably, clauses like “restricting access to sale/discounts on products/services” can be termed as arbitrary categorization since they affect the rights of consumers directly.

Cross-Jurisdictional Analysis

Before the Indian Ministry of Consumer Affairs, market research and examinations on the impact of digital marketplaces have similarly been carried out by consumer protection and competition law watchdogs of many other jurisdictions. Some of the noteworthy regulations introduced in other jurisdictions are as follows:

USA: The two agencies involved in online consumer protection in the US are the Federal Trades Commission (‘FTC’) and the Federal Communications Commission (‘FCC’). While the FCC reviews consumer complaints, the FTC investigates and takes actions against those involved in illicit trade practices. Previously, the FTC had released a dotcom disclosure guidance document in which it mentions that how intently it manages the structure and substance of information distributed in the online marketplace to prevent unreasonable or deceptive activities and protect the consumers from such practices. In any case, while the sectoral division of regulators may provide cures for that specific sector, it isn’t without its disadvantages, lack of co-operation between the regulators and overlapping decisions of authorities, just to name a few.

EU: The EU introduced new rules for consumer protection in January 2020. This initiative adopted by the commission urges more transparency on e-commerce marketplaces, same consumer rights for “free digital services”, better search rankings, transparency in customer reviews, customized pricing. It also focuses on forbidding purchasing of tickets online through bots and encouraging honest discount claims. The directive also mentions levying penalties on those e-commerce platforms which violate these consumer rules, which is up to 4 percent of the platform’s overall turnover.

Conclusion

In an industry that is going through a phase of expansion and technological advancement, robust legislation such as the Act was the need of the hour. Certainly, the Rules can be considered as a step in the right direction. Even though some of the provisions of the Rules might be in contravention to the sellers but overall, these rules were needed because until now, there was no particular legislation that dealt with unconventional issues resulting from the e-commerce industry. Lastly, these Rules cover all the contemporary issues and act as much-awaited legislation governing the new e-commerce industry and shall aim to let out some uniformity in the market.

August 27, 2020
The Future of Financial Institution Resolution Mechanisms: FRDI to Make a Comeback?

By Anirudh Rao Saxena and Anupriya Nair, Fourth-year students at NALSAR, Hyderabad

An air of uncertainty and impermanence surrounds the future of the Indian financial system as a result of COVID-19. On 11th July 2020, speaking at the State Bank of India (SBI) economic conclave, RBI Governor Shaktikanta Das voiced his concerns pertaining to a likely increase in cases of capital erosion and non-performing assets (“NPA”) in the banking sector, as a result of the pandemic. As a contingency response to these vulnerabilities, he proposed the setting up of a resolution corporation (“RC”) with requisite legislative support to aid in the insolvency management of financial firms.

Chronology of Events

The necessity to establish an RC for insolvency and liquidation proceedings of Financial Service Providers (“FSPs”) was originally observed in the controversial Financial Resolution and Deposit Insurance Bill , 2017 (“FRDI”). The late Finance Minister (“FM”), Arun Jaitley, in August 2017, launched the FRDI in the Lok Sabha. Subsequently, in August 2018, interim FM Piyush Goyal withdrew the FRDI owing to public anxieties surrounding a ‘bail-in’ clause which was put in place to combat issues of inadequate deposit insurance.

In February 2020, FM Nirmala Sitharaman announced that although the revival of the FRDI is in the works, the Ministry of Finance cannot commit to a timeline for it to be tabled in Parliament. Currently, media reports suggest speculation around a forthcoming revised Financial Sector Development and Regulation (Resolution) Bill, 2019 (“FSDR”) in accordance with a briefing note prepared by economic affairs secretary, Atanu Chakraborty.

A Primer on FRDI

The prime reason for the introduction of FRDI was due to the increasing interaction between the public and the financial sector. It was owing to this very reason that the government felt a need to protect the interests of the depositors. Furthering this intention, the government introduced the contentious FRDI Bill, 2017 in the Lok Sabha.

Presently, India lacks an all-inclusive and integrated legal framework for the resolution and liquidation of financial firms. The responsibilities and powers for resolution are dispersed amongst regulators, Courts and the Government under multiple laws. These powers are quite limited, therefore banks are typically restricted to two methods of resolution i.e. winding up of the bank or mergers. Further, the impact of failure in case of a traditional insolvency procedure is limited to the creditors of the insolvent firm, however the failures of financial providers have a much wider ramification on the economy of a country (Cypriot Financial crisis). Thus, just as the Insolvency and Bankruptcy Code, 2016 (“IBC”) has provided a comprehensive resolution mechanism for non-financial firms, the FRDI Bill aims to do the same for financial institutions.

What Triggered the Withdrawal of FRDI?

The foremost trigger behind the withdrawal of the FRDI was the questionable ‘bail-in’ clause found in Section 52 of the Bill. This section allowed for, if the RC saw fit, the internal restructuring of liabilities (deposits). Moreover, further sub-sections of the clause provided for the cancellation and modification (into long-term bonds and equity) of deposits. It is notable that the extent of the powers of the RC in this regard would be applicable on deposits only beyond the insurance cover amount of INR 1 lakh. Inevitably, this clause led to apprehension among depositors owing to the possibility of being left with a mere 1 lakh in case of bank failure.

In response to public concerns surrounding the ‘bail-in’ clause, not only the Ministry of Finance, but the late FM Arun Jaitley himself, presented the clause as a transparent means of granting additional protection to deposits. Au contraire, The Associated Chambers of Commerce & Industry of India (“ASSOCHAM”) argued against the clause, bringing focus to the dangers of diminishing trust in the banking system and of the consequent routing of public investment into unsuccessful avenues leading to the eventual erosion of the banking system. The competing objectives of the Bill, and that of the depositors, led to debate resulting in the withdrawal of the Bill.

The Revival of FRDI in 2020: Understanding its functioning

FRDI aims to provide establishment of a RC and a regime which would enable a timely resolution of failing financial firms. The RC will consist of representatives from all financial sector regulators (the Reserve Bank of India, the Securities and Exchange Board of India, the Insurance Regulatory and Development Authority of India and the Pension Fund Regulatory and Development Authority), the ministry of finance as well as independent members. It aims to achieve timely intervention by classifying firms into 5 categories – low, moderate, material, imminent, or critical. Determining the health of a financial entity, ensures that a timely decision can be taken before it’s classified as a weak entity and there is no other option left but to liquidate the firm.

The liquidation waterfall mechanism sets up a priority in terms of dispersal of payments on the occurrence of liquidation. According to the hierarchy, first priority is given to secured creditors, followed by unsecured creditors, and finally by operational creditors. Under the current regime regulated by Deposit Insurance and Credit Guarantee Corporation (“DICGC”), the deposits are insured up to INR 1 lakh over which the deposit is treated on par with unsecured creditors. However, as per the provisions of the FRDI Bill, these uninsured deposits will be placed above unsecured creditors and Government dues. FM Nirmala Sitaraman, in her 2020 budget speech, announced that the limit for insured deposits would be increased to INR 5 lakhs. This move would ensure improved protection of the rights of the depositors since a larger sum of deposits are protected. For this transition to occur in a seamless way, the FRDI Bill would have to transfer the deposit insurance functions from the DICGC to the RC which would then result in an integrated approach to the depositor’s protection and resolution process.

Decoding the Status Quo

The status quo of FRDI may be ascertained from the assertions made by RBI Governor Shaktikanta Das as part of his recent speech at the aforementioned SBI economic conclave. On account of similarities between his proposal and the FRDI with respect to the suggestion to set up an RC, the re-emergence of a revised FRDI may be easily perceived.

First, Das drew attention towards the increased relevance of resolution as opposed to liquidation of banks. He cited resolution (wherein the bank remains a going concern) as being more effective in providing depositors with a higher value of return.

Second, the traditional merger approach often utilized to save failing banks by merging (The merger of Corporation Bank and Andhra Bank with Union Bank ) with larger banks, doesn’t provide the same return as the resolution process.

Third, Das stressed upon the necessity to have the RC acting beyond simple implementation of corrective measures. The primary focus of the RC, as he stated, is not to correct, but to monitor, foresee and assess emerging risks as and when they surface.

Interim Mechanism

On 15th November 2019, the Ministry of Corporate Affairs (“MCA”) notified the Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019 (“Rules”) with the objective to provide a framework for insolvency and liquidation proceedings of FSPs other than banks.

The Rules shall be applicable to FSPs (to be notified by the Central Government) as per Section 227 of the IBC including discussions with appropriate regulators, for the purpose of conducting insolvency and liquidation proceedings within a specified time frame. It is imperative to comprehend the provisional nature of the framework provided under Section 227 as it has been set up as an interim mechanism until either a revised legislation is enacted, or the IBC is amended.

The Way Forward

It is important to analyze and address the position FSDR will take in its proposed reforms. The bail-in clause was problematic in the FRDI owing to the lack of coherent legal framework within which it operated. This ultimately resulted in disproportionately disadvantaging individuals while leaving the corporate and financial sectors unharmed. In order to preserve financial stability, it is essential that the new Bill is strategically designed to establish a balance between the rights of private stakeholders and public policy interests.

The FSDR should consider including the “no creditor worse off test” in order to safeguard stakeholder interests. This move will convince investors that the bail-in provision is merely a way in which the bank buys time to restore its strength and long-term viability. This framework has been tried and tested during the 2011 Denmark financial crisis, and was advocated by the International Monetary Fund. It is of utmost importance that the bail-in framework is carefully structured to ensure effective implementation in the FSDR.

Additionally, owing to the constant changes in the dynamics of the banking sector with various mega sector banks undergoing mergers, it would be ideal to wait until there is better clarity on the future of the banking sector before introducing a new Bill. In order to better incorporate the legislative framework of other acts with the functioning of a new Bill, multidisciplinary research should be conducted before its enactment.

August 26, 2020