The Corporate & Commercial Law Society Blog, HNLU

Author: HNLU CCLS

  • SEBI’s Closing Auction Session: Legal and Market Fault lines

    SEBI’s Closing Auction Session: Legal and Market Fault lines

    ANISHA AND DEV KUMAWAT, THIRD AND FOURTH- YEAR STUDENTS AT TNNLU, TIRUCHIRAPPALLI

    INTRODUCTION

    The Securities and Exchange Board of India (‘SEBI’) has released a consultation paper on 22 August, 2025, suggesting the commencement of Closing Auction Session (‘CAS’) in the equity share market or stock market. The new framework is not just a reform to the market structure for ameliorating the closing- price integrity rather it has far-reaching implications for Indian securities law and corporate governance. The proposed amendment related to CAS is far more than the statistical closing price for the trading day, as it has paramount implications for the legal and contractual matters, none the less from takeover regulations, delisting thresholds to mutual fund net asset valuations and the determination of settlement obligations. Through this, SEBI is not just affecting the economic framework of the market but also proposing a new regulatory and commercial frameworks by recalibrating on determination of prices.

    To address this issue, this article examines the legal and market issues that are raised by CAS ranging from takeover thresholds, delisting processes mutual fund valuations to its impact on insider trading enforcement and minority shareholder protection. Thus, a comparative analysis has been drawn focusing on its regulatory safeguards and highlighting the opportunities and risks of the proposed framework. Ultimately, it suggests a layered regulatory approach to harmonize SEBI’s twin objectives of accurate price discovery and investor protection through greater transparency, real-time surveillance and protective mechanisms.

    FROM VWAP TO CAS: A STRUCTURAL SHIFT IN PRICE DISCOVERY

    The proposed amendment sharply contrasts with the present method of calculating the price of the stocks for each company i.e. the closing price. Currently, the closing price is calculated from the Volume-Weighted Average Price (‘VWAP’), i.e. the weighted average price of trades that has been executed continuously during the last half an hour. But under the new framework, a dedicated twenty- minute CAS (3:15–3:35 p.m. IST) would be taken into account and the orders would be finalized as per the acceptance, matching and execution of stocks via buying and selling, through a call- auction mechanism. For the first instance, it has been initiated for derivatives eligible (Future & Option Stocks) the highly liquid securities crucial for index and derivatives settlement with possibility of later expansion to wider cash market. This framework is reasoned by SEBI in phased approach on two grounds: firstly, F&O stocks form the backbone of institutional portfolios and are most relevant for index benchmarking; secondly, manipulation risks could be mitigated because of their high liquidity rates.

    The practical effect can be elucidated by a short numeric contrast. Under the current VWAP approach, if a stock trades mostly between ₹100- ₹102 during the day and one among the last few trades transaction is of ₹108, the VWAP may lift modestly to about ₹103.5, thus slightly affecting the Net Asset Value (‘NAV’) and index weights. Now, under the newly introduced framework (CAS), if the 3:00- 3:15 VWAP is ₹101 with ±3% band, then the auction could clear  up to around ₹104. Should a cluster of institutional orders push the clearing price to that level, ₹104 would stand as the official close, determining NAVs, takeover thresholds, and derivative settlements. This change is not minimal as a shift of ₹3-₹4 per share across millions of shares put a lot of effect on wealth transfers between acquirers, minority shareholders and passive investors. This shows how VWAP dilutes the impact of any single trade across an extended period, while on the other hand, CAS magnifies the influence by compressing decisive price formation into a narrow, highly visible window, thus creating  a natural choke point for significant players.

    CLOSING PRICE AS A LEGAL AND MARKET BENCHMARK

    The shift is not just a mere technicality as the closing price acts as the standardized benchmark in securities regulation. For instance, under Regulation 3 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, open offer which has the mandate of 25% shareholding threshold is calculated with reference to the closing price.  Through this, it protects the minority shareholders in control transactions. Additionally,  Regulation 8 of the SEBI (Delisting of Equity Shares) Regulations, 2021 set the floor for exit consideration in delisting exercises through closing price. Moreover, even mutual fund valuations under Regulation 47 of the SEBI (Mutual Funds) Regulations, 1996  determine the NAV  available to investors through the same. In this sense, the closing price performs a quasi- legal function, extending beyond market mechanics to structure substantive entitlements and liabilities. Any change in the methodology of its discovery, therefore, extends beyond technical microstructure reform like price fluctuations and engages fundamental questions of investor protection and regulatory design. Heavy order flows during the auction period can unduly influence the closing price. This makes it difficult for the small shareholders to counter the influence of large institutional trades.

    One of the most analytical difficulty lies in balancing SEBI’s dual objectives: one being enhancing price accuracy and other being preventing regulatory arbitrage or market distortions. The consultation paper has acknowledged that the closing prices are often subject to marking the close, a practice where traders execute small-volume traders just before the market closes to nudge prices in the desired direction. It has been globally recognized by courts and regulators as a form of market manipulation. The fact has been reinstated in India by the Securities Appellate Tribunal through Regulation 3 of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003 which prohibits manipulative and deceptive devices. While the newly introduced framework of CAS by concentrating liquidity into a single call auction, may diminish the efficacy of last- minute trades, it also creates a new issue related to concentration of large orders to influence the equilibrium price by large players.

    In the context of takeovers, the person holding 25% of company’s shares has to make an open offer to other stakeholders and that price is linked to past closing prices. So, under the new framework, the closing price could be fluctuated either up or down, depending on how big investors place their orders in that short auction window. This advantages the buyer, who is willing to take the risk of bidding aggressively in the CAS. In delisting too, price is influenced by CAS. When such a scenario persists, then prices become more volatile or controlled by the hands of a few large orders, thus leading to unfair exit value of minority shareholders. In the case of SEBI v. Cabot International Capital Corp. (2004), it was held that the main aim of securities law is to protect the investors. It means any change in reduction of fairness for investors in exit processes goes against the principal of investor protection.

    CONCENTRATED ORDERS, MANIPULATION, AND INSIDER RISKS

    Moreover, insider trading regulation is also affected by CAS. Under the SEBI (Prohibition of Insider Trading) Regulations, 2015, material events are reflected in stock prices with the closing price serving as a reference for detecting suspicious trading activities. When the auction price can be influenced by a dominating group of participants, then the casual link between non-public information and price movement becomes harder to establish. This results in weakening of evidentiary foundation of enforcement i.e. without adequate surveillance. If left unchecked, it could undermine the deterrent value of insider trading provisions. For minority investors, the risk is especially acute, as concentrated orders during the auction could distort prices to their disadvantage, undermining the very protections securities law aims to guarantee.

    Comparative jurisprudence like European Union’s Euronext market shows that closing auctions are typically safeguarded by protective mechanism like volatility extensions, real-time extensive prices, and order imbalance disclosures. Even though, the same has been acknowledged by the SEBI’s consultation process but it does not properly consider the operability in India’s context. It is characterized by substantial retail participation, high algorithmic trading activity, and resource- constrained market surveillance. If these safeguards are not incorporated, CAS may unintentionally tilt the market towards institutional investors, thus weakening the legal and fiduciary protections afforded to minority shareholders under the Takeover Code and Delisting Regulations.

    A layered approach is required to address these risks posed by CAS like requiring disclosure of large orders at the time of auction could enhance transparency and would supply regulators with empirical data to monitory systematic risks. Additionally, practices like layering, spoofing and order clustering could be incorporated in the system to protect both market integrity and equitable access as real- time surveillance system. Through the lens of economics, these measures could help reduce price imbalance, thus ensuring minority shareholders rights.

    CONCLUSION

    The proposed CAS marks a structural reorientation in India’s price- discovery framework, with implications that extended far beyond a technical refinement. By concentrating the price formation into a narrow window, potential choke points could be found where the dominant investors get disproportionate influence, raising questions over fairness and investor protection, especially for minority shareholders. SEBI must therefore approach CAS with strong rigorous safeguards, empirical oversight and a commitment to equitable governance, to ensure a balance between the statutory and fiduciary protections that underpins the Indian securities law.

  • Decoding Residuary Jurisdiction: Why NCLT cannot release PMLA Attachments

    Decoding Residuary Jurisdiction: Why NCLT cannot release PMLA Attachments

    RITURAJ KUMAR , FIFTH – YEAR STUDENT AT RMLNLU, LUCKNOW

    INTRODUCTION

    The interplay of the Insolvency and Bankruptcy Code, 2016 (‘IBC’) and the Prevention of Money Laundering Act, 2002 (‘PMLA’) has been an issue of deliberation since the introduction of the IBC. The conflict is quite natural as both statutes have a non-obstante clause suggesting each has an overriding effect. This leads to a situation where both statutes claim primacy in case of conflict. Further, they both have divergent objects. The IBC aims to maximise the asset during the Corporate Insolvency Resolution Process (‘Resolution Process’), whereas the PMLA provides for confiscating assets arising from or engaged in money laundering. This becomes a significant barrier during the resolution process.

    The discussion around the primacy of the statute and whether a moratorium imposed under Section 14 of the IBC would extend to the attachment made by the Enforcement Directorate (‘ED’) under Section 5 of the PMLA has been a concern for almost a decade.  This blog does not delve into the above issue and restricts its scope to why the National Company Law Tribunal(‘NCLT’) cannot release attachments of a corporate debtor confirmed by the Adjudicating Authority under the PMLA. The National Company Law Appellate Tribunal (‘NCLAT’) in Anil Goel for Dunar Foods v. ED recently affirmed this position that the NCLT cannot release such attachments. However, the legal position on this issue remains unsettled as the Bombay High Court in Shivcharan v. Adjudicating Authority and Anr (‘Shivcharan’) had previously authorised the NCLT to release such attachments while exercising its residuary jurisdiction. Currently, the Shivcharan judgement is pending before the Supreme Court of India for final determination of this issue. In this light, this blog examines the residuary jurisdiction provided under the IBC and argues how Shivcharan judgement disregards the established legal principle and procedure in an attempt to achieve the objects of the IBC.

    RESIDUARY JURISDICTION OF THE NCLT

    Residuary jurisdiction has been vested in the NCLT under Section 60(5)(c) of the IBC. However, it is limited to deciding matters related to the resolution or liquidation of the Corporate Debtor, and it does not provide an inherent jurisdiction. This aligns with the Embassy Property Developments Pvt. Ltd. V. State of Karnataka and Ors case, where the Supreme Court of India asserted that the NCLT cannot replace the legitimate jurisdiction of other courts or tribunals when the issue does not arise solely from or relate to the insolvency of the corporate debtor. By extension, this would equally apply to a special statute like the PMLA where the attachment was confirmed by the Adjudicating Authority under Section 8(3) of the PMLA.

    The attachment under the PMLA relates to the ‘proceeds of crime’ derived from the criminal activities associated with the scheduled offences. These crimes threaten the integrity of the financial system and affects the public at large. These offences are prosecuted by the state and are in the realm of public law. The PMLA was introduced to fulfil India’s international commitment to combat money laundering, aligning with the Vienna Convention (1988) and the United Nations Convention against Transnational Organised Crime (2000).  Such matter, being in the realm of public law, cannot be brought within the phrase “arising out of or in relation to the insolvency resolution” as enshrined under the aforementioned section.

    This position has been recently reaffirmed in Kalyani Transco v. M/s Bhushan Power and Steel Ltd. , where the division bench of the Supreme Court held that the NCLT or NCLAT does not have any authority to adjudicate upon a public law like PMLA. The NCLT, deriving its jurisdiction from the provisions of the IBC and constituted under the Companies Act 2013, is a coram non judice to direct the ED to release the attachment. 

    NCLT AUTHORITY DURING THE RESOLUTION PROCESS 

    During the resolution process, the primary duty of a Resolution Professional is to run the Corporate Debtor as a going concern.Recently, in the case of Mr Shailendra Singh, Resolution Professional of Foxdom Technologies Pvt Ltd V. Directorate of Enforcement & Anr, the Resolution Professional invoked the residuary jurisdiction to defreeze the account of the Corporate Debtor, which was frozen by the Adjudicating Authority under PMLA. The NCLT held that they do not have the power to issue directions to the ED in this regard. It reiterated the stance adopted by the NCLAT in Kiran Shah v. Enforcement Directorate Kolkata that the jurisdiction to deal with matters related to attachment and freezing of accounts under PMLA vests exclusively with the authorities designated under the PMLA. If aggrieved by any action, the Resolution Professional can seek appropriate remedies under the PMLA itself. The statute provides adequate mechanisms for resolving concerns and claims. This clear demarcation of jurisdiction ensures that the PMLA remains independent of IBC and serves its legislative object.

    NCLT AUTHORITY AFTER APPROVAL OF THE RESOLUTION PLAN 

    While the forum for releasing attachments during the resolution process is relatively clear, the situation becomes complicated after approval of the resolution plan under Section 32A of the IBC  It states that the Corporate Debtor cannot be held liable for the prior offence committed by the erstwhile promoter, and protects the property from being attached.

    In Shivcharan judgement, the Bombay High Court reinforced this interpretation that after approval of the resolution plan, the Adjudicating Authority under the PMLA must release the attachments. It also stated that this is the only means of ensuring that the right, as stipulated in Section 32A of the IBC, will start to flow. This position is supported by the Supreme Court’s decision in Manish Kumar v. Union of India which upheld the constitutionality of Section 32A. Article 141 of the Constitution of India ensures consistency in the interpretation of law and set a judicial precedent where all lower courts follow the ruling made by the Supreme Court of India. Consequently, the PMLA Court is bound to comply and give effect to the Section 32A by releasing the attachment.

    However, the Shivcharan judgement erred in empowering the NCLT to release the attached property made under the PMLA under the residuary jurisdiction. The Bombay HC read something not expressly provided in the law and authorised NCLT to adjudicate upon the issue falling into the purview of another court. Though this judgment seeks to achieve the object of the IBC, it overlooks the relevant precedents and established principles. Notably, it stands in aberration with the Gujarat Urja Vikas Nigam Ltd. v. Amit Gupta, where the Supreme Court issued a note of caution to NCLT while exercising the residuary jurisdiction. The Apex Court noted that the NCLT has jurisdiction to adjudicate disputes that arise solely from or relate to the insolvency of the corporate debtor. It has to ensure that they do not usurp the legitimate jurisdiction of other courts or tribunals when the issue extends beyond the insolvency of the corporate debtor.

    Additionally, this approach is also in conflict with the principle of harmonious construction, which is applied to reconcile conflicting provisions within a statute or two different statutes. A harmonious construction cannot extend to the limit which renders one provision completely redundant. The Shivcharan judgement makes the provisions of the PMLA nugatory by bypassing the PMLA courts, and authorises the NCLT to release the attachment.

    Moreover, allowing the NCLT to discharge the attachment practically implies that the NCLT is sitting in an appeal against the Adjudicating Authority of the PMLA, where the latter confirmed the attachment made by the ED.  This goes against the settled principle that the forum to hear the appeal is to be tested in reference to the forum which passed the original order. Since the attachments are confirmed under Section 8(3) of the PMLA by its Adjudicating Authority, it must be discharged either by the same forum or by the appellate forum under Section 26 of the PMLA constituted thereunder. In short, the Adjudicating Authority under the IBC i.e. NCLT cannot assume the role of Adjudicating Authority under the PMLA.

    A WAY AHEAD

    As the appeal of the Shivcharan judgement and related cases are pending before the Supreme Court, a clear jurisdictional boundary must be established by a conclusive ruling. The authority to discharge attached property must rest with the PMLA Court unless a legislative amendment says otherwise. The PMLA Court is a competent forum authorised by the law to deal with attachment and permitting the NCLT to adjudicate on such matters only causes jurisdictional conflict and confusion among the litigators, forcing them to move from one court to another.

    However, while adopting this approach, Section 32A of IBC must be given effect. This provision represents the last expression of the intent of the legislature, as it was introduced through an amendment in 2020. After approval of the resolution plan, the PMLA court must be mandated to release the attachment. This ensures that the protection under the said provision can take effect, and the Successful Resolution Applicant is not made liable for the prior offence. For Section 32A to operate effectively, the perquisite prescribed therein must be satisfied, namely that the new management is not related to the prior management and is not involved in the alleged offence. In practice, the PMLA Court often encounters difficulties in determining compliance with these requirements while considering the release of attachments. To address this issue, the NCLT may issue a No Objection Certificate (‘NOC’) while approving a resolution plan, specifying that the statutory conditions of Section 32A are met. Such an NOC will affirm that a promoter is not regainingcontrol or laundering assets through the resolution process. It will prevent jurisdictional conflict and will not cause unnecessary hardships to litigating parties. In effect, this will ensure that resolution applicants are not discouraged, and revival of a corporate debtor is not obstructed.     

    This conflict between the IBC and the PMLA reflect the difficulty of reconciling two statutes having divergent objects and non-obstante clause. To maintain the independence of both statutes, a consistent position has to be adopted defining a clear jurisdictional boundary ensuring the revival of a corporate debtor is not discouraged. A conclusive ruling by the Supreme Court in this regard or an appropriate legislative amendment is essential to resolve this conflict and bring much-needed clarity to relevant stakeholders.

  • Term Sheets and their Status in India: Key Lessons from the Oyo-Zostel Dispute

    Term Sheets and their Status in India: Key Lessons from the Oyo-Zostel Dispute

    ADITYA GANDHI AND SIDDHARTH SHARMA, FOURTH- YEAR STUDENT AT NLUO, ORISSA

    INTRODUCTION

    Term Sheets are preliminary agreements executed at the first stage of complex commercial transactions between companies and prospective investors. These agreements outline the deal structure and cover the material terms and conditions of an investment. They largely serve as non-binding agreements to direct negotiations between the investors and the target. While the core commercial terms in a term sheet are intended to be non-binding, virtually all term sheets contain certain clauses like exclusivity and confidentiality, that are binding and legally enforceable. This creates an uncertainty as to whether a “non-binding” term sheet could crystallize into a set of binding rights and obligations.

    In this context, the recent Delhi High Court (‘Delhi HC’) judgement in Oravel Stays Private Limited v. Zostel Hospitality Private Limited has highlighted the question regarding the legal enforceability of term sheets. The Delhi HC quashed the arbitral award that held the term sheet signed between Oyo and Zostel to be binding in Zostel’s favour. The dispute, spanning nearly a decade, seems to have concluded with Zostel withdrawing their special leave petition before the Supreme Court in July 2025.

    In light of this judgement, the article aims to map out the impact that the Delhi HC judgement will have on the status of term sheets. The authors explore the key difference in the rationale of the aforementioned judgement and the arbitral award.

    FACTUAL BACKGROUND

    This dispute stemmed from a proposed acquisition that fell through. Oyo and Zostel had executed a term sheet in 2015, where Oyo offered to purchase certain assets from Zostel. In line with the conventional approach, the term sheet’s preamble mentioned that it was non-binding and subject to definitive agreements. The proposed acquisition did not materialise after differences emerged between the parties before definitive agreements could be signed. Zostel claimed it had completed its obligations under the term sheet and sought for the specific performance of reciprocal obligations. Oyo contended that without any definitive agreements, it had no obligations towards Zostel as the term sheet was non-binding.

    THE ARBITRAL AWARD IN FAVOUR OF TERM SHEET ENFORCEABILITY

    The Arbitral Tribunal held that the term sheet had become binding due to the conduct of the parties. It observed that Zostel’s performance of its obligations under the term sheet gave them a legitimate expectation from Oyo to fulfil reciprocal obligations. The Tribunal further observed that Oyo’s communications to Zostel indicated that the parties were acting upon the term sheet. The Tribunal further held that the transaction envisaged in the term sheet was not consummated due to Zostel’s performance of their obligations; and there was no consensus ad idem between the parties. However, the Tribunal stopped short of granting the relief of specific performance to Zostel. Instead, it held that Zostel was entitled to bring a claim for specific performance of the term sheet in the absence of any definitive agreements.

    The Tribunal’s award marked a significant deviation from the standard legal position on the enforceability of term sheets. This approach by the Tribunal considered the actual intent and performance of the parties over mere contractual terminology. To put things into perspective, Oyo had acquired control over the business assets of Zostel after singing the term sheet. Further, the Tribunal observed that Zostel had satisfied all the conditions laid out in the ‘closing’ clause of the Term Sheet; and that the closing of the transaction (Oyo acquiring Zostel) was the only outcome after compliance with the stipulated conditions. Following this reasoning, the Tribunal held that the Term Sheet had become a binding document due to the actions of the parties.

    THE DELHI HC RULING

    The Delhi HC set aside the arbitral award rendered in favour of Zostel for being inconsistent with the public policy of India. The Court observed that the conclusions drawn in the award were at odds with the express language of the term sheet, wherein it stated that it is non-binding except for five specifically delineated clauses. It noted that had it been the intention of the parties that all the provisions of the term sheet be made binding, there would have been no occasion to incorporate an express stipulation to the contrary.

    The Court placed reliance on the Karnataka High Court judgement in Azeem Infinite Dwelling v. Patel Engineering Ltd. (‘Azeem Infinite’), which held that term sheets cannot be considered as binding agreements if they require the execution of definite agreements. It underscored that the term sheet was a preliminary document, the binding nature of which was subject to the execution of definitive agreements pertaining to its subject matter. It further observed that the arbitral tribunal did not hold that any implied term must be read into the term sheet to render it binding; rather, it anchored its finding of the binding nature of the term sheet on the conduct of the parties.

    The court’s view supported the strict interpretation of contractual terms, holding that the intention of the parties must be ascertained from the words used and not from the subsequent conduct of the parties. The Court also remarked that the award itself acknowledged the absence of definitive agreements, which was attributed to unresolved issues with a minority investor. There was no consensus ad idem between the parties, since the definitive agreements as envisaged under the term sheet were never executed.

    The Delhi HC also emphasised on the nature of a term sheet as a determinable contract; i.e. a contract whose outcome can be decided unilaterally by the ‘sweet will’ of one party without assigning any reasons for the same. This observation of term sheets being determinable contracts further weakens the case for their enforceability, emphasising that they are usually non-binding unless explicitly mentioned otherwise.

    INTERPRETATION UNDER CONTRACT LAW

    For any agreement to constitute a binding contract, the intention of the parties to create legally binding relations becomes the primary consideration. Indian courts have inferred the intention of parties not just through express written terms of the agreement, but also through their conduct. The Supreme Court (‘SC’) in Transmission Corpn. of Andhra Pradesh Ltd. v. GMR Vemagiri Power Generation Ltd. held that the conduct of parties, along with the surrounding facts, is relevant in determining if a binding agreement exists in the absence of express written terms. In this dispute, the Tribunal went a step further by holding the term sheet to be binding due to the conduct of parties, despite the preamble clearly stating otherwise.

    Though the Delhi HC found the Tribunal’s reliance on conduct to be precarious, it stopped short of going into the merits of the Award. The SC’s judgement in Bank of India v. K Mohandas, where it observed that contracts must be interpreted from their text, and not subsequent conduct of parties, offers support to the Delhi HC’s concerns. There is a clear conflict with regards to whether subsequent conduct should be considered to decide whether an agreement is binding. The precedent in Azeem Infinite supports the premise that term sheets requiring execution of definitive agreements are not binding. That said , there isn’t any definitive precedent on this issue. As a result, there still remains a sufficient legal basis for term sheets to be held binding in future decisions.

    Ultimately, the conflict between strict textual interpretation against reliance on subsequent conduct of the parties to infer a binding contract creates uncertainty for parties. The inconsistent precedents on this issue leave a significant ambiguity as to if, and when a term sheet becomes binding.

    WAY FORWARD

    Term sheets show the intention of parties to negotiate and subsequently reach an agreement. They do not represent consensus ad idem between the parties. The Delhi HC’s judgement is likely to become the binding precedent on this issue. However, the Award, backed by previous jurisprudence and no settled position, shows that there still is a possibility of courts holding term sheets to be binding in the future. This dispute has emphasised on the importance of term sheets to be well drafted and watertight to safeguard the interests of the parties.

    The buyers must  ensure that they are not held liable for breach of contract if a transaction falls through despite the term sheet being signed. Adding a final confirmation of closing from the buyer to the Closing clause can prevent the buyer from any liability. This adds an extra safeguard, ensuring that the buyer is not held implicitly responsible for breach of contract, especially when a term sheet is not even a binding agreement. A well-drafted termination clause can permit the buyer to terminate if the due diligence findings are unsatisfactory. At the same time, it can also allow the seller to withdraw if they believe the deal won’t conclude. The sellers need to avoid a situation where if a transaction falls through, their performance of obligations under the term sheet should not be rendered meaningless. To prevent this, sellers can seek indemnification in case the transaction does not materialize. This would protect them from the losses incurred from carrying out their obligations under the term sheet.

    Apart from the party-led solutions, the courts must also foster a consistent approach when deciding the enforceability of term sheets and other preliminary agreements. The courts should apply a two-tier test to harmonise the conflict between strict textual and contextual interpretations. First, the courts must consider the explicit language in the agreement. If the language designates the agreement as non-binding, a strong presumption against enforceability must be taken. Second, for this presumption to be rebutted, the party seeking enforceability must demonstrate that the parties’ subsequent conduct is overwhelmingly significant. Such conduct must show a clear intention to supersede, and mutually waive the non-binding clause and create a final, binding deal.

    Conclusion

    The Delhi High Court’s judgement affirms that term sheets, unless categorically stated to be binding, serve as instruments of intent that do not create binding legal obligations. Although conduct like transfer of assets and data sharing may indicate commercial intention of the parties, it does not result in creation of enforceable rights. For commercial intention to attain legal finality, terms of the contract must be express and not implied. This underscores the importance of clear and precise drafting of preliminary agreements where language disclaiming enforceability should be explicit and reiterated throughout. The Delhi HC’s verdict is a key reference point for contractual interpretation of not just term sheets, but all preliminary agreements in commercial disputes. This case also serves valuable lessons to buyers and sellers in drafting term sheets while entering into corporate transactions.

  • Misplaced Reliance on CPC in Arbitration: From the lens of Ravi Ranjan Developers vs Aditya Kumar Chatterjee

    Misplaced Reliance on CPC in Arbitration: From the lens of Ravi Ranjan Developers vs Aditya Kumar Chatterjee

    BY SHOUBHIT DAFTAUR AND AROHI MALPANI, THIRD – YEAR STUDENT AT MNLU, MUMBAI

    INTRODUCTION

    The interplay between domestic arbitration and the Code of Civil Procedure, 1908 (‘CPC’) has long been fraught with tension. While certain CPC principles, such as the doctrine of res judicata under Section 11, have constructively contributed to arbitral practice by ensuring finality in dispute resolution, the indiscriminate imposition of procedural rules designed for civil litigation into arbitration has often been erroneous and misplaced. Arbitration, by its very design, prioritises party autonomy, procedural flexibility, and efficiency, and these objectives are frequently compromised when courts rely too heavily on civil procedure doctrines.

    The Supreme Court’s decision in Ravi Ranjan Developers Pvt. Ltd. v. Aditya Kumar Chatterjee (‘Ravi Ranjan’) exemplifies this difficulty. In the case, despite the arbitration agreement specifying Kolkata as the seat, the Respondent approached the Muzaffarpur District Court post-termination and later filed a petition under Section 11 before the Calcutta High Court. Ravi Ranjan Developers challenged the Court’s jurisdiction, citing a lack of cause of action, while the Respondent argued jurisdiction based on the arbitration clause. However, the Supreme Court problematically held that an arbitration agreement cannot confer jurisdiction on a court that inherently lacks it, applying a principle rooted in the CPC that negates autonomy and efficiency.

    This reasoning represents a significant departure from India’s recent pro-arbitration jurisprudence. Importing CPC-based jurisdictional tests into arbitration alters the centrality of party autonomy and threatens to dilute the efficiency and autonomy that arbitration seeks to achieve. Against this backdrop, this blog critiques the misplaced reliance that courts often place on CPC in arbitration and advocates for a clearer demarcation between the two frameworks, so as to preserve the foundations on which the arbitral process rests.

    THE RAVI RANJAN DEVELOPERS JUDGEMENT: A DEPARTURE FROM EFFICIENCY AND AUTONOMY

    The division bench in Ravi Ranjan Developers held that an arbitration agreement cannot confer jurisdiction upon a court that inherently lacks it. The crux of the controversy lies in the fact that this interpretation departs from the Supreme Court’s precedents as well as party autonomy and procedural efficiency, the pillars of arbitration. Party autonomy permits parties to designate either the seat or the venue of arbitration. In the BALCO case, the Supreme Court held that the term subject-matter of the arbitration under Section 2(1)(e) of the Act refers to the juridical seat, not the location of the cause of action or subject-matter of the suit. Once a seat is chosen under Section 20, the courts at that seat alone have supervisory jurisdiction. The Court has further ruled that parties may select a neutral seat of arbitration, and that a narrow construction of Section 20 would render this autonomy nugatory.    

    Building on this principle, BGS SOMA JV v. NHPC (Ltd..) clarified that when a venue is expressly designated and the arbitration proceedings are anchored to it, with no contrary indications,      it must be treated as the juridical seat. Applying this, the reference to Kolkata satisfies all conditions, making it the legal seat and conferring exclusive jurisdiction on its courts. Despite this clarity, the court erred in concluding that an agreement cannot confer jurisdiction on a place that otherwise lacks it, overlooking that such autonomy is not only consistent in the judicial precedents, but also it forms a statutory right.

    Fair, speedy, and inexpensive resolution is the essence of arbitration, but in Ravi Ranjan Developers, the Supreme Court undermined this principle by disregarding the parties’ express choice of Kolkata as the juridical seat. By reverting to a cause-of-action-based analysis under the CPC, the Court imposed delay, expense, and uncertainty, eroding the efficiency and autonomy that arbitration is meant to safeguard. This reasoning marks a troubling departure from India’s pro-arbitration jurisprudence, threatening to dilute party autonomy, compromise finality, and undo the progress made in fostering arbitration as an alternative to litigation

    MISPLACED RELIANCE ON THE CODE OF CIVIL PROCEDURE

    The Statement of Objects and Reasons of the Arbitration and Conciliation Bill, 1995, makes it clear that the Act was intended to comprehensively govern arbitration, reduce court interference, and simplify the enforcement of arbitral awards. This intention is further firmly set out in Section 5 of the Act. The meaning of this provision is straightforward- laws like the CPC, are not meant to apply to arbitration proceedings unless the Act itself refers to them. The Act is a complete and self-sustained code, and any procedure to be followed must arise from the Act itself rather than external sources.

    Indian courts have on several occasions supported this understanding. One such instance was the Court’s ruling in Essar House Pvt. Ltd. v. Arcellor Mittal Nippon Steel India Ltd. (‘     Essar’     ). The Supreme Court held that while courts must keep in mind the basic principles of CPC, they are not bound to apply every procedural requirement strictly when deciding an application for interim relief under Section 9 of the Act. The Court, therefore, clarified that procedural technicalities under the CPC should not prevent courts from doing justice, upholding the separation between CPC rules and dispute resolution via arbitration.

    However, Sanghi Industries Ltd. v. Ravin Cables Ltd. appears to narrow the scope of the court’s powers under Section 9 by requiring that the conditions under Order XXXVIII Rule 5 of CPC be met before interim relief can be granted. This decision seems to go against the broader and more flexible interpretation adopted in Essar, and arguably compromises the independent and self-contained nature of the Act by drawing it back to the procedural framework of CPC.

    A similar borrowing can be seen in the debate around impleadment. The power to implead parties stems from Order I Rule 10 of the CPC. While this principle is well established in civil and commercial disputes, its extension into arbitration through reliance on the Group of Companies doctrine in Cox and Kings II in the absence of a clear statutory provision raises concerns. Particularly criticised for weakening the consensual foundation of arbitration by substituting implied consent for the express consent mandated under Section 7 of the Act, this inclusion has nonetheless found some support. What is clear, however, is that a procedural device rooted in the CPC has been read into a framework intended to be autonomous and self-contained. It is against this background of contested application and creeping CPC influence that the reasoning in Ravi Ranjan Developers must be understood.

    Parties cannot be compelled to enter arbitration, and by the same logic, cannot be made to follow procedural laws they did not agree to. In Afcons Infrastructure Ltd. v. Cherian Varkey Construction Co. (P) Ltd., the C     ourt held that parties must give their consent before being referred to arbitration under Section 89 of CPC. A clear example of non-application of CPC principles in practice can be found in Emkay Global Financial Services Ltd. v. Girdhar Sondhi, where the Supreme Court reaffirmed that, unlike CPC, arbitration treats the concept of seat as central. It held that the seat chosen by the parties acts as a neutral location for the arbitration, and even if no part of the cause of action arises there, the seat alone confers exclusive jurisdiction on the courts of that place to oversee the arbitral process. This position affirms that once the seat is determined, for instance, Mumbai, the Mumbai courts alone have the authority to regulate the proceedings arising from that agreement, regardless of any connection to the cause of action. Thus, this clarity leaves no room for importing jurisdictional doctrines from the CPC and places the control of arbitration squarely in the hands of the parties. 

    As established, the Court in Ravi Ranjan Developers runs counter to the legislative scheme of the Act, eroding the core tenets that distinguish arbitration from traditional litigation. If India is to affirm its commitment to an arbitration-friendly regime, it must resist the temptation to fall back on outdated procedural frameworks. Upholding party autonomy and ensuring the non-applicability of CPC-based tests is not merely desirable; it is essential.

    CONCLUSION AND WAY FORWARD: THE PATH TO A TRULY PRO-ARBITRATION INDIA

    Party autonomy and procedural efficiency in international arbitration are not loose ideals but have been firmly established in the UNCITRAL Model Law and widely followed in both common law and civil law countries. Leading arbitral institutions such as the International Chamber of Commerce and London Court of International Arbitration structure their procedural frameworks around these principles, enabling parties to shape proceedings on their terms while ensuring the expeditious resolution of disputes. This reflects a trend across many arbitration-friendly countries that value clarity in commercial disputes, which is diluted by antithetical reliance on CPC principles. If India wants to be seen as a reliable arbitration hub, these principles cannot be selectively applied. 

    The Supreme Court’s reasoning in Ravi Ranjan brings forth the perils of conflating arbitration with civil procedure. The CPC has been designed to regulate adversarial litigation in courts and is inherently different to arbitration. Importing CPC principles in arbitration dilutes the very principles that make arbitration a preferred method for dispute resolution. When courts superimpose civil procedural frameworks upon arbitral proceedings, they risk collapsing arbitration back into the litigation model it was intended to replace. India has made serious efforts to promote itself as a pro-arbitration jurisdiction. Landmark rulings like BALCO and BGS SOMA JV v. NHPC Ltd. have moved the law closer to international norms. However, when judgments like Ravi Ranjan Developers are passed, it slows down progress and creates confusion.

    The takeaway is clear- for India to maintain credibility as a pro-arbitration regime, the judiciary must resist the tendency to borrow from the CPC, and instead reaffirm arbitration as a distinct legal framework governed by its own statute and international principles. Only by safeguarding this separation can India strengthen its arbitration ecosystem and align itself with global best practices. By reviving a cause-of-action test rooted in the CPC, the Supreme Court in Ravi Ranjan Developers didn’t just misread party autonomy, it set Indian arbitration back by reinforcing judicial overreach over consensual dispute resolution. Unless courts resist the temptation to read CPC into arbitration, India risks reducing arbitration to nothing more than litigation in disguise.

  • Regulatory Turf Wars Resolved: Rethinking Regulatory Boundaries

    Regulatory Turf Wars Resolved: Rethinking Regulatory Boundaries

    NITIN PRADHAN AND MAHADEV KRISHNAN, FOURTH- YEAR STUDENTS AT ARMY LAW COLLEGE, PUNE AND NLUO, ORISSA

    INTRODUCTION

    The question of jurisdiction between the sectoral regulators and the Competition Commission of India (‘CCI’) is not new. Since the establishment of the CCI, concerns have been raised as to whether it is possible to co-exist with specialised regulators in technologically intensive sectors. The Kerala High Court (‘Court’), in Asianet Star Communications Pvt. Ltd. v. CCI & Ors. recently provided some sorely needed clarity by holding that the Telecom Regulatory Authority of India (‘TRAI’) and the CCI play different but complementary roles.

    The Court stressed that the mandate of one of the regulators cannot be displaced by that of the other and that the interaction between the two regulators should be driven by functional harmony, rather than displacement. TRAI comes into play in the structural and technical regulation of the telecom sector, licensing, tariffs, interconnection, and service quality, which provide smooth foundations of operations. In comparison, the mandate of the CCI is to protect competition, ensure that dominance is not abused and to ensure fairness in the market. Naturally, the two spheres overlap. The decision by the Court is important in that it enhances regulatory synergy instead of turf wars and the fact that overlapping jurisdictions, despite being a challenging issue, can be harmonized by working together.

    The case raises fundamental questions about institutional balance in markets where both technical oversight and competition enforcement are indispensable. More broadly, it signals the maturing of India’s regulatory architecture, where cooperation rather than conflict may increasingly define the relationship between regulators.

    Both regulators tend to claim that they are the first responder during jurisdictional conflicts. TRAI makes such a claim when complaints are technical or regulatory-based, e.g. when complaints are about licensing or interconnection. On the contrary, CCI intervenes when the matter involves anti-competitive practice or damage to the fairness of the market, which may not be within the regulatory jurisdiction of TRAI.

    It also gained national attention in the landmark decision of Bharti Airtel Ltd. v/s CCI. There, the Supreme Court ruled that whenever technical issues are involved then the sectoral regulator such as TRAI must suggest an opinion before the CCI steps in, this seemed to tilt the balance towards TRAI. However, this raises an important question; can sectoral regulation and competition law operate side by side without undermining each other?

    In this article, the authors explain the different roles of TRAI and CCI and reflect upon what the Asianet v. CCI judgment means for businesses, regulators, and the future of regulatory practice in India. Aiming to shed light on a possible forward path towards a more coordinated and effective framework for addressing overlaps between sector-specific regulation and competition law.

    BACKGROUND TO THE DISPUTE

    The dispute started when a major Kerala-based multi-system operator (‘MSO’) called Asianet Digital Network Pvt. Ltd. (‘ADNPL’) filed a complaint with the CCI against one of the dominant broadcasters called Star India Pvt. Ltd. (‘SIPL’). ADNPL claimed that SIPL had misused its market dominance in the broadcasting service market by: (i) Granting disproportionately high discounts to a rival MSO, Kerala Communicators Cable Ltd. (KCCL); (ii) Entering into “sham marketing agreements” involving unjustified payments to KCCL; and (iii) Effectively denying market access to ADNPL by conferring undue advantages on its competitor.

    On observing a prima facie case, the CCI issued an order of an investigation under Section 26(1) of the Competition Act, 2002 (‘Act’). SIPL opposed the argument that the complaint was clearly within the jurisdiction of TRAI, as it involved tariffs, discounts and interconnection agreements all of which were covered in details by TRAI Act, 1997. According to SIPL, the CCI had interfered with a domain that should be left to the sectoral regulator by intervening. ADNPL responded that TRAI governs technical and structural concerns and that discriminatory pricing and sham agreements are anti-competitive practices which are well within the jurisdiction of the CCI.

    Therefore, the High Court was obliged to consider two points: whether the presence of TRAI denied the jurisdiction of CCI, and whether the Section 26(1) of the CCI direction to investigate on the basis of which it ordered a certain investigation without issuing prior notice, infringed natural justice.

    COURT’S REASONING AND KEY FINDINGS

    In the present case the Court took a measured approach to address the seeming conflict between the TRAI and the CCI. The Court recognised TRAI and CCI as specialised regulators, but with distinct mandates. TRAI’s jurisdiction is deeply rooted in the technical and operational aspects such as licensing, tariff regulation and interconnection. Whereas, the duty of CCI is to ensure the fair market behaviour, investigating abuse of dominance and maintaining competitive equilibrium.

    Crucially, the Court declined the notion that an overlap of functions implied the jurisdictional exclusion. Instead, it emphasised upon maintaining functional harmony while echoing the principles laid down in Bharti Airtel case. It reaffirmed that sectoral expertise should not forbid competition oversight where market manipulation is concerned.

    Regarding the procedure, the Court clarified that under Section 26(1) of the Act, the CCI is not required to issue prior notice before directing the DG to investigate. Additionally, the Court also clarified that marketing agreements, when used to disguise anti-competitive conduct, clearly falls under jurisdiction of CCI not TRAI’s.

    Thus, the judgement upheld the autonomy of the CCI while also reaffirming the value of inter-regulatory cooperation rather than conflict.

    EU EXPERIENCE: WHY TURF WARS ARE RARE

    This is unlike the country India which has not experienced any conflict of jurisdiction between sectors within the European Union. This can be called the result of a highly orchestrated regulatory design. The Regulation 1/2003 clearly stipulates the application of Articles 101 and 102 TFEU, in parallel to national or sectoral regulations, whereas the ECN+ Directive (2019/1) takes the matter of coordination by supporting the national competition authorities with harmonization of powers and its integration into the European Competition Network (‘ECN’) The ECN serves as the facilitator of coherent enforcement so that the regulatory intersections do not result into the inter-institutional disagreements.

    The reduction of redundancy and construction of cooperative enforcement is reflected not only in scholarly analysis, e.g., in Potocnik & Manzour, in European Papers, but also in the ICN, 2025 report. The principle has been entrenched in courts interpretation: in Deutsche Telekom (C-280/08 P) and Telefnicia (C-295/12 P), the CJEU said that even approved by the regulator tariffs could amount to margin compression under Article 102 TFEU. In Meta v Bundeskartellamt (C-252/21) decided more recently, the Court empowered competition authorities to take into account compliance with the GDPR and stressed that cooperation with regulators must be followed.

    The combination of these aspects demonstrates that they are established on complementary and coordinating basis, with not much room left to turf wars as seen between TRAI and CCI in India continuously.

    PREDATORY PRICING OR PRICE PENETRATION?

    In the landmark Bharti Airtel Case, the SC was confronted with the critical question of whether Jio’s initial free pricing model amounted to predatory pricing under the Act. Bharti Airtel alleged that Jio’s deep pricing offering telecom services at virtually no cost was not a legitimate market entry strategy but a means to eliminate competition through price predation. The CCI, however, dismissed the complaint at the prima-facie stage, holding that no case of abuse of dominance was made out, especially since Jio was a new entrant and not a dominant player in the relevant market at the time.

    The case not only clarified the line between legitimate price penetration and predatory pricing but also underscored the importance of TRAI’s sectoral expertise which includes regulating tariffs, interconnection agreements, and market entry conditions. It held that CCI should intervene only after TRAI has addressed the relevant technical and regulatory concerns.

    The decision is particularly relevant in this case of similar allegations of discriminatory pricing and jurisdictional overlap between CCI and TRAI and therefore, the necessity of coordinated regulation and the balancing of market entry and anti-competitive protection in regulated industries.

    IMPLICATIONS FOR BUSINESSES AND REGULATORY PRACTICE

    The Asianet judgment is not just an institutional ground score settlement, but has real consequences on the market players. Telecom and media businesses will no longer be able to believe that their conformity to TRAI norms will exempt them of competition scrutiny. In even the most regulated industries, anti-competitive practices like discriminatory pricing, exclusive agreements or fake agreements could be subject to parallel proceedings by the CCI.

    The judgement also hereby denoted that both regulatory due diligence is now a two-dimensional authentication, on one hand, sectoral compliance and on the other hand, competitive impact. Marketing agreements, tie-ups, or discount structures will not only have to be tested against TRAI guidelines but also against possible exposure to the competition law.

    Furthermore, this facilitates a more cooperative style, switching from a turf war to a joint control that balances technical oversight and equity in the market. This move deters the exploitation of regulatory areas by businesses and ensures a transparent conduct across all operations.

    CONCLUSION

    The Asianet case is a milestone in the regulation development of India that was in conflict to cooperation. The Kerala High Court in maintaining the concurrent jurisdiction of TRAI and CCI, allowed that regulatory overlaps are not necessarily problematic provided both regulatory authorities are mindful of functional limits. In conjunction with Bharti Airtel, the ruling highlights the fact that the judiciary favours cooperation among regulators as opposed to competition.

    Nonetheless, harmonisation through judges is not a complete solution. The convergence of telecom, media and technology sectors has been growing and as a result, overlaps will continue to increase. India should thus institutionalise inter-regulatory coordination by statutory reforms, memoranda of understandings or joint decision making. The UK and EU are good examples where coordination models are clear, and the regulators follow them.  The Indian regulation of the future is not in the strict jurisdiction separation but in the collaborative models that provides predictability to the business, efficiency to the markets and fairness to the consumers.

  • SEBI’s AI Liability Regulation: Accountability and Auditability Concerns

    SEBI’s AI Liability Regulation: Accountability and Auditability Concerns

    AYUSH RAJ AND TANMAY YADAV, FOURTH AND THIRD-YEAR STUDENTS AT GUJARAT NATIONAL LAW UNIVERSITY, GANDHINAGAR

    INTRODUCTION

    Securities and Exchange Board of India’s (‘SEBI’) February 2025 amendments (Intermediaries (Amendment) Regulations, 2025) inserted Regulation 16C, making any SEBI-regulated entity solely liable for AI/ML tools it uses, whether developed in-house or procured externally. This “sole responsibility” covers data privacy/security, the integrity of artificial intelligence (‘AI’) outputs, and compliance with laws. While this shift rightfully places clear duties on intermediaries, it leaves unaddressed how AI vendors themselves are held to account and how opaque AI systems are audited. In other words, SEBI’s framework robustly binds intermediaries, but contains potential gaps in vendor accountability and system auditability. This critique explores those gaps in light of international standards and practice.

    SCOPE OF REGULATION 16C AND ITS LEGAL FRAMEWORK

    Regulation 16C was notified on Feb 10, 2025 with immediate effect. In substance, it mirrors SEBI’s November 2024 consultation paper: “every person regulated by SEBI that uses AI…shall be solely responsible” for (a) investor data privacy/security, (b) any output from the AI it relies on, and (c) compliance with applicable laws. The rule applies “irrespective of the scale” of AI adoption, meaning even small or third‑party use triggers full liability. SEBI may enforce sanctions under its general powers for any violation.

    This framework operates within SEBI’s established enforcement ecosystem. Violations can trigger the regulator’s full spectrum of penalties under the Securities and Exchange Board of India Act, 1992, ranging from monetary sanctions and cease-and-desist orders to suspension of operations. The regulation thus creates a direct enforcement pathway: any AI-related breach of investor protection, data security, or regulatory compliance automatically becomes a SEBI violation with corresponding penalties.

    The legal significance lies in how this shifts risk allocation in the securities ecosystem. Previously, AI-related harms might fall into regulatory grey areas or involve complex questions of vendor versus user responsibility. Regulation 16C eliminates such ambiguity by making intermediaries the single point of accountability, and liability, for all AI deployments in their operations.

    VENDOR-ACCOUNTABILITY GAP

    In practice intermediaries often rely on third-party models or data, but the regulation places all onus on the intermediary, with no parallel duties imposed on the AI vendor. If a supplier’s model has a hidden flaw or violates data norms, SEBI has no direct rulemaking or enforcement channel against that vendor. Instead, the intermediary must shoulder penalties and investor fallout. This one-sided design could dilute accountability: vendors might disclaim liability in contracts, knowing enforcement power lies with SEBI, not with the provider. As a result, there is a regulatory blind spot whenever AI harms stem from vendor error.

    Moreover, industry and global reports warn that relying on a few AI suppliers can create systemic risks. The Bank for International Settlements (BIS) Financial Stability Institute notes that “increased use of third-party services (data providers, AI model providers) could lead to dependency, disruption of critical services and lack of control,” exacerbated by vendor lock-in and market concentration. In other words, heavy dependence on external AI technologies can amplify risk: if one vendor fails, many intermediaries suffer concurrently. The US Treasury likewise highlighted the so‑called “vendor lock-in” problem in financial AI, urging regulators to require vendors to enable easy transitions between competing systems. SEBI’s framework currently lacks any mechanism to counteract lock‑in, such as mandated data or model portability requirements that would allow intermediaries to switch between AI providers without losing critical functionality.

    The recognition of these risks inherently places a responsibility on intermediaries to secure strong contractual controls with AI suppliers. This requires regulated entities to perform thorough due diligence and establish back-to-back arrangements with AI vendors to mitigate risk. Such agreements must include provisions like audit rights, data access, and vendor warranties. However, because explicit legal requirements are absent, the onus falls entirely on intermediaries to negotiate these terms. A failure to do so means SEBI’s liability framework itself provides no enforcement of vendor-side transparency.

    In practice, this gap means an intermediary could satisfy SEBI’s rule on paper (having liability assigned), yet still face failures or disputes with no legal recourse beyond its own contract. The regulator’s approach is asymmetrical: intermediaries have all the incentives to comply, while vendors have none. SEBI’s choice to rely on intermediaries may have been pragmatic, but it is a potential weakness if vendors operate without accountability.

    Consider an AI-driven trading recommendation system supplied by Vendor X. If X’s model generates a flawed recommendation that causes losses, Regulation 16C makes the brokerage (user) fully liable. Yet Vendor X could escape sanction if it sold the software “as is.” Under OECD principles, both the user and the supplier are expected to manage risk cooperatively, but SEBI’s text does not reflect that partnership.

    The foregoing points suggest that SEBI may need to clarify how vendor risks are handled. Potential solutions could include: explicitly requiring intermediaries to contractually compel vendor compliance and audit access, or even extending regulatory standards to cover AI vendors serving Indian markets.

    AUDABILITY AND TRANSPARENCY OF AI SYSTEMS

    A related issue is auditability. Even if intermediaries are liable, regulators must be able to verify how AI systems operate. However, modern AI, especially complex Machine Learning (ML) and generative models, can be “black boxes.” If SEBI cannot inspect the model’s logic or data flows, apportioning entire liability to an intermediary could be problematic.

    Regulators worldwide emphasize that AI systems must be transparent and traceable. The OECD’s AI Principles state that actors should ensure “traceability … of datasets, processes and decisions made during the AI system lifecycle, to enable analysis of the AI system’s outputs and responses to inquiry”. Similarly, a UK financial‑services review emphasizes that auditability “refers to the ability of an AI system to be evaluated and assessed, an AI system should not be a ‘black box’”. In practical terms, auditability means maintaining logs of data inputs, model versions, decision rationales, and changes to algorithms, so that an independent reviewer can reconstruct how a given outcome was reached.

    SEBI’s 16C does not itself mandate audit trails or explain ability measures. It only requires the intermediary to take responsibility for the output. There is no explicit requirement for intermediaries (or their vendors) to preserve model logs or allow regulator inspection. Without such provisions, enforcement of output accuracy or compliance with laws is hampered. For example, if an AI-generated trade signal caused a regulatory breach, SEBI (or a forensic auditor) needs access to the system’s internals to determine why.

    Industry guidance suggests that firms should make auditability a contractual requirement when procuring AI. This could involve specifications on data retention, explainability reports, and independent testing. In the SEBI context, best practice would be for intermediaries to demand from AI providers any data necessary for SEBI audits.

    In essence, two main concerns arise that are closely interconnected. BIS notes that “limits to the explainability of certain complex AI models can result in risk management challenges, as well as lesser … supervisory insight into the build-up of systemic risks“. If AI outcomes cannot be easily audited, SEBI risks being unable to verify compliance, and lacking explicit audit provisions, regulators and investors may lack confidence in the system’s integrity. Additionally, without mandated audit provisions, firms may neglect this in vendor agreements, though the operational reality for firms should be to include audit clauses and perform due diligence. SEBI should consider guidance or rules requiring regulated entities to ensure audit rights over AI models, just as banks must under banking third-party rules.

    CONCLUSION

    SEBI’s insertion of Regulation 16C is a welcome and necessary move: it recognises that AI is now mission-critical in securities markets and rightly puts regulated entities on notice that AI outputs and data practices are not outside regulatory reach. Yet the regulation, as drafted, addresses only one side of a multi-party governance problem. Making intermediaries the default legal backstop without parallel obligations on vendors or explicit auditability requirements risks creating enforcement illusions, liability on paper that is difficult to verify or remediate in practice.

    To make the policy effective, SEBI should close the symmetry gap between users and suppliers and make AI systems practically observable. At a minimum this means clarifying the standard of liability, requiring intermediaries to retain model and data audit trails, and mandating contractual safeguards (audit rights, model-version logs, notification of material model changes, and portability requirements). If SEBI couples its clear allocation of responsibility with enforceable transparency and vendor-accountability mechanisms, it will have moved beyond a paper rule to a practical framework that preserves market integrity while enabling safe AI adoption.

  • Decoding NCLT’s Philips India Ruling: Evolving Judicial Reasoning & Broader Implications

    Decoding NCLT’s Philips India Ruling: Evolving Judicial Reasoning & Broader Implications

    Vaibhav Mishra and Sparsh Tiwari, Fourth- year student at Hidayatullah National Law University, Raipur

    INTRODUCTION

      Capital reduction is a salient aspect of corporate finance that is dealt with under section 66 (‘the section’) of the Companies Act of 2013 (‘2013 Act’). It entails a reduction in the issued share capital of the company. Accounting and Corporate Regulatory Authority of Singapore explains the commercial rationale for undertaking the capital reduction as including a plethora of reasons such as simplifying capital structure, and ownership structure, increasing dividend-paying capacity, etc.

      Indian  corporate jurisprudence has evolved through numerous judgments that have elucidated the scope of this section. The established position was that the company’s rationale for the invocation of the section cannot be questioned, affirming its wide application. Last year, in September 2024, a petition was filed by Phillips India Limited before National Company Law Tribunal (‘NCLT’) Kolkata (‘the tribunal’) under the section seeking permission for the reduction of capital. The company provided two reasons for the application i.e. providing liquidity to the minority & reducing administrative costs. However, the tribunal, in its order dismissing the petition, held that such a transaction fell outside the scope of capital reduction.

      Though a development in last year, the vacuum of judicial discretion under Section 66 still remains in the Indian regime. This article attempts to critically analyse NCLT’s order vis-à-vis precedents. The article also analyses relevant foreign authorities to clarify the scope of the section. Furthermore, it also delves into the possibility of effecting the takeover outside these traditional arrangements.

      NCLT’S ORDER VIS-À-VIS PRECEDENTS

        In this matter, Koninklijke Philips N. V., which held 96.13% of shares in Philips India Limited, wanted to effect capital reduction by purchasing shares of minority shareholders. For this, a two-fold reason was provided by the company, viz., firstly, providing liquidity to the shareholders who could not liquidate their holdings following the company’s delisting in 2004, and secondly, reducing the administrative costs associated with minority shareholders. However, the tribunal dismissed the petition, with the interpretation of the statutory scheme of the section playing a key role in its decision.

        Before delving into judicial reasoning, it is crucial to examine the existing precedents on this section’s interpretation. In a similar factual scenario, the Bombay High Court in Capital of Wartsila India Limited v. Janak Mathuradas, confirmed the petitioner company’s capital reduction that was undertaken to provide liquidity to minority shareholders who had no way to liquidate their holdings after the company was delisted in 2007. Similarly, the single judge bench of Delhi NCLT in Devinder Parkash Kalra & Ors. v. Syngenta India Limited allowed capital reduction as a means of providing liquidity to the minority shareholders. It is pertinent to note that NCLT confirmed the application of capital reduction even though it called for revaluation by an independent valuer. Also, in Economy Hotels India Services Private Limited v. Registrar of Companies, Justice Venugopal termed the process of capital reduction under the section as a “domestic affair”, affirming its expansive scope. These precedents reflect the traditional line of reasoning where the courts did not interfere in the application of the section except to secure certain equitable objectives, such as securing the minority’s interest.

        ASSESSING THE NCLT’S ORDER IN LIGHT OF THE STATUTORY SCHEME OF THE SECTION

          In this matter, the tribunal characterised the nature of the transaction as a buy-back and not a capital reduction. The rationale for this decision was twofold: first, the present transaction did not fall under any of the three instances outlined under the section, and second, the inapplicability of the section in light of section 66(8). As evident, the order was a departure from the established line of judicial reasoning associated with capital reduction.

          Firstly, on the rationale that the present transaction did not fall under instances provided under the section, it is pertinent to note that the tribunal failed to give any consideration to the words “in any manner” as used in the section. These words are of wide import and must be given their natural meaning. Moreover, a reference may be made to the corresponding provision of the Companies Act, 1956 (‘the Act’) for guidance. Section 100 of the now-repealed Act further clarified the generality of the provision by incorporating the words “in any manner; and in particular and without prejudice to the generality of the foregoing power”. Therefore, the incorporation of the words “in any manner”, though not the same as section 100, supports an expansive interpretation not limited to the instances mentioned under the section.

          Furthermore, an expansive interpretation could reasonably allow the present transaction to fall within the purview of section 66(b)(ii), which states that a company can “pay off any paid-up share capital which is in excess of wants of the company”.The reasoning is that one of the motivations behind the company’s decision to undertake this transaction was to reduce the administrative costs of managing around 25,000 shareholders who collectively held a minuscule 3.16% of the total share capital. This objective of reducing administrative costs can reasonably be interpreted as falling within the scope of being in “excess of wants” under section 66(b). Further support for this interpretation is provided by Ramaiya’s commentary[i], where he suggests that “a company may be in need of money so paid-up through capital in business but still may not be in want of the money through share capital”. Thus, an expansive interpretation brings this transaction within the ambit of the section.

          Secondly, section 66(8) states that “nothing in this section shall apply to buy-back of its securities under Section 68”. To clarify the scope of this provision, the tribunal referred to section 100 of the Act, highlighting that it lacked a provision like section 66(8). The tribunal interpreted this discrepancy to mean that section 66(8) restricted the buy-back of securities under the section. However, this reasoning is beset by the fact that the Act lacked any provision for buy-back of securities. It was only in 1999 that such a provision, viz. section 77A, was included. The 2013 Act creates a separate section i.e. section 68, to deal with buy-back transactions. Hence, it is contended that 66(8) is clarificatory in nature, implying that capital reduction and buy-back of shares are governed under separate sections, and does not serve to restrict the scope of capital reduction. Thus, the author opines that the tribunal has erred in its order, creating an uncertain position in a relatively established position on the applicability of the section. 

          JUDICIAL DISCRETION IN CAPITAL REDUCTION TRANSACTIONS: AN ANALYSIS

          Judgements from the UK offer critical cues on understanding capital reduction. For instance, inBritish American Trustee and Finance Corporation v. Couper, judicial discretion over the capital reduction process was affirmed by the court. The courts also laid the relevant principles like fairness and equitable process for minority shareholders, creditors, etc., to guide this ‘judicial discretion’. In Re Ranters Group PLC[ii], the court interpreted the section 135(1) of the Company Act, 1985. Interestingly, section 135, though no longer in effect, uses similar wording, like the section in the context of capital reduction i.e. “reduced in any way”. Harman J. here held that the court needs to ensure broadly three things, viz, equitable treatment of shareholders, protection of creditor’s interest and ensuring that shareholders are aware of the proposal. The NCLT’s order exceeds this ‘judicial discretion’. In the instant case, there was nothing in the order to prove inequitable treatment or violation of the creditor’s interest. Therefore, the deviation in NCLT’s order could affect the business autonomy of the company and could potentially create various challenges for the corporate sector in executing transactions.

          Thus, the situation calls for legislators to reassess the structure & statutory scheme of the section of the 2013 Act. NCLT’s order, if treated as precedent, implies that the whole process under the section becomes dependent on the tribunal’s discretion. As is evident, the section starts with ‘subject to confirmation by tribunal’. It is contended that the role of the judiciary is limited to protecting the interests of shareholders, creditors and ensuring equity in transactions.

          EXPLORING THE ALTERNATIVES TO THE TRADITIONAL WAY OF CAPITAL REDUCTION

          In this matter, Phillips was unable to effect capital reduction even after obtaining the consent of 99% of shareholders. This highlights the need for an alternative structure that allows companies to undertake capital reductions outside the bounds of the traditional arrangement. In this context, valuable insights could be drawn from section 84 of the Companies Act of Ireland, 2014, which outlines two methods of capital reduction: the Summary Approval Procedure ( SAP) and the Court-bound method. The SAP allows a company to carry out a capital reduction through a two-fold process, firstly, by passing a special resolution of the shareholders and lastly, declaration of solvency from the directors. This process avoids the need of court approval, bringing in the efficiency and flexibility that our system currently lacks.

          Another example of a highly relaxed framework can be found in section 256B of the Corporations Act, 2001 in Australia, where companies wishing to effect capital reduction may do so, provided they lodge a notice with the Australian Securities and Investments Commission (‘ASIC’) prior the meeting notice is sent to the shareholders. The shareholders hold the final authority to decide on the capital reduction, and their decision does not require any confirmation. Thus, capital reduction remains entirely within the domain of the shareholders.

          In the Indian context, section 236 of the 2013 Act, mirroring section 395 of the Act, could potentially serve as an alternate mechanism for the acquisition of minority shares. This provision allows any person or group of persons holding ninety percent or more of the issued equity capital of a company to acquire the remaining minority shareholdings. However, there are few precedents on its application, and the provision lacks clarity due to its clumsy drafting. For example, while section 236(1) & (2) allows the majority with more than 90% shareholding to buy minority shares, 236(3) dealing with minority shareholders does not obligate them to sell their shareholding. Thus, 236 offers an incomplete remedy from the perspective of the company. It is contended that this provision should be interpreted in light of its objective, well-stated in its JJ Irani Committee report. The evident intention of the committee in introducing section 395 of the Act was to create a legal framework for allowing the acquisition of minority shareholding. However, as noted above, the provision in its current form does not put an obligation on the minority shareholders while providing a ‘buy-out’ mechanism to the majority, illustrating a conservative approach of legislators.

          Therefore, it is suggested that necessary amendments be made to section 236(3) to impose a mandate on minority shareholders to divest their shareholding, while also ensuring an equitable valuation for them. Such amendments would facilitate the full realisation of the remedy provided under this provision, serving as an alternative to the section of the 2013 Act.

          CONCLUDING REMARKS

          While the NCLT’s deviation from the established precedent on capital reduction may be flawed in its reasoning, it has nonetheless sparked a debate about the necessity of exploring alternatives to traditional capital reduction methods.  The need for such alternatives is further underscored by the economic and time-related costs associated with seeking tribunal confirmation. The focus should be on identifying alternative methods that safeguard minority shareholders from exploitation, while also enabling companies to undertake capital reduction quickly and efficiently.

          [i] Ramaiya, Guide to the Companies Act, 2013, vol. 1 (25th ed. LexisNexis 2021)

          [ii] [1988] BCLC 685.

        1. Opportunism or Omission? Dual Facets of Customs Misclassification Saga

          Opportunism or Omission? Dual Facets of Customs Misclassification Saga

          Riya Poddar, Fourth- Year student at Amity University, Noida

          INTRODUCTION

          Proper classification of goods, as per the guidelines provided by the Harmonised System of Nomenclature ( ‘HSN Code’), is an important dimension in cross-border trade, which not only assists in determining tariff rates but also facilitates free flow of goods across borders. Unperturbed by such a structured foundation, disputes with regard to misclassification continue to remain a persistent challenge within the customs law. The point of conflict often stems from either intended tax fraud or deliberate or unintentional misinterpretation by the department, causing a tussle between the taxpayer and the authorities.

          The recent case of Skoda Auto Volkswagen India Pvt. Ltd. v. Union of India and Ors. (2025), (‘Skoda’) has once again brought to the forefront the debate over the systemic defaults within India’s customs landscape. What is controversial is whether the ambiguity in the classification norms is being used very conveniently as a loophole to avoid duty under the mask of interpretation. While the error may be innocent, the likelihood of intentional misinterpretation by the department raises significant questions in the minds of the taxpayers. This blog seeks to analyse the given case in order to uncover the systemic flaws surrounding the misclassification issue and propose a way forward.

          SCRUTINY OF THE ISSUE SURROUNDING MISCLASSIFICATION

          The Customs Department served a Show Cause Notice to Skoda Volkswagen in September 2024 under Section 28(4) of the Customs Act, 1962 (‘the Act’), raising a substantial demand of $1.4 billion, alleging deliberate misclassification of imported goods to lower import duty payment.

          It is well-settled law that the customs authorities can carry out reassessment proceedings for up to five years only. However, the allegations posed by the Directorate of Revenue Intelligence on Skoda Volkswagen for deliberately misleading the custom authorities since 2012 by misclassifying import of cars as “individual parts” rather than “Completely Knocked Down Units” (‘CKD Units’), raises questions about their own intentions as to why the concerned authority remained mum for such a prolonged duration. Such inaction invokes suspicion of either incompetence or a deliberate plan to delay prosecution.  

          Further, it is pertinent to note that before 2011, the term ‘CKD Units’ lacked a precise and clear definition, leaving it open to subjective interpretation. Ambiguity with regard to the same was addressed on 1st March 2011, when the Central Board for Indirect Tax and Customs (‘CBIC’) issued Notification No. 21/2011-Customs, where CKD Unit has been defined as a kit consisting of necessary parts of a vehicle apart from gearbox and pre-assembled engine. Failure to clearly delineate such important elements provided a foundation for controversies, as seen in Skoda.

          INTENT OR OVERSIGHT: THE GREY ZONE

          The current Skoda Volkswagen misclassification dispute highlights the multifaceted dynamics between the intentional corporate wrongdoings and the probable negligence of the concerned authorities. Resolution of this ongoing controversy will provide the much-needed clarity on disputes surrounding the misclassification issue.

          Examining ‘Intent’ and ‘Oversight’

          Notably, the customs authorities have accused Skoda Volkswagen of paying lower import duty on goods for the past 12 years, but the fact that the authorities never raised a single objection on the same for such a significant duration weakens the credibility of their allegations. It is essential to determine whether the delay was a strategic move by the authorities, using it as a revenue-generating tool. Such an approach, if intentional, reflects a broader structural flaw where the authorities prioritise revenue generation, amplifying financial burden on businesses.

          Another aspect worth mentioning is the vague and ambiguous classification of HSN Codes. Disputes pertaining to tariffs continue to arise, primarily because they are based on technical product characteristics that lack a clear definition. For instance, car seats, despite being an integral component of a motor vehicle, are classified under Heading 940120 as “seats of a kind used for motor vehicle” rather than Heading 87089900, which deals with “parts and accessories of a motor vehicle”. Such vague and ambiguous distinction in the key terms and norms provides authorities with an upper hand to interpret it in a manner that aligns with their revenue objectives and undermines the very purpose of having codified rules and regulations relating to the same.

          THE BIGGER PICTURE: CHALLENGES AND WAY FORWARD

          Over the past few years, the customs framework has become increasingly technical and compliance-oriented, thereby heightening the burden on taxpayers. The structural inequality becomes increasingly significant when equating the capabilities of large corporations with those of small businesses and entities. While businesses having ample resources can ensure seamless compliance, in contrast, the smaller entities are disproportionately charged. Recognising this, the Federation of Indian Micro and Small and Medium Enterprises, the leading advocacy association for Indian Small and Medium Enterprises (‘SME’), has also reportedly advocated for simplified and streamlined customs procedures to address structural disparity that involves small exporters. Further, the Economic Survey 2024-25 data also clearly indicates that the SME sector continues to be excessively burdened with regulatory compliance, thereby calling for deregulation to enable SME’s to compete on a more level playing field.

          In addition to this imbalance, the financial strain of non-compliance, which results in long pending disputes or imposition of penalties and interests, further aggravates the problems of the bona fide taxpayers. The operational dislocations caused by such issues compel the businesses to allocate their resources in resolving such disputes, thereby affecting their capability to contribute to the economy. Further, problems such as erosion of investors’ trust, delay in clearance of goods or shipments, also significantly affect a company’s ability to maximise profit and generate revenue. This discrepancy not only weakens the taxpayer’s trust on the tax system but also hinders the growth of a country’s economy.

          It is pertinent to mention that in the case of M/s. Aska Equipment’s Ltd. v. Commissioner of Customs (Import), the Hon’ble Delhi Bench of Customs, Excise and Service Tax Tribunal (‘CESTAT’), recognised that penalising companies acting in good faith merely on account of a difference of opinion regarding the classification of goods would deter genuine trade practices. A similar judicial approach was adopted by the Hon’ble Delhi Bench of CESTAT in the case of Sarvatra International Vs Commissioner of Customs (ICD).

          Undoubtedly, the outcome of the Skoda case is likely to set a judicial precedent, providing the much-needed clarity on issues that extend beyond just the misclassification claim. Hence, the answer to the questions raised in this case will not only determine the fate of the company but also the future of customs enforcement in India.

          Roadmap

          It is very evident from the challenges being faced by the taxpayers owing to the current HSN classification framework that reform is the need of the hour. Policies must be formulated in a way that not only shields the bona fide taxpayers and businesses from unjust hardships but also ensures compliance on their part. One of the most essential reforms is the implementation of clear and consistent guidelines pertaining to HSN classification. Further, leveraging the use of technology such as Artificial Intelligence-regulated systems can highly minimise the likelihood of errors. Additionally, simplifying the dispute resolution process through digital case tracking and conducting training programmes for both customs officials and Importers can increase compliance and bridge the knowledge gaps that currently exist. Such reforms would guarantee that the system remains approachable in the long run, eventually contributing to a just and equitable economy.

          CONCLUSION

          The controversial discussion surrounding the misclassification issue points towards the need for a balanced tax compliance approach. While the Act aims to create an integrated and streamlined tax system, its current framework unjustly penalises and burdens honest taxpayers. By plugging systemic loopholes and ensuring equitable treatment for compliant enterprises, the government can preserve the very purpose of the tax system and gain public trust in the tax administration. Legal reforms, supported by firm enforcement mechanisms, are needed to achieve this balance.

        2. COMI Confusion: Can India Align With The Global Insolvency Order?

          COMI Confusion: Can India Align With The Global Insolvency Order?

          Prakhar Dubey, First- Year LL.M student, NALSAR University, Hyderabad

          INTRODUCTION

          In the contemporary global economy, where firms often operate across various countries, the growing complexity of international financial systems has made cross-border insolvency processes more complicated than ever. International trade and business have proliferated, with companies frequently possessing assets, conducting operations, or having debtors dispersed across multiple nations. In a highly interconnected environment, a company’s financial hardship in one jurisdiction may have transnational repercussions, impacting stakeholders worldwide. Consequently, addressing insolvency with equity, efficacy, and certainty is essential.

          A fundamental challenge in cross-border insolvency is establishing jurisdiction—namely, which court will manage the insolvency and which laws will regulate the resolution process. The issue is exacerbated when several nations implement disparate legal norms or frameworks for cross-border recognition and collaboration. Two fundamental concepts, forum shopping and Centre of Main Interests (‘COMI’), profoundly influence this discourse.

          Forum shopping occurs when debtors take advantage of jurisdictional differences to file in nations with more lenient rules or advantageous outcomes, such as debtor-friendly restructuring regulations or diminished creditor rights. Although this may be strategically advantageous for the debtor, it frequently generates legal ambiguity and compromises the interests of creditors in alternative jurisdictions. To mitigate such exploitation, the United Nation Commission on International Trade Law Model Law on Cross-Border Insolvency (‘UNCITRAL Model Law’) has formalised the COMI test, a principle designed to guarantee openness and predictability in cross-border procedures. It offers an impartial method to determine the most suitable forum based on the locus of a debtor’s business operations.

          Although recognising the need for cross-border bankruptcy reform, India has not yet officially adopted the Model Law. Instead, it relies on antiquated processes such as the Gibbs Principle, which asserts that a contract covered by the law of a specific country can only be terminated under that legislation, along with ad hoc judicial discretion. These constraints have led to ambiguity, uneven treatment of creditors, and prolonged cross-border remedies.

          This blog critically assesses India’s present strategy, highlights the gap in the legislative and institutional framework, and offers analytical insights into the ramifications of forum shopping and COMI. This analysis utilises the Jet Airways case to examine comparable worldwide best practices and concludes with specific measures aimed at improving India’s cross-border insolvency framework.

          INDIA’S STANCE ON ADOPTING THE UNCITRAL MODEL LAW

          The existing cross-border insolvency structure in India, as delineated in Sections 234 and 235 of the Insolvency and Bankruptcy Code ( ‘IBC’ ), 2016, is predominantly inactive. Despite the longstanding recommendations for alignment with international standards from the Eradi Committee (2000) and the N.L. Mitra Committee (2001), India has not yet enacted the UNCITRAL Model Law.

          More than 60 nations have implemented the UNCITRAL Model Law to enhance coordination and collaboration across courts internationally. India’s hesitance arises from apprehensions of sovereignty, reciprocity, and the administrative difficulty of consistently ascertaining the COMI. Adoption would include not only legislative reform but also institutional preparedness training for judges, fortifying the National Company Law Tribunal (‘NCLT’) and National Company Law Appellate Tribunal (‘NCLAT’), and establishing bilateral frameworks.

          KEY PROVISIONS OF THE UNCITRAL MODEL LAW AND IMPLICATIONS FOR INDIA

          The four fundamental principles of the UNCITRAL Model Law, Access, Recognition, Relief, and Cooperation, are designed to facilitate the efficient and fair resolution of cross-border bankruptcy matters. They facilitate direct interaction between foreign representatives and domestic courts, expedite the recognition of foreign procedures, protect debtor assets, and enhance cooperation among jurisdictions to prevent delays and asset dissipation.

          The effectiveness of these principles is evident in global bankruptcy processes, as demonstrated by the rising number of nations implementing the UNCITRAL Model Law and the more efficient settlement of complex international cases. Nonetheless, its implementation has not achieved universal acceptance, with certain countries, such as India, opting for different approaches, which may pose issues in cross-border insolvency processes.

          In the case of In re Stanford International Bank Ltd., the English Court of Appeal faced challenges in establishing the COMI due to inconsistencies between the company’s formal registration in Antigua and Barbuda and the true location of its business operations. This case underscores the imperative for a well-defined COMI standard that evaluates significant commercial operations rather than merely the jurisdiction of incorporation. The Court of Appeal finally determined that the Antiguans’ liquidation represented a foreign primary procedure, underscoring that the presumption of registered office for COMI may only be refuted by objective and verifiable elements to other parties, including creditors. This case highlights the complexity that emerges when a company’s official legal domicile diverges from its practical reality, resulting in difficulties in implementing cross-border insolvency principles.

          Moreover, India’s exclusion of a reciprocity clause hindered the global implementation of Indian rulings and vice versa. In the absence of a defined statutory mandate, ad hoc judicial collaboration often demonstrates inconsistency and unpredictability, hence compromising the global enforceability of Indian insolvency resolutions. This reflects the challenges encountered by other jurisdictions historically, as demonstrated in the European Court of Justice’s ruling in Re Eurofood IFSC Ltd. This pivotal judgment elucidated that the presumption of the registered office for the COMI can only be contested by circumstances that are both objective and verifiable by third parties, including the company’s creditors. These cases highlight the pressing necessity for a comprehensive and globally harmonised legal framework for insolvency in India, with explicitly delineated criteria to prevent extended and expensive jurisdictional conflicts.

          FORUM SHOPPING AND INSOLVENCY LAW: A DELICATE BALANCE

          Forum shopping may serve as a mechanism for procedural efficiency while simultaneously functioning as a strategy for exploitation. Although it may assist debtors in obtaining more favourable restructuring terms, it also poses a danger of compromising creditor rights and creating legal ambiguity.

          In India, reliance on the Gibbs Principle, which posits that a contract can only be discharged by the governing law, has hindered flexibility. This was seen in the Arvind Mills case, where the disparate treatment of international creditors was scrutinised, and in the Dabhol Power issue, where political and legal stagnation hindered effective settlement.

          While a certain level of jurisdictional discretion enables corporations to seek optimal restructuring, India must reconcile debtor flexibility with creditor safeguarding. An ethical framework grounded in transparency and good faith is crucial to avert forum shopping from serving as a mechanism for evasion.

          COMI IN INDIA: NEED FOR LEGAL CLARITY

          India’s judicial involvement in COMI was prominently highlighted in the Jet Airways insolvency case, which entailed concurrent processes in India and the Netherlands. The NCLT initially rejected the acknowledgement of the Dutch proceedings owing to the absence of an explicit provision in the IBC. The NCLAT characterised the Dutch process as a “foreign non-main” proceeding and confirmed India as the COMI. In a recent judgment dated November 12th, 2024, the Supreme Court ultimately ordered the liquidation of Jet Airways, establishing a precedent for the interpretation of COMI. This decision solidifies India’s position as the primary jurisdiction for insolvency proceedings involving Indian companies, even when concurrent foreign proceedings exist. It underscores the Indian judiciary’s assertive stance in determining the COMI and signals a stronger emphasis on domestic insolvency resolution, potentially influencing how future cross-border insolvency cases are handled in India.

          This case illustrates the judiciary’s readiness to adapt and the urgent requirement for legislative clarity. In the absence of a defined COMI framework, results are mostly contingent upon court discretion, leading to potential inconsistency and forum manipulation. Moreover, it demonstrates that India’s fragmented strategy for cross-border cooperation lacks the necessary robustness in an era of global corporate insolvencies.

          To address these difficulties, India must execute a set of coordinated and systemic reforms:

          Implement the “Nerve Centre” Test (U.S. Model)

          India should shift from a rigid procedure to a substantive assessment of the site of significant corporate decision-making. This showcases the genuine locus of control and decision-making, thereby more accurately representing the commercial landscape of contemporary organisations.

          Apply the “Present Tense” Test (Singapore Model)

          The COMI should be evaluated based on the circumstances at the time of insolvency filing, rather than historical or retrospective factors. This would deter opportunistic actions by debtors attempting to exploit more lenient jurisdictions.

          Presumption Based on Registered Office

          Utilising the registered office as a basis for ascertaining COMI provides predictability; nonetheless, it must be regarded as a rebuttable presumption. Judicial bodies ought to maintain the discretion to consider factors outside registration when evidence suggests an alternative operational reality.

          Institutional Strengthening

          India’s insolvency tribunals must be endowed with the necessary instruments and experience to manage cross-border issues. This encompasses specialist benches within NCLT/NCLAT, training initiatives for judges and resolution experts, and frameworks for judicial collaboration. The adoption of the UNCITRAL Model Law must incorporate a reciprocity clause to enable mutual enforcement of judgments. India should pursue bilateral and multilateral insolvency cooperation agreements to augment worldwide credibility and enforcement.

          By rectifying these legal and procedural deficiencies, India may establish a resilient insolvency framework that is internationally aligned and capable of producing equitable results in a progressively interconnected financial landscape.

          CONCLUSION

          The existing cross-border bankruptcy structure in India is inadequate to tackle the intricacies of global corporate distress. As multinational businesses and assets expand, legal clarity and institutional capacity become imperative. The absence of formal acceptance of the UNCITRAL Model Law, dependence on antiquated principles such as the Gibbs Rule, and lack of a clearly defined COMI norm have resulted in fragmented and uneven conclusions, as shown by the Jet Airways case. To promote equity, transparency, and predictability, India must undertake systemic changes, including the introduction of comprehensive COMI assessments, a reciprocity provision, and institutional enhancement. Adhering to international best practices will bolster creditor trust and guarantee that India’s bankruptcy framework stays resilient in a globalised economic landscape.

        3. Contractual ‘Non-Use’ Covenants: Plugging the Shadow-Trading Gap

          Contractual ‘Non-Use’ Covenants: Plugging the Shadow-Trading Gap

          Aditya Singh, THIRD- Year Student, Rajiv Gandhi National University of Law, Punjab

          INTRODUCTION

          The successful prosecution in Securities and Exchange Commission (SEC) v. Panuwat has introduced “shadow trading” as a novel enforcement concept for securities regulators. While India is yet to confront a concrete instance of shadow trading and its cognizance by Securities and Exchange Board of India (‘SEBI’), the U.S. experience highlights a potential lacuna in domestic regulations. Under SEBI’s current framework, insiders face civil liability only when trading in the stock of the very issuer, whose Unpublished Price-Sensitive Information (‘UPSI’) -they possess, and SEBI must prove both that the information “likely to materially affect” a particular security and that the insider used it with profit motive. The application of the shadow-trading principle domestically would therefore demand a framework which captures UPSI-driven trades beyond the issuer’s own stock, without becoming entangled in intricate economic-linkage or intent inquiries.

          This piece shows how India can strengthen its insider-trading regime by requiring all “designated persons” to pre-commit—via an expanded Code of Conduct—to refrain from using any UPSI for profit, and then empowering SEBI to invoke misappropriation principles against any breach. It begins by defining “shadow trading,” contrasts the classical and misappropriation theories, and then sets out the covenant-plus-notice proposal and its statutory foundation. The piece goes on to address proportionality and practical objections before concluding with implementation steps.


          THE SHADOW-TRADING PUZZLE

          Scholars have defined shadow trading as – when private information held by insiders can also be relevant for economically-linked firms and exploited to facilitate profitable trading in those firms. In SEC v. Panuwat, the U.S. District Court for Northern California confronted a novel fact pattern: Matthew Panuwat, a Senior Director at Medivation, received a confidential email revealing Pfizer’s imminent acquisition of Medivation. Rather than trading Medivation stock, he bought shares of Incyte—a competitor whose share price would rise on news of the Medivation deal.

          On the anvils of misappropriation theory, it was held that Panuwat’s breach of Medivation’s insider trading policy which expansively prohibited trading (while in possession of Medivation’s inside information) in not only Medivation’s securities, but arguably in any publicly traded securities in which Medivation’s inside information would give its insiders an investing edge. This fiduciary duty to Medivation—gave rise to insider-trading liability, even though he never traded Medivation securities. In rejecting Panuwat’s argument that liability requires trading in the issuer whose information is misused, the court emphasized that “misappropriation of confidential information for trading any economically linked security” falls within the scope of securities fraud under Rule 10b-5.

          The above discussion necessitates understanding 2 main principles behind insider trading. Under the classical model, insider-trading liability arises when an insider breaches a fiduciary duty by trading in the issuer’s own securities. By contrast, misappropriation theory treats any breach of duty to the source of confidential information as actionable; and India has consistently adhered to the classical approach.

          POSSIBLE IMPLEMENTATION IN INDIA THROUGH EXPANSIVE INTERPRETATION

          While the market-protection, investor-equity, and price-discovery rationales behind the prohibition of insider trading have been extensively examined by scholars, those same principles equally justify a similar regulatory approach to shadow trading, which is effectively an extension of insider trading itself.

          An interpretative reading of the SEBI (Prohibition of Insider Trading) Regulations, 2015 (‘PIT Regulations’), can be used for the domestic application of shadow trading . Regulation 2(1)(n) defines UPSI as any information “directly or indirectly” relating to a company’s securities that is “likely to materially affect” their price. The qualifier “indirectly” can thus for instance bring within UPSI material non-public information about Company A that predictably moves Company B’s shares due to their economic linkage. Indian tribunals have already endorsed expansive readings (see FCRPL v SEBI).  Likewise, the definition of “Insider” under Regulation 2(1)(g) encapsulates anyone who “has access to” UPSI. Once that information is used to trade Company B’s securities, the trader effectively becomes an “insider” of Company B.

          However, relying solely on this interpretative route raises a host of practical and doctrinal difficulties. The next section examines the key obstacles that would complicate SEBI’s attempt to enforce shadow‐trading liability under the existing PIT framework.

          CHALLENGES TO IMPLEMENTATION

          Key implementation challenges are as follows:

          No clear test for “indirect” links: Using “indirectly” as a qualifier posits the problem that no benchmark exists to determine how tenuous an economic link between two entities may be. Is a 5 % revenue dependence enough? Does a 1% index weight qualify? Without clear criteria, every “indirect” claim becomes a bespoke debate over company correlations in the market.

          Heavy proof of price impact: To show UPSI would “likely materially affect” a non-source instrument, SEBI and insiders can each hire economists/experts to argue over whether UPSI about Company A truly “likely materially affects” Company B’s price. Disputes over timeframes, statistical tests, and which market indicators to use would turn every shadow-trading case into an endless technical showdown.

          Uncertain Profit-Motive Standards: Courts already grapple with an implicit profit-motive requirement that the PIT Regulations do not explicitly mandate—a problem Girjesh Shukla and Aditi Dehal discuss at length in their paper—adding an ambiguous intent element and uncertain evidentiary burden. In shadow‐trading cases, where insiders can spread trades across stocks, bonds or derivatives, this uncertainty multiplies and is compounded by the undefined “indirect” linkage test and the need for complex price impact proofs as outlined above.

          THE CONTRACTUAL “NON-USE” COVENANT AND IMPORT OF MISAPPROPRIATION THEORY

          The author argues here that, despite there being many ways through legislative action to solve the problem, the quickest and most effective solution to this problem would be through an import of Misappropriation theory.

          This can be done by leveraging SEBI’s existing requirement for written insider-trading codes. Regulation 9(1) of the PIT Regulations mandates that every listed company adopt a Code of Conduct for its “designated persons,” incorporating the minimum standards of Schedule B, with a designated Compliance Officer to administer it under Regulation 9(3).

          Building on this foundation, SEBI could introduce a requirement to each Code to include a “Non-Use of UPSI for Profit” covenant, under which every insider expressly agrees to (a) abstain from trading in any security or financial instrument while in possession of UPSI, except where a safe-harbour expressly applies, (b) accept that a formal “UPSI Notice” serves as conclusive proof of materiality, obviating the need for SEBI—or any adjudicator—to conduct fresh event studies or call expert testimony on price impact and (c) Safe-harbour provision: extent to which trades can be made, to be determined/formulated by SEBI from time to time. Section 30 of the SEBI Act, 1992 authorises the Board to make regulations to carry out the purposes of this Act, thereby making the addition procedurally valid as well. It is important to note here that this covenant works alongside SEBI’s trading-window rules under PIT Regulations: insiders must honour the temporary ban on trading whenever they hold UPSI.

          Time-bound blackouts are already standard: EU MAR Article 19 enforces a 30-day pre-results trading freeze, and India’s PIT Regulations enforces trade freeze during trading window closures. This covenant simply extends that familiar blackout to cover any UPSI capable of moving related securities to adapt to evolving loopholes in information asymmetry enforcement.

          Under this covenant structure, SEBI’s enforcement simplifies to three unambiguous steps:

          1. UPSI Certification: The company’s board or its designated UPSI Committee issues a written “UPSI Notice,” categorising the information under pre-defined, per se material events (financial results, M&A approvals, rating actions, major contracts, etc.).
          2. Duty Evidence: The insider’s signed covenant confirms a clear contractual duty not to trade on UPSI and to treat the Board’s certification as definitive.
          3. Trade Verification: Any trade in a covered instrument executed after the UPSI Notice automatically constitutes a breach of duty under misappropriation theory—SEBI needs only to show the notice, the covenant and the subsequent transaction.

          To avoid unduly rigid freezes, the covenant would operate as a rebuttable presumption: any trade executed after a UPSI Notice is prima facie violative unless the insider demonstrates (i) a bona-fide, UPSI-independent rationale or; (ii) eligibility under a defined safe-harbour.

          The import of the misappropriation theory will help execute this solution, that is to say, as soon as this covenant is breached it would be a breach of duty to the information’s source, triggering the insider trading regulation through the misappropriation principle.

          The misappropriation theory can be embedded in the PIT regulations through an amendment to the Regulation 4 by SEBI to read, in effect:

          4(1A). “No Insider shall misappropriate UPSI in breach of a contractual or fiduciary duty of confidentiality (including under any Company Code of Conduct) and trade on that information in any security or financial instrument.”

          The blanket restraint on trading engages Article 19(1)(g) of the Constitution but survives the four-part proportionality test articulated in Modern Dental College & Research Centre v State of MP and applied to financial regulation in Internet & Mobile Association of India v RBI.

          WHY NOT A FACTOR-BASED TEST?

          An alternative approach,  advocates for a similar factor based test to determine “abuse of dominant position” by antitrust regulators to be adopted to the PIT regulations to determine cognizable economic linkage. Under this model, SEBI would assess a mix of metrics to decide when Company A’s UPSI is “economically linked” enough to Company B’s securities to trigger liability.

          However, the author argues that the covenant-based approach would be more effective. Unlike a factor-based linkage regime, which demands constant recalibration of revenue shares, index weights and supply-chain ties; fuels expert-driven litigation over chosen metrics and look-back windows; produces unpredictable, case-by-case outcomes; imposes heavy database and pre-clearance burdens; and leaves insiders free to game the latest matrices—the covenant-plus-misappropriation model skips the entire exercise as relies on one clear rule: no trading on UPSI. SEBI’s job becomes simply to confirm three things: the insider signed the promise, the information was certified as UPSI, and a trade took place afterward. This single-step check delivers legal certainty, slashes compliance burdens, and sharply boosts deterrence without ever reopening the question of how “indirectly” two companies are linked.

          CONCLUSION

          The covenant-plus-misappropriation framework streamlines enforcement, preserves SEBI’s materiality standard, and leverages existing Code-of-Conduct machinery—allowing rapid roll-out without new legislation. However, its success depends on corporate buy-in and consistent compliance-monitoring: companies must integrate covenant execution into their governance processes, and SEBI will still need robust surveillance to detect breaches. Therefore, SEBI should publish a consultation paper and pilot the covenant with select large-cap companies
          to identify practical challenges before a market-wide rollout.