The Corporate & Commercial Law Society Blog, HNLU

Author: HNLU CCLS

  • Addressing the Silence: Security for Costs in India’s Arbitration Landscape (Part I)

    Addressing the Silence: Security for Costs in India’s Arbitration Landscape (Part I)

    BY PRANAV GUPTA AND AASHI SHARMA, SECOND- YEAR STUDENT AT RGNUL, PUNJAB

    Introduction

    The recent cases of Lava International Ltd. and Tomorrow Sales Agency have reignited the confusions regarding the concept of Security for Costs (‘SfC’) in India.Gary B. Born[i] defines SfC as “an interim measure designed to protect a respondent against the risk of non-payment of a future costs award, particularly where there is reason to doubt the claimant’s ability or willingness to comply with such an award.”

    The authors in this manuscript shall wade through the confusions raised in the above cases. For that, firstly, we try to conceptually understand the concept of SfC by distinguishing it from the other situated similar concepts, while also emphasizing on the legal provisions governing them. Secondly, we analyze the concept of SfC in light of the leading international investment and commercial arbitration practices. Lastly, the authors propose a two-tier solution to the problem of SfC in India building on the international practices with certain domestic modifications.

    Security for Costs: Concept and Law
    1. Understanding Security for Costs:

    The concept of SfC is fundamentally different from that of ‘securing the amount in dispute’, as the latter is a measure to ensure the enforceability of the arbitral award by securing the party with whole or some part of the amount claimed or granted. section 9(1)(ii)(b) and section 17(1)(ii)(b) of The Arbitration and Conciliation Act, 1996 (‘The Arbitration Act’) regulates the regime for ‘securing the amount in dispute’ as an interim measure. The Hon’ble Supreme Court in the cases of Arcelor Mittal and Nimbus Communications clarified that section 9 permits securing the ‘amount in dispute’ on a case by case basis. Further, SfC is also distinct from ‘Recovery of Costs’, as ‘costs’ are recovered post the declaration of award and is addressed by section 31A of The Arbitration Act. 

    B. Security for Costs and Section 9: A Legal Void:

    While, The Arbitration Act deals with the similarly situated aspects of SfC as shown above, it remains silent on a provision for SfC, a gap that remains unaddressed even by the 2015 Amendment and The Draft Arbitration and Conciliation (Amendment) Bill, 2024. A landmark ruling with respect to SfC was delivered in the J.S. Ocean Liner case, by ordering to deposit USD 47,952 as an amount for recovery of legal costs. The court relied on section 12(6) of the English Arbitration Act 1950, akin to section 9(1)(ii)(b) of The Arbitration Act, to award SfC as an interim measure in this case. However, this harmonious interpretation was later rejected in the cases of Intertoll Co. and Thar Camps, by observing that under sub-clause (b) of section 9(1)(ii), only ‘amount in dispute’ can be secured and not the SfC. Hence, The Arbitration Act needs a reform with respect to the provision concerning SfC.

    International Precedents concerning Security for Costs
    1. Investment Arbitration Insights:

    The International Centre for Settlement of Investment Disputes (‘ICSID’) Tribunal (‘The Tribunal’), being the world’s primary institution, administers the majority of all the international investment cases. Till the 2022 Amendment to The ICSID Arbitration Rules (‘ICSID Rules’), even ICSID Rules were silent on this concept of SfC, however now Rule 53 of the same Rules contains the express provision for awarding SfC by The Tribunal. As the newly introduced Rule 53 is in its nascent stage with no extensive judicial precedents[ii] on it yet, the authors analyze the cases prior to the 2022 Amendment to understand the mechanism for granting SfC.

    Prior to the 2022 Amendment, SfC was granted as a provisional measure[iii] under Article 47 of The ICSID Convention and Rule 39 of The ICSID Rules as observed in the cases of RSM v. Grenada[iv] and Riverside Coffee.[v] However, in the Ipek[vi] case, the Tribunal permitted the granting of SfC only in ‘exceptional circumstances’.[vii] The high threshold[viii] was reaffirmed in Eskosol v. Italy[ix], where even the bankruptcy didn’t sustain an order for SfC. Further, in EuroGas[x] case, financial difficulty and Third-Party Funding (’TPF’) arrangement were considered as common practices, unable to meet the threshold of ‘exceptional circumstances’.

    Finally, in the RSM v. Saint Lucia[xi] case, the high threshold[xii] was met as the Claimant was ordered to pay US$ 750,000 as SfC on account of its proven history of non-compliance along with the financial constraints, and TPF involvement. In the same case, The Tribunal established a three-prong test[xiii] for awarding SfC emphasizing on the principles of ‘Exceptional Circumstances, Necessity, and Urgency’,[xiv] with the same being followed in the further cases of Dirk Herzig[xv] and Garcia Armas.[xvi] Further, The Tribunal added a fourth criterion of ‘Proportionality’[xvii] to the above three-prong test in the landmark case of Kazmin v. Latvia.[xviii]

    The Permanent Court of Arbitration (“PCA”) is another prominent institution, with nearly half its cases involving Investment-State arbitrations. The PCA resorts to Article 26 of the UNCITRAL Arbitration Rules to award SfC as seen in the Nord Stream 2 case.[xix] In Tennant Energy v. Canada[xx] and South American Silver,[xxi] the PCA applied the same test, devised in the Armas case to grant SfC.[xxii] Similar approaches have been adopted by the local tribunals, including Swiss Federal Tribunal and Lebanese Arbitration Center.[xxiii]

    [i] Gary B. Born, International Commercial Arbitration (3rd edn, Kluwer Law International 2021); See also Maria Clara Ayres Hernandes, ‘Security for Costs in The ICSID System: The Schrödinger’s Cat of Investment Treaty Arbitration’ (Uppsala Universitet, 2019) <https://uu.diva-portal.org/smash/get/diva2:1321675/FULLTEXT01.pdf&gt; accessed 17 June 2025.

    [ii] International Centre for Settlement of Investment Disputes, The First Year of Practice Under the ICSID 2022 Rules (30 June 2023).

    [iii] Lighthouse Corporation Pty Ltd and Lighthouse Corporation Ltd, IBC v. Democratic Republic of Timor-Leste, ICSID Case No. ARB/15/2, Procedural Order No. 2 (Decision on Respondent’s Application for Provisional Measures) (13 February 2016) para 53.

    [iv] Rachel S. Grynberg, Stephen M. Grynberg, Miriam Z. Grynberg and RSM Production Corporation v. Grenada, ICSID Case No. ARB/10/6, Tribunal’s Decision on Respondent’s Application for Security for Costs (14 October 2010) para 5.16.

    [v] Riverside Coffee, LLC v. Republic of Nicaragua, ICSID Case No. ARB/21/16, Procedural Order No. 7 (Decision on the Respondent’s Application for Security for Costs) (20 December 2023) para 63.

    [vi] Ipek Investment Limited v. Republic of Turkey, ICSID Case No. ARB/18/18, Procedural Order No. 7 (Respondent’s Application for Security for Costs) (14 October 2019) para 8.

    [vii] BSG Resources Limited (in administration), BSG Resources (Guinea) Limited and BSG Resources (Guinea) SÀRL v. Republic of Guinea (I),ICSID Case No. ARB/14/22, Procedural Order No. 3 (Respondent’s Request for Provisional Measures) (25 November 2015) para 46.

    [viii] Lao Holdings N.V. v. Lao People’s Democratic Republic (I), ICSID Case No. ARB(AF)/12/6, Award (6 August 2019) para 78.

    [ix] Eskosol S.p.A. in liquidazione v. Italian Republic, ICSID Case No. ARB/15/50, Procedural Order No. 3 Decision on Respondent’s Request for Provisional Measures (12 April 2017) para 23.

    [x] EuroGas Inc. and Belmont Resources Inc. v. Slovak Republic, ICSID Case No. ARB/14/14, Procedural Order No. 3 (Decision on the Parties’ Request for Provisional Measures) (23 June 2015) para 123.

    [xi] RSM Production Corporation v. Saint Lucia, ICSID Case No. ARB/12/10, Decision on Saint Lucia’s Request for Security for Costs (13 August 2014) para 75.

    [xii] Transglobal Green Energy, LLC and Transglobal Green Panama, S.A. v. Republic of Panama, ICSID Case No. ARB/13/28, Decision on the Respondent’s Request for Provisional Measures Relating to Security for Costs (21 January 2016) para 7.

    [xiii] Libananco Holdings Co. Limited v. Republic of Turkey, ICSID Case No. ARB/06/8, Decision on Applicant’s Request for Provisional Measures (7 May 2012) para 13.

    [xiv] BSG Resources Limited (n vii) para 21.

    [xv] Dirk Herzig as Insolvency Administrator over the Assets of Unionmatex Industrieanlagen GmbH v. Turkmenistan, ICSID Case No. ARB/18/35, Decision on the Respondent’s Request for Security for Costs and the Claimant’s Request for Security for Claim (27 January 2020) para 20.

    [xvi] Domingo García Armas, Manuel García Armas, Pedro García Armas and others v. Bolivarian Republic of Venezuela, PCA Case No. 2016-08, Procedural Order No. 9 Decision on the Respondent’s Request for Provisional Measures (20 June 2018) para 27.

    [xvii] Transglobal Green Energy (n xii) para 29.

    [xviii] Eugene Kazmin v. Republic of Latvia, ICSID Case No. ARB/17/5, Procedural Order No. 6 (Decision on the Respondent’s Application for Security for Costs) (13 August 2020) para 24.

    [xix] Nord Stream 2 AG v. European Union, PCA Case No. 2020-07, Procedural Order No. 11 (14 July 2023) para 91.

    [xx] Tennant Energy, LLC v. Government of Canada, PCA Case No. 2018-54, Procedural Order No. 4 (Interim Measures) (27 February 2020) para 58.

    [xxi] South American Silver Limited v. The Plurinational State of Bolivia, PCA Case No. 2013-15, Procedural Order No. 10 (Security for Costs) (11 January 2016) para 59.

    [xxii] Domingo García Armas (n xvi).

    [xxiii] Claimant(s) v. Respondent(s) ICC Case No. 15218 of 2008.

  • Reconsidering the Scope of Section 14 of IBC: Analysing the Inherent Extra-Territorial Scope of Moratorium 

    Reconsidering the Scope of Section 14 of IBC: Analysing the Inherent Extra-Territorial Scope of Moratorium 

    BY ADITYA DWIVEDI AND PULKIT YADAV, FOURTH-YEAR STUDENTS AT NUSRL, RACHI

    INTRODUCTION

    The moratorium provisions under the Insolvency and Bankruptcy Code, 2016 (‘The Code’), are important mechanisms to maintain the debtor’s assets and maximise value for all stakeholders. Yet, the territorial applicability of these provisions, especially in proceedings involving cross-border assets, is a matter of judicial interpretation and academic discussion. 

    This article analyses the extra-territorial applicability of moratorium under the Code with a special focus on comparing and contrasting the interpretation of moratoriums applicable to Corporate Insolvency Resolutions Process (‘CIRP’) and Insolvency Resolution Process (‘IRP’) under Sections 14 and 96 of the Code, respectively. 

    By analysing the recent judgment of the Calcutta High Court in Rajesh Sardarmal Jain v. Sri Sandeep Goyal, (‘Rajesh Sadarmal’) this article contends that whereas Section 96 moratorium might be restricted to Indian jurisdiction, Section 14 moratorium necessarily has extra-territorial application due to the interim resolution professional’s statutory obligation to manage foreign assets under Section 18(f)(i) of the Code.

    TERRITORIAL SCOPE OF MORATORIUM: DIVERGENT INTERPRETATIONS

    The Code provides for two types of insolvency proceedings: CIRP for corporate persons under Part II and IRP for individuals and partnership firms under Part III, with moratoriums under Sections 14 and 96, respectively, to facilitate these processes

    However, courts have interpreted the moratoria under Sections 14 and 96 differently. In P. Mohanraj v. Shah Bros. Ispat, the Supreme Court held that Section 14 has a broader scope but limited its analysis to domestic proceedings. In contrast, the Calcutta High Court in Rajesh Sadarmal highlighted the extra-territorial reach of Section 96. Hence, examining these interpretations is key to understanding the territorial scope of both provisions.

    INSOLVENCY RESOLUTION PROCESS VIS-A-VIS SCOPE OF SECTION 96: ANALYSING THE NARROW INTERPRETATION OF MORATORIUM UNDER PART III

    IIn Rajesh Sardarmal, the Calcutta High Court held that the Section 96 moratorium for personal guarantors does not extend to foreign jurisdictions, as the Code’s scope under Section 1 is limited to India and does not specify the enforcement of the Section 96 moratorium in foreign courts. Thus, the court held that actions in foreign jurisdictions cannot be suspended by Section 96. This interpretation implies that all provisions under the Code lack extra-territorial application.

    However, this view contradicts the Code’s inherent extra-territorial mechanism, as outlined in Sections 234 and 235 of the Code which respectively empower the central government to enter into reciprocal arrangements with other countries to enforce the provisions of the Code and allow the Adjudicating Authority (‘AA’) to issue a letter of request to the competent authority of a reciprocating country, requesting it to take necessary action regarding any ongoing homebound proceedings against the Corporate Debtor (‘CD’) under the Code. Further, this interpretation also negates the inherent extra-territorial scope of the moratorium under Section 14. 

    CORPORATE INSOLVENCY RESOLUTION PROCESS VIS-À-VIS SCOPE OF SECTION 14: A CASE WARRANTING BROADER INTERPREATAION OF MORATORIUM UNDER PART II

    The Supreme Court, in M/S HPCL Bio-Fuels Ltd v. M/S Shahaji Bhanudas Bhad, held that the Code, as an economic legislation, is intended for the revival of the CD rather than being used as a recovery mechanism. Further, in Swiss Ribbons Pvt. Ltd. v. Union of India, the Apex Court held that moratorium under section 14 envisions the protection of the assets of the CD, to facilitate its smooth revival. 

    Therefore, applying Rajesh Sadarmal’s narrow interpretation to Section 14 would weaken the moratorium’s purpose and hinder the CIRP. In a globalised economy, corporate debtors often hold foreign assets, which must be brought under the control of the interim resolution professional and the resolution professional under Sections 18 and 25 of the Code, respectively. This will maximise the value of the CD and enhance the chances of higher recovery for creditors. Further, it would also prevent successful resolution applicants from acquiring foreign assets of the CD without making any payment, and enable the committee of creditors to exercise their commercial wisdom judiciously in selecting the most suitable resolution plan after assessing the true financial position of the CD. 

    EXTRA-TERRITORIAL SCOPE: LEGISLATIVE INTENT AND STATUTORY FRAMEWORK

    In Dr. Jaishri Laxmanrao Patil v. The Chief Minister & Anr, the Supreme Court held that courts must act upon the intent of the legislature, and such intent can be gathered from the language used in the statute. Moreover, inRenaissance Hotel Holdings Inc. v.  B. Vijaya Sai & Others, the Apex Court ruled that the quintessential principle of interpretation is that every provision of a statute shall be interpreted considering the scheme of the given statute. Meaning thereby that the textual interpretation must align with the contextual one. 

    The Supreme Court went further ahead in the State of Bombay v. R.M.D. Chamarbaugwala, and held that a statute may have extra-territorial application if a sufficient territorial nexus exists. Hence, Section 1 of the Code does not bar such application. Interpreting Section 14 thus requires examining legislative intent and nexus, with Sections 18(f)(i), 234, and 235 providing key guidance.

    SECTION 18(f)(i): CONTROL OVER FOREIGN ASSETS

    After the commencement of insolvency and imposition of moratorium, the AA appoints an interim resolution professional under Section 16. As per Section 18(f)(i), the interim resolution professional must take control of all assets owned by the corporate debtor, including those located abroad. This establishes a clear territorial nexus, supporting extra-territorial application.

    In M/s Indo World Infrastructure Pvt. Ltd. v. Mukesh Gupta, the National Company Law Appellate Tribunal (‘NCLAT’) held that under Section 18(f), read with Section 20, the interim resolution professional must secure and preserve the corporate debtor’s assets. This interpretation aligns with the moratorium’s objective under Section 14. Such an intra-textual reading reflects the legislative intent to extend the moratorium to foreign assets for effective CIRP and value maximisation. While Section 1 poses no bar, supported by the doctrine of territorial nexus, actual enforcement abroad still depends on securing international cooperation through agreements under the Code.

    INTERNATIONAL AGREEMENT UNDER SECTION 234 AND 235: HIGHLIGHTING THE INHERENT EXTRA-TERRITORIAL SCOPE OF THE CODE

    Under Part V, the Code provides a legislative route under Sections 234 and 235 to facilitate the extraterritorial application of its provisions. This legislative structure recognises the necessity of international coordination and highlights the extraterritorial nature of the Code. 

    However, their efficacy is yet to be tested because, to date, no notification[i] has been issued by the central government in this regard. Therefore, unless the central government gives effect to these provisions through mutual agreement with other countries, no provision of the Code can be extended to foreign proceedings or assets situated in foreign lands. 

    However, in State Bank of India v. Videocon Industries Ltd., the National Company Law Tribunal (‘NCLT’) held that the  CD’s foreign assets will form part of the CIRP and be subject to Sections 18 and 14 of the Code. Yet, the NCLT has not provided any judicial framework for the consolidation of the CD’s foreign assets in the CIRP. 

    Therefore, even if the CD’s foreign assets are considered part of the CIRP, in the absence of a judicial or legislative framework (such as mutual agreements), those assets cannot be included in the CIRP.

    NEED FOR A COMPREHENSIVE CROSS-BORDER FRAMEWORK

    In DBS Bank Limited Singapore v. Ruchi Soya Industries Limited & Another, the Apex Court held that the primary aim of the Code is to balance the rights of various stakeholders by enabling the resolution of insolvency, encouraging investment, and optimising asset value. 

    Therefore, it is necessary to address the concerns of distressed Indian companies with a foreign presence and foreign companies having the centre of main interest (‘COMI’) in India. This will ensure that stakeholders or creditors are not left in the lurch due to skewed recovery resulting from the non-inclusion of the CD’s foreign assets in the CIRP. 

     However, to effectively address these concerns, there is a need to devise a cross-border framework that encompasses not only the CIRP but also the IRP. At present, India lacks such a framework, which constitutes a significant regulatory gap in its insolvency regime. In cases where personal guarantors possess assets located outside the country, this gap severely impairs the ability of creditors to recover dues effectively. The present framework is limited in scope and fails to provide mechanisms for the recognition and enforcement of foreign proceedings involving personal guarantors, thereby undermining the efficiency of cross-border recoveries.

    While the Report of the Insolvency Law Committee on Cross-Border Insolvency, 2018 (‘The Report’) laid down a robust foundation for dealing with CDS, it did not address personal insolvency, as Part III of the Code had not yet been notified at that time. The report emphasised the importance of providing foreign creditors access to Indian insolvency proceedings and of enabling Indian insolvency officials to seek recognition abroad. However, with the subsequent notification of provisions relating to personal guarantors, there is now an urgent need to expand the cross-border framework to encompass personal guarantor insolvency as well. The report also supports this view as it provides for the subsequent extension of cross-border provision on IRP, post notification of Part III. 

    Moreover, in Lalit Kumar Jain v. Union of India,  the Supreme Court held that due to the co-extensive nature of the liability of the surety with that of the principal debtor under Section 128 of the Indian Contract Act, 1872, creditors can recover the remaining part of their debt from CIRP by initiating IRP against the personal guarantor to the CD.

    Therefore, failing to extend the cross-border insolvency regime to IRP would limit creditors’ access to the guarantor’s foreign assets, thereby impeding the full and effective realization of their claims.

    To address this regulatory shortfall, a pragmatic way forward would be to operationalise Section 234 through mutual agreements with key trading partners of India, by expanding the scope of the cross-border framework, as suggested in the report   to include IRP, and amending the Code accordingly. 

    Further, the Courts should also refrain from narrowly interpreting the scope of moratoriums and other provisions of the Code, and should take into account the doctrine of territorial nexus while analysing the scope of any provision of the Code. 

    A broader interpretation, especially in cases involving foreign assets or proceedings, would facilitate a more effective and holistic resolution process by recognising the global footprint of many CDs. This approach aligns with the objective of maximising the value of assets under Sections 20 and the preamble of the Code and ensures that proceedings under the Code are not rendered toothless in cross-border contexts. 

    Additionally, invoking the doctrine of territorial nexus can help establish a sufficient legal connection between India and foreign assets or persons, thereby allowing Indian insolvency courts to issue directions that can have extraterritorial reach, wherever justified. This interpretive approach will ultimately enhance creditor confidence and will reinforce India’s credibility as a jurisdiction with a robust insolvency regime.

    Moreover, in the absence of any judicial and legislative framework, the doctrine of Comity of Courts can be invoked by the creditors seeking the enforcement of insolvency proceedings on foreign lands. This common law doctrine postulates an ethical obligation on the courts of one competent jurisdiction to respect and to give effect to the judgments and orders of the courts of other jurisdictions.

    Creditors can also seek recognition of Indian insolvency proceedings abroad through the UNCITRAL Model Law on Cross-Border Insolvency, as seen in Re Compuage Infocom Ltd., where the Singapore High Court recognised the Indian CIRP but denied asset repatriation. This highlights the urgent need for a comprehensive cross-border insolvency framework aligned with the spirit of the Code and the report that is primarily based on the Model Law.

    CONCLUSION

    While the Calcutta High Court’s ruling in Rajesh Sardarmal limits the territorial reach of Section 96 moratorium, Section 14 moratorium has to be interpreted more expansively, considering its inextricable link with Section 18(f)(i). Further, while interpreting the Code, the courts must give due regard to the legislative intent and the judicial principle of territorial nexus.  The success of the Code’s insolvency resolution mechanism, especially in cross-border asset cases, relies on acknowledging and enabling the extra-territorial operation of moratorium provisions. Legislative amendments, international cooperation frameworks, and judicial interpretation of the Code’s provisions based on legislative intent are essential to realise this goal.

    [i] Uphealth Holdings, INC. v. Dr. Syed Shabat Azim & Ors. Co., 2024 SCC OnLine Cal 6311 ¶ 20

  • Bridging Borders: SCRR Amendment 2024 and India’s Gateway to Global Capital

    Bridging Borders: SCRR Amendment 2024 and India’s Gateway to Global Capital

    BY MANAV PAMNANI AND SHOURYA SHARMA, THIRD-YEAR STUDENTS AT NALSAR HYDERABAD AND JINDAL GLOBAL LAW SCHOOL, SONIPAT

    INTRODUCTION

    The Department of Economic Affairs, Ministry of Finance (‘MoF’), has recently amended the Securities Contracts Regulation Rules, 1957 (‘SCRR’). This Amendment attempts to make it easier for Indian public companies to list their equity shares within International Financial Service Centres (‘IFSCs’) such as the Gujarat International Finance Tec-City (‘GIFT City’), under the framework of Direct Listing of Equity Shares Scheme and the Companies (Listing of Equity Shares in Permissible Jurisdictions) Rules, 2024. One of the significant changes under the Amendment is the reduction of minimum public shareholding thresholds from 25% to 10% for listing made in IFSCs, making international listings more accessible, especially for start-ups and technology-driven enterprises. This move mirrors the government’s broader commitment towards placing India among the world’s competitive investment-friendly destinations and financial hives. This article attempts to analyse the legal framework of this Amendment, alongside exploring its practical implications for the Indian financial landscape.

    REGULATORY FOUNDATIONS AND LEGISLATIVE DEVELOPMENTS

    The SCRR was notified by the Central Government to help achieve the objectives of the Securities Contracts (Regulation) Act, 1956 (‘SCRA’) effectively. The preamble clause of the SCRA states that the objective of the statute is to regulate undesirable transactions in securities by overseeing the dealing in securities and monitoring other ancillary business activities. The Amendment aligns the SCRR with this overarching objective. The legal foundation of this Amendment lies in section 30(h)(A) of the SCRA, which gives the Central Government the power to introduce rules stipulating the specific requirements that companies have to follow to get their securities listed on any stock exchange. The word “any” here has to be given a wide interpretation to align with the framers’ intention which was to bestow supervisory and regulatory authority upon the Government to foster the maintenance of a reliable and efficient securities business framework. Therefore, the regulation of listing of securities on IFSCs squarely falls within the competence and authority of the Government.

    Earlier in 2024, the MoF, through a notification amending the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (‘NDI Rules’), explicitly enabled the listing of securities of public Indian companies on international exchanges recognized in Schedule XI of NDI Rules. This, termed as the Direct Listing Scheme, governed several intricacies such as permissible investors, compliance with sectoral caps, regulations regarding prohibited sectors, and pricing guidelines. Simultaneously, the Ministry of Corporate Affairs (‘MCA’) had also introduced the Companies (Listing of Equity Shares in Permissible Jurisdictions) Rules, 2024 by virtue of its power under section 23(3) r/w section 469 of the Companies Act, 2013 to regulate the entities that can list and jurisdictions where the listing can take place.

    However, both these enactments, along with the Companies (Amendment) Act, 2020 which prescribed certain similar requirements pertaining to listing in international exchanges, served as mere regulatory tools rather than efficient operational guidelines. They prescribed an overarching framework that has to be adhered to during such listing and discussed the eligibility criteria but failed to provide or clarify points regarding specific thresholds and other operational mechanisms specified under the SCRR.

    LEGAL ANALYSIS

    The recent Amendment fills the void identified above by introducing a few but impactful changes in the securities listing regime, thus reflecting its commitment to fostering a globally competitive and investor-friendly framework while aligning domestic practices with international standards. These international standards include the minimum public float thresholds in jurisdictions like Singapore, the International Organisation of Securities Commissions’ principles of efficiency, transparency and fairness in cross-border listings, the securities regime in the Dubai International Financial Centre, the Financial Action Task Force’s Anti-Money Laundering /Combating the Financing of Terrorism recommendations, and the pricing mechanisms and sectoral compliance thresholds present in the European Union Capital Markets Union and the United States Securities and Exchange Commission Regulations.

    The widespread benefits accruing to investors and other stakeholders through the effectuation of this Amendment not only covers the inflow of higher foreign capital and a more efficient and dynamic securities framework but also extends to direct tax advantages. section 10(4D) of the Income Tax Act, 1961 provides a significant tax exemption on income arising from transactions conducted on recognized stock exchanges within IFSCs, including GIFT-IFSC. This incentivizes participation, reduces transactional costs for investors, and creates a persuasive financial rationale for businesses contemplating listing on foreign exchanges. It is also in line with the numerous Double Taxation Avoidance Agreements (‘DTAAs’) entered into by India to prevent non-resident Indians from being taxed twice, in both, India and their country of residence, thus significantly alleviating their tax burden. Additionally, the Securities and Exchange Board of India (‘SEBI’) has considerable control over listing and transactions in the IFSC, as is evident from the scheme of the SEBI (International Financial Services Centres) Guidelines, 2015. This reiterates the commitment of SEBI to safeguard the interests of investors and other stakeholders, alongside maintaining an effective securities landscape.

    An important caveat to consider with respect to this Amendment is that the reduction of thresholds from 25% to 10% extends only to listings made in the IFSC. This implies that as per domestic subscription requirements, the extent of public shareholding is still fixed at the previous 25%. This distinction creates a dual regulatory framework, potentially leading to compliance complexities for companies seeking listings in both domestic and IFSC exchanges. This may limit the seamless integration of domestic and international listing strategies, requiring companies to carefully navigate the differing regulatory requirements to maximize benefits and avoid potential conflicts. Although the text of the Amendment alters Rule 19(2)(b) of SCRR, which covers domestic listings, the primary intention of the legislature was to effect changes in the IFSC listing framework. This ambiguity necessitates a clarification, which will most likely uphold uniformity by stating that the reduction also extends to listings made on domestic stock exchanges by companies wishing to obtain listing on permitted international exchanges. The importance of such uniformity and standardization is also evident from the two definitions (IFSC and International Financial Services Centre Authority (‘IFSCA’) that have been introduced which do not impose their own requirements but simply suggest an alignment with the definitions incorporated in existing legislations. The Amendment while defining these terms states that an IFSC means an IFSC as defined under section 3(1)(g) of the IFSCA Act, 2019 and an IFSCA means the Authority established under section 4(1) of the IFSCA Act. This significantly reduces complexity and fosters consistency and clarity in the navigation of relevant legalities pertaining to share listing and other compliance requirements.

    PRACTICAL IMPLICATIONS

    This Amendment marks a shift in India’s financial regulatory regime by redefining the entry of companies into global capital markets. In its amplitude, it is not an ordinary technical change but a strategic recalibration of structures of investment. The reduction of public shareholding thresholds from 25% to 10% for foreign listings creates an easier route for start-ups, emerging businesses, and small, mid and large capitalisation companies to access global capital, a phenomenon that is already experiencing an upward trajectory. For example, the gross foreign portfolio investment (‘FPI’) in India was massively estimated at around US$ 41.6 billion in the year 2023-24, which is bound to increase manifold due to this Amendment. The business insights from  companies like Reliance Industries Limited and HDFC Bank Limited, among others, reflect clear examples of corporations successfully accessing large amounts of global capital due to international financial listing. This consequentially places Indian business enterprises in a robust position as reduction in public shareholding compliance requirements is an attractive proposition for investors.

    Interestingly, the lowering of the barriers to international capital access also provides the same growth opportunities to a wider spectrum of sector-specific enterprises, including deep technology, renewable energy and biotechnology. These are crucial sectors requiring large investments. Furthermore, this change may even decentralise India’s economic hubs by allowing international capital to penetrate smaller companies located in tier-2 and tier-3 cities. As an offshoot, regions other than the economically prospering metro cities would witness increased industrialisation and employment generation since more local companies would gain access to foreign investments.

    A research conducted by the International Monetary Fund on emerging markets provides a broader context in which this Amendment fits into a global trend, towards more accessible and flexible capital markets. It represents the benefits of India’s strategic approach to positioning itself as an attractive destination for global investors. Indian firms may be better positioned to raise capital in foreign currencies with a more straightforward pathway to listing abroad while hedge-protecting firms reliant on imports for raw materials or technology from the capricious market exchange rate.

    Contrary to the apprehensions of capital outflow, this Amendment may benefit India’s domestic markets since an international listing enhances reputation of a company, provides international exposure, and encourages investor confidence. Companies will attract a larger pool of sophisticated retail and institutional investors, leading to increased credibility and brand value through such listings. This will enhance liquidity, valuation, expertise, innovation and overall market efficiency.

    However, the opportunity comes with nuanced challenges, particularly for companies that aim to be listed on both domestic and international exchanges. In a dual-listed company structure, the requirement for multi-jurisdictional shareholder and board approvals introduces complexities to decision-making and company operations. This substantially increases audit and compliance costs, necessitating detailed planning and high investments in financial and legal advisory services.

    CONCLUDING REMARKS

    This Amendment is more than a routine regulatory change because it aims to manifest India as a global financial hub by significantly relaxing listing requirements in the IFSC. It serves as a forward-looking measure with the objective of modernising the Indian securities law landscape and aligning it with international best practices by furthering a more inclusive access to global capital markets. With the introduction of this Amendment, the legislature has taken a significant step in the right direction and it will be interesting to observe the future course this Amendment adopts, particularly concerning its effective implementation.

  • The European Commission’s Fine On Meta For Tying Allegations And Why India Needs To Do More

    The European Commission’s Fine On Meta For Tying Allegations And Why India Needs To Do More

    BY ANUSHKA GUHA, THIRD-YEAR STUDENT AT NLU, ODISHA

    INTRODUCTION

    The European Commission (‘EC’) fined Meta for tying Facebook Marketplace (‘FM’) to its social media platform, Facebook, in November 2024. FM is Meta’s online classified advertisement service which was introduced in 2016 and can be used to sell and buy products. Tying is a practice in which the availability of a product or a service is made conditional upon the availability of another. The EC found that Facebook had used its dominant position in the market for social networks and in the market for displaying classified ads to tie both services. What this essentially does is, expose all users of Facebook to FM, regardless of whether they want to see those ads or not. Such practices pose a competitive disadvantage for other online classified ads services, as they do not have access to the enormous database of social media users like Facebook does. Meta has also been accused of imposing unfair trade conditions through its terms of service that authorizes it to use ad-related data of competing classified ads service providers, who advertise on Facebook and Instagram, for the benefit of FM.

    GLOBAL SCRUTINY ON META

    This comes at a time when Meta is also under the scrutiny of the United States Federal Trade Commission for its acquisition of WhatsApp and Instagram resulting in the elimination of competition among social media platforms. The EC has previously fined Meta for providing misleading information during the WhatsApp-Facebook merger in 2014. In India, the Competition Commission of India (‘CCI’) has penalised Meta for abuse of its dominant position over WhatsApp’s contentious privacy policy introduced in 2021, which authorized the messaging platform to share user data with its parent company Meta and its subsidiaries. 

    This is not the first time Meta has been accused of tying its services. The launch of Threads in 2023 raised concerns about tying, as it requires one to have an account on Instagram. Meta, formerly known as Facebook, acquired Instagram, a photo-sharing app, in 2012. Although marketed as a competitor of microblogging platform X, the prerequisite of an Instagram account to operate the application makes it vulnerable to antitrust scrutiny, because the functioning of Threads and Instagram is fundamentally different. The Turkish Competition Authority, Rekabet Kurumu (‘RK’), has been investigating Meta’s anti-competitive practices since last year. In December 2023, the RK launched an investigation into the alleged tying of Threads and Instagram. 

    Subsequently, in January 2024, Meta was fined $160,000 per day for failure to adequately address competition concerns arising from its dominance in social networking, consumer communication, and online advertising. Most recently, the RK fined Meta $37.20 million over data-sharing practices between Facebook, WhatsApp, Instagram, and Threads.

    TYING : THE INDIAN PERSPECTIVE

    Tying is prohibited under section 4(2)(e)  of the Competition Act, 2002, in the context of abuse of dominance. The CCI’s interpretation of tying has been a bit more restrictive than its European counterpart. This is especially demonstrated by the element of ‘coercion’ which is very narrowly considered by the CCI. We will try to understand this through two cases: Harshita Chawla v. WhatsApp and Facebook (‘Harshita Chawla’) and the Baglekar Akash Kumar v. Google LLC (‘Google Meet case’). 

    In Harshita Chawla, WhatsApp was accused of tying its Unified Payments Interface, WhatsApp Pay (‘WPay’) services with its messaging platform. The CCI dismissed the allegations on two grounds: first, that the element of ‘coercion’ in using the two products was absent; and second, that it did not cause foreclosure of competition in the market for payments services. It is prima facie amply clear that WhatsApp’s messaging platform and WPay operate in different relevant markets, which is a consideration that was taken into account by the CCI as well. However, its rationale for reaching the conclusion stands on shaky ground. The CCI has failed to consider here that WPay is not independent of the messaging platform, and users need to have a WhatsApp account in order to use it. While the implementation of WPay did not foreclose competition in the market of payment services by itself because it is a heterogeneous market, WhatsApp’s conduct is in clear violation of Section 4(2)(e) for two reasons: first, that users need to use the messaging platform in order to use WPay; and second, that WhatsApp leveraged its dominance in the smartphone-based OTT messaging service market to enter into the payments services market.

    A similar reasoning was used in the Google Meet case. In 2020, Google was accused of anti-competitive tying following the integration of its video-conferencing service Google Meet (‘Meet’) with its client mail service, Gmail. This meant that Meet came pre-installed with Gmail and the latter could not be used without the former. CCI dismissed the allegations on Google on two grounds. Firstly, users were free to use Meet without having a Gmail account. They just needed a Google account, not Gmail. Additionally, they were not under an obligation to necessarily use the video-conferencing service while using Gmail. Secondly, it did not restrict users from using other video conferencing apps with their Google account, thus reaching the conclusion that users are not being ‘coerced’ to use Meet and Gmail together. This approach again overlooks the fact that a dominant enterprise (here, Google) leveraged its position in one relevant market (here, client mail service) to enter into another relevant market (here, video-conferencing service). 

    A PROBLEMATIC APPROACH

    The CCI’s narrow interpretation and mandatory requirement of ‘coercion’ in order to constitute tying is arguably not a favorable one. As demonstrated by both the cases above, it clearly neglects the presence of leveraging. Even if we consider that WPay did not cause foreclosure of market competition in Harshita Chawla, it does not weaken the fact that if a user wishes to use WPay, they would necessarily have to pass through WhatsApp, thereby increasing the market power of the messaging platform and giving it a competitive edge over its counterparts in that relevant market. Additionally, the CCI completely ignores the aspect of consumer inertia or status quo bias with its disproportionate focus on coercion. The concept of status quo bias assumes that consumers refrain from making active choices to change the status quo regardless of economic irrationality. In comparison, it has been due importance by the EC on more than one instance, a notable one being the Google Search (Shopping) decision, where it was observed that of the total consumers, only 1% looked at the second page of Google search results. Similarly, a user with a Gmail account is more likely to tilt towards using Meet over other video-conferencing apps, simply out of convenience, or one may say, irrationality. 

    If we apply the Indian approach to the present case of Meta tying FM with Facebook, chances are that Meta will probably escape CCI’s scrutiny, specifically with respect to tying, because it does not ‘coerce’ Facebook users to necessarily use FM. Users can use the social media platform without using the classified ads services and are also free to use other classified ads services while using Facebook. This approach ignores the aspect that FM is a service that cannot be used in isolation without having a pre-existing Facebook account. Consumer inertia is a significant factor in this case, considering the enormous user base of Facebook. Additionally, as compared to any other online classified ads services, Meta obviously has access to a variety of personal data of millions of users across the world (‘Big Data’), which gives it a significant competitive advantage. Something that has been consistently also ignored is the annoyance caused to the users who do not want to use the additional services but are unable to disable them. These are factors that must be taken into account by CCI while adjudicating upon tying allegations in the digital market. 

    CONCLUSION AND THE WAY FORWARD

    In evolving digital markets, Big Data raises competitive concerns, when dominant undertakings use it to the detriment of other competitors, by indulging in tying and leveraging. Being a non-price parameter for competition, possession of Big Data by technological giants (‘Big Tech’) puts non-dominant enterprises at a disadvantage. This is where competition regulators are expected to step in. As Big Tech is under stringent scrutiny around the world, remarkably in jurisdictions other than the European Union, it calls for stronger compliance strategies. For more market-friendly effects of antitrust regimes, it is essential to go beyond the imposition of fines. A monetary penalty, no matter how hefty it is, does not act as an effective deterrent for Big Tech as compared to the money that they make every minute of the day. Antitrust watchdogs should go further than that, and ensure the termination of the services or modification of anti-competitive features of such services, in order to protect and promote competition in the market. Considering liberal jurisdictions like the United States are becoming more active in scrutinising the distortion of competition by Big Tech, it is essential for developing economies like India to catch up as well, and not shy away from imposing stringent measures in the interest of consumer welfare. As we anticipate India’s ex-ante framework, one can hope that CCI will take its lessons and adopt a more dynamic approach in the future. 

  • Algorithmic Enforcement and Anti-Competitive Effects: CCI vs. Swiggy and Zomato

    Algorithmic Enforcement and Anti-Competitive Effects: CCI vs. Swiggy and Zomato

    BY VASHMATH POTLURI, THIRD-YEAR STUDENT AT NALSAR, HYDERABAD

    INTRODUCTION

    The food delivery market in India has been one of the most dynamic and volatile markets, witnessing the quick exit of players like Uber Eats and Food Panda, among others, while being dominated by Zomato and Swiggy with a whopping market share of 58% and 42%, respectively. While there are many factors for such dominance, the recent allegations of Price Parity Clauses (“PPCs”) and exclusive agreements by the National Restaurants Association of India (“NRAI”) against both these platforms shed some light on the reasons for such market share. The findings of the Director General (“DG”), as reported by Reuters, indicate that the Competition Commission of India (“CCI”) is proceeding against these platforms under section 3(4)(c) of the Competition Act, 2002 (“Act”) based on the presumption that Swiggy and Zomato operate in a vertical framework as intermediaries distinct from their restaurant partners. However, this article challenges this presumption and argues that Swiggy and Zomato’s ownership of cloud kitchens transforms their relationship with restaurants into one of direct competition. As a result, this paper pushes for a reclassification of this case under Section 3(3)(a) and (b), enabling a shift from a ‘rule of reason’ approach to a per se standard. 

    The article advances this argument in a two-fold manner. First, it will analyze the anti-competitive effects of PPCs and exclusivity agreements, particularly in conjunction with Swiggy and Zomato’s cloud kitchens. Second, it will examine the role of dynamic algorithms in furthering these practices, proposing the introduction of the Algorithmic Facilitation Standard (“AFS”) in the Act, to ensure regulatory scrutiny and transparency in the market in line with the approach of the EU. 

    HORIZONTAL PRICE FIXING AND MARKET ALLOCATION

    The allegations by the NRAI that Swiggy and Zomato operate their cloud kitchens and enter into arrangements such as PPCs and exclusivity agreements throw light on the dominance of these platforms through anti-competitive practices. These practices demonstrate that these platforms are not merely intermediaries with restaurants as downstream partners, but competitors operating simultaneously in both the food preparation and delivery markets. This dual role works to the detriment of independent restaurants. 

    In the MakeMyTrip (“MMT-GO”) case, the CCI assessed the anti-competitive effects of wide Price Parity Clauses (“PPCs”) and exclusivity partnerships in a vertical framework between MakeMyTrip, Goibibo, and OYO with their hotel partners. The CCI found that these agreements restricted hotels from offering lower prices or better terms on competing platforms, creating entry barriers and limiting consumer choice. As a result, the CCI held that these agreements resulted in an Appreciable Adverse Effect on Competition (“AAEC”) — a standard under Section 19(3) of the Act, which examines factors such as foreclosure of competition, barriers to entry, and harm to consumer choice. Relying on these findings, this article argues that the anti-competitive practices of Swiggy and Zomato produce identical effects, such as inflated prices and foreclosure of competition, but in a horizontal framework rather than a vertical one. 

    Applying the findings of the MMT-GO on wide PPCs, the PPCs entered into by Swiggy and Zomato are wide because they suppress competition in the market by mandating that restaurants maintain uniform prices across all channels, including their direct platforms and competing delivery services. This eliminates price differentiation and forces restaurants to inflate prices, depriving consumers of competitive pricing or discounts. These clauses also ensure that Swiggy and Zomato’s cloud kitchens are insulated from price competition, as restaurants cannot undercut them even when operating more cost-effectively. On the other hand, exclusivity agreements further suppress competition by restricting restaurants from listing on competing platforms or offering direct delivery services, creating a “lock-in” effect. This limits consumer access to popular restaurants and forecloses rival platforms from competing effectively. 

    These arrangements unfairly establish the dominance of Swiggy and Zomato’s cloud kitchens by allowing them to leverage vast data generated through their platforms. This data provides critical insights into consumer preferences, including popular cuisines, peak ordering times, delivery locations, and pricing trends. Using this information, Swiggy and Zomato can strategically design their cloud kitchen offerings to align with market demand precisely, bypassing the trial-and-error process faced by independent restaurants. They can quickly identify underserved cuisines or delivery zones and establish cloud kitchens to fill these gaps with minimal risk and cost. This data-driven approach grants their cloud kitchens a significant competitive edge over independent restaurants, which lack access to such comprehensive data and must rely on slower, costlier market research methods.

    The combined effects of PPC, exclusivity agreement, and cloud kitchens on a horizontal level, results in the creation of barriers to entry and foreclosure of competition, causing an AAEC under Section 19(3)(a) to (c). Hence, this article argues that the CCI must re-examine this case under Section 3(3)(a) and (b) through a ‘per se’ approach. Taking inspiration from the EU’s Vertical Block Exemption Regulation (“VBER”), which removed wide PPCs from the regulatory exemption, the CCI could impose cease-and-desist orders and monetary penalties, ensuring a competitive marketplace.

    ALGORITHMIC FACILIATATION STANDARD

    Swiggy and Zomato’s algorithms play a crucial role in enforcing PPCs and exclusivity agreements, amplifying their anti-competitive effects. These platforms use algorithms to monitor pricing across various channels, including restaurants’ direct platforms and competing delivery services, ensuring strict compliance with PPCs. By scanning for pricing discrepancies, the algorithms flag instances where restaurants offer lower prices on alternative channels. Non-compliant restaurants face automated penalties, such as reduced visibility in search results or exclusion from promotional campaigns, discouraging price competition. Similarly, these algorithms enforce exclusivity agreements by tracking restaurants’ activities on competing platforms. Exclusive partners receive preferential treatment, such as enhanced visibility, while restaurants breaching exclusivity face reduced exposure, limiting their ability to attract orders.

    Operating as a “black box,” these algorithms lack transparency, leaving restaurants unaware of the reasons for penalties or visibility changes. This creates a unilateral power dynamic that disproportionately favours Swiggy and Zomato, making it difficult for restaurants to challenge or adapt to platform policies.  In this context, the article proposes that the AFS identify the role of such algorithms and bring them under regulatory scrutiny. Under this, the CCI would be required to follow a two-step inquiry-

    MANDATORY ALGORITHMIC DISCLOSURES: 

    The first step in the proposed AFS is to mandate disclosures by Swiggy and Zomato regarding their algorithmic decision-making. These platforms must provide information about the design, operation, and structure of their algorithms, specifically in relation to penalizing or incentivizing restaurants. Such disclosures should be made to the DG under Section 36(4)(b) of the Act during the investigation stage. This requirement mirrors the EU Platform to business regulations 2019/1150, which mandates transparency in ranking criteria, ensuring that platforms do not manipulate search results based on monetary compensation or preferential treatment.

    EFFECTS BASED OUTCOME ANALYSIS:

    The second step shifts the scrutiny from intent to effects, applying an effects-based outcome analysis to assess whether these algorithms control prices, foreclose competition, or limit consumer choice by restricting visibility or promotions. If these practices result in an AAEC, the burden of disproving their anti-competitive impact should shift onto Swiggy and Zomato, allowing the CCI to order a rollback of such algorithms, if necessary. This aligns with the EU Court of Justice’s ruling in the Google Shopping case which found algorithmic self-preferencing anti-competitive, and rejected short-term efficiency arguments as justifications for long-term market harm. Likewise, under Section 19(3)(d) to (f) of the Act, any efficiency claims by Swiggy and Zomato should be dismissed if they come at the expense of competition.

    WAY FORWARD

    This article proposes that the AFS could be incorporated into the Act in two ways. First, under the ‘Hub-and-Spoke’ model, introduced through the Competition Amendment Act, 2023, wherein, a central entity (hub) can facilitate anti-competitive coordination among independent entities (spokes), even if they do not explicitly collude with each other. In this context, Swiggy and Zomato function as hubs, using algorithms to impose price parity and exclusivity conditions on restaurants (spokes), effectively orchestrating market behavior without direct collusion between restaurants. Second, the liability of Swiggy and Zomato could be invoked under Section 2(b), as part of tacit collusion through algorithmic enforcement. Since intent is irrelevant under ‘per se’ approach, the AFS would impute intent constructively, aligning with the Competition Law Review Committee 2019’s recommendation of a “guilty until proven otherwise” standard in cases involving algorithmic anti-competitive practices.

    CONCLUSION

    While the case is still pending before the CCI, this article has established that Swiggy and Zomato’s anti-competitive practices produce effects similar to horizontal price fixing and market allocation under Section 3(3)(a) & (b). A reclassification accordingly would enable for a shift to ‘per se’ from ‘rule of reason’, under which the entire burden to prove the anti-competitive effects rests on the complainant, and in such situations where these practices are furthered by opaque algorithms, it becomes difficult to hold Swiggy and Zomato responsible for their actions. Thus, under the AFS, the mere presence of algorithms and assessment of their prima-facie effects after due disclosure to the CCI, the burden to disprove AAEC would be heavy on Swiggy and Zomato. This reclassification would represent a significant jurisprudential shift, setting a precedent for addressing algorithm-driven anti-competitive practices and establishing a framework for future actions against quick commerce platforms.

  • Examining the Flaws in SEBI’s Proposed AI & ML Regulations

    Examining the Flaws in SEBI’s Proposed AI & ML Regulations

    BY SACHIN DUBEY AND AJITESH SRIVASTAVA, THIRD-YEAR STUDENTS AT NLU, ODISHA AND LLOYD LAW COLLEGE

    INTRODUCTION

    Artificial Intelligence (‘AI’) has become an integral part of our daily lives, influencing everything from smart home technology to cutting-edge medical diagnostics. However, it’s most profound influence is perhaps in transforming the landscape of securities market. AI has advanced the efficiency of investor services and compliance operations. This integration empowers stakeholders to make well-informed decisions, playing a pivotal role in market analysis, stock selection, investment planning, and portfolio management for their chosen securities.

    However, despite the advantages, AI poses risks such as algorithmic bias from biased data, lack of transparency in models, cybersecurity threats, and ethical concerns like job displacement and misuse, highlighting the need for strong regulatory oversight. Therefore, Securities and Exchange Board of India (‘SEBI’) vide consultation paper dated 13thNovember, 2024 proposed amendments holding regulated entities (‘REs’) accountable for the use of AI and machine learning (‘ML’) tools.  

    These amendments enable SEBI to take action in the event of any shortcomings in the use of AI/ML systems. SEBI emphasises that these entities are required to safeguard data privacy, be accountable for actions derived from AI outputs, and fulfil their fiduciary responsibility towards investor data, while ensuring compliance with applicable laws.

    In this article, the author emphasises the necessity of the proposed amendments while simultaneously highlighting their potential drawbacks. 

    NEED OF THE PROPOSED AMENDMENTS

    The need for proposing amendments holding REs accountable for AI/ML usage has arisen due to various risks associated with its usage. 

    AI relies heavily on customer inputs and datasets fed into them for arriving at its output. The problem is that humans have found it very difficult to understand or explain how AI arrives at its output. This is widely referred to as “black box problem”. In designing machine learning algorithms, programmers set the goals the algorithm needs to achieve but do not prescribe the exact steps it should follow to solve the problem. Instead, the algorithm creates its own model by learning dynamically from the given data, analysing inputs, and integrating new information to address the problem. This opacity surrounding explainibility of AI outputs raises concerns about accountability for AI-generated outcomes within the legal field.

    Further, if just one element in a dataset changes, it can cause the AI to learn and process information differently, potentially leading to outcomes that deviate from the intended use case. Data may contain inherent biases that reinforce flawed decision-making or include inaccuracies that lead the algorithm to underestimate the probability of rare yet significant events. This may lead to jeopardising the interests of customers and promoting discriminatory user biases. 

    Additionally, relying on large datasets for AI functionality poses considerable risks to privacy and confidentiality. AI models may sometimes be trained on datasets containing customers’ private information or insider data. In such situations, it becomes crucial to establish accountability for breaches of privacy and confidentiality. 

    SHORTCOMINGS

    SEBI’s proposal to amend regulations and assign responsibility for the use of AI and machine learning by REs is well-intentioned. However, it could create challenges for both regulated entities and industry players, potentially slowing down the adoption of AI and stifling innovation.

    a. Firstly, SEBI’s proposal to assign responsibility for AI usage adopts a uniform, one-size-fits-all regulatory approach, which may ultimately hinder technological innovation. Effective AI regulation requires greater flexibility, favouring a risk-based framework. This approach classifies AI systems based on their risk levels and applies tailored regulatory measures according to the associated risks. A notable example is the European Union’s AI Act which adopts a proportionate, risk-based approach to AI regulation. This framework introduces a graduated system of requirements and obligations based on the level of risk an AI system poses to health, safety, and fundamental rights. The Act classifies risks into four distinct categories- unacceptable risks, high risks, limited risks and minimal risks. As per the classification, certain AI practices which come under the category of unacceptable risks are completely prohibited while others have been allowed to continue with obligations imposed upon them to ensure transparency.  

    b. Secondly, while SEBI’s regulatory oversight of AI usage by REs is crucial for protecting investor interests, it is equally important to establish an internal management body to oversee the adoption and implementation of AI within these entities. SEBI could draw insights from the International Organization of Securities Commission’s (‘IOSCO’) final report on AI and machine learning in market intermediaries and asset management. The report recommends that regulated entities designate senior management to oversee AI/ML development, deployment, monitoring, and controls. It also advocates for a documented governance framework with clear accountability and assigning a qualified senior individual or team to approve initial deployments and major updates, potentially aligning this role with existing technology or data oversight.

    c. Thirdly, SEBI has entirely placed the responsibility for AI and machine learning usage on REs, neglecting to define the accountability of external stakeholders or third-party providers. REs significantly rely on third parties for AI/ML technologies to ensure smooth operations. Hence, it is vital to clearly outline the responsibilities of these third parties within the AI value chain. 

    d. Fourthly, the Asia Securities Industry & Financial Markets Association (‘ASIFMA’) raised a concern that financial institutions should not be held responsible for client decisions based on AI-generated outputs. It contends that it would be unjustified to hold institutions liable when an AI tool provides precise information, but the client subsequently makes an independent decision. This viewpoint goes against SEBI’s proposed amendments which seemingly endorses broader institutional liability.  

    e. Lastly, SEBI’s proposed amendments and existing regulations remain silent on the standards or requirements for the data sets (input data) utilized by AI/ML systems to carry out their functions. While the amendments imply that REs must ensure AI models are trained using data sets that either do not require consent (e.g., publicly available data) or have obtained appropriate consent, particularly under the Digital Personal Data Protection Act, 2023 (DPDPA), SEBI could have more explicitly define the standards for high-quality data sets suitable for AI/ML functionality particularly crucial when the data protection rules have not seen the light of the day.

    CONCLUSION

    While it is commendable that SEBI, recognizing the growing use of AI/ML tools in the financial sector, proposed amendments to hold REs accountable for their usage, it should have given due consideration to the factors mentioned above. Because it is vital to ensure that any policy introduced is crafted carefully in a way that does not, in any way, discourage innovation and growth in the emerging fields of AI and ML technology. 

  • Extra Cover: The Case for Regulating Sports Agents in Cricket

    Extra Cover: The Case for Regulating Sports Agents in Cricket

    BY SIMONE AVINASH VAIDYA, SECOND-YEAR STUDENT AT MNLU, MUMBAI

    Introduction

    The past two decades have witnessed an unprecedented boom in the commercialisation and commodification of Indian sport. An athlete’s horizon is no longer limited to the playing field, with production sets, brand shoots and promotional appearances routinely featuring as aspects of their professional obligations. It is common for A-list athletes to engage the services of Sports Agents or Agencies to manage their commercial ventures, and it is becoming increasingly prominent for upcoming sportspersons to sign with agents for this purpose. This practice has especially permeated the cricket pitch. This agreement comprises endorsements, team affiliations, compliance with regulatory guidelines and other brand ventures, with the agent essentially becoming the athlete’s manager.

    Indian sports are largely unregulated by the State in the absence of a comprehensive sports law and agency contracts in cricket are especially ad-hoc in their functioning. While other jurisdictions or authorities generally have codified laws or regulations pertaining to sports agents, India and the Board of Control for Cricket in India (‘BCCI’) do not prescribe comprehensive or even adequate guidelines for the same. Documentation and registration are the first steps in such regulation, and the BCCI has yet to implement even an accreditation system.

    This article seeks to establish the case for the regulation of agency contracts in cricket. While the rationale is applicable to all sports in India, the researcher focuses on the cricket field, shedding light on the virtual free hand given to player agents and managers. This article is structured along the same lines as Aditya Sondhi’s 2010 paper arguing the need for cricket legislation.

    Prognosis

    In the context of the dearth of laws and regulations for such agency relations, the Indian Contract Act, 1872 (‘ICA’) serves as the governing statute. The enforceability of sports agency contracts flows from Chapters I, II and X of the ICA. The foundation of any sports agency contract is the agency-principal relationship, which is governed by Chapter X of the ICA, starting with Section 182. The multi-billion dollar valuation of the industry amplifies the high stakes as cricket agency contracts operate in a league of their own.  The ICA is a general law failing to meet the unique needs of these situations. It is insufficient to address every aspect of cricket agency contracts, and there are multiple reasons for the same.

    Firstly, the fervour around cricket in India is unparalleled, heightening financial and emotional stakes. Given this massive commercial landscape, sports agents wield significant power in managing business deals. With such high stakes, the potential for conflicts of interest becomes a serious concern. Agents often negotiate across multiple interests, including franchises, sponsors, and the athlete’s commercial rights, which may not always align with the player’s best interests. Cricketer Kamran Khan’s story garnered media attention, with reports of his agent demanding 25% of his IPL contract money. This was not the only instance of such exploitative practices coming to light- Zaheer Khan’s legal dispute with Percept D’Markr, a talent management agency, was decided by the Supreme Court in 2006. It was held that the agency’s Right of First Refusal clause was void on the grounds of restraint of trade, under Section 27 of the ICA.

    Similarly, there is a substantial risk of loss and hardship caused due to category locking. This refers to the practice of restricting an athlete’s ability to endorse products from competitors of their existing sponsors. While this practice is common in sports contracts, it can often lead to an unfair restriction on the athlete’s freedom to choose endorsements. This risk is prevalent in the light of an agent’s often unbridled authority to negotiate and enter into brand deals on behalf of the athlete.

    Secondly, the athlete’s personality rights stand the risk of being misused. Personality rights refer to the right of a person to control the commercial use of their identity, including their name, image, likeness, and other personal attributes In India, while there is no dedicated legislation governing personality rights, athletes increasingly face challenges in protecting these rights from unauthorized commercial exploitation. Sports agencies have substantial power in this regard since they facilitate such agreements and transactions.

    Thirdly, the Mudgal Committee, constituted by the Supreme Court after the 2013 IPL Fixing Scandal, acknowledged the nefarious role played by some agents in its 2014 Report. Although the Report didn’t comprise an in-depth investigation of the same, it addressed the unethical conduct of these agents, and how they often serve as the bridge between the athlete and the bookie. This concern was also reiterated in the Lodha Committee Report, wherein the unscrupulous backgrounds of player agents were brought into question. The agent shares a fiduciary relationship with the athlete and is in a position of power while influencing them. This poses the risk of athletes being pressured by agents to engage in illicit and illegal activities, with younger or less experienced sportspersons being especially vulnerable to such influences.

    Furthermore, the culture of nepotism, non-accountability and excessive discretion in the cricket industry makes athletes reluctant to approach the courts for the redressal of their rights. The observation of favouritism at multiple levels of the cricket set-up also exacerbates the disinclination of athletes to speak up against potentially powerful sports agencies. In light of these varied considerations and interwoven complexities, it is evident that unregulated sports agencies are likely to become the malaise of the commercial world of cricket. The ICA is insufficient to meet the needs of such a uniquely dynamic landscape, and there is a pressing need to introduce- legislation for sports law at large, and rules for agency contracts in particular.

    Global Best Practices- France and the US

    France and the United States have enacted statutory regulations for sports agents, recognizing the need to effectively respond to the various challenges and exploitative practices in the industry.

    France has enacted the Code du Sport for this purpose. Sports agents in France must be licensed by the relevant sports federation, such as the Fédération Française de Football (‘FFF’) for football agents. To obtain a license, agents must meet educational and professional criteria, pass an exam, and adhere to ethical standards set by the federations. One of the key features of French sports law is its focus on transparency and athlete protection. Agents are required to have a written contract with the athlete, which must clearly outline their duties and the financial terms. The Code du Sport also imposes limits on the commissions agents can charge, typically capping them at a percentage of the athlete’s earnings. This prevents exploitation and ensures that athletes are not overcharged for agent services. Additionally, French law includes strict provisions on conflicts of interest and agent conduct. Agents cannot represent conflicting parties in the same deal, such as both a player and a club. Violations of these regulations can result in penalties, including fines, suspension, or revocation of an agent’s license.

    In the US, the Sports Agent Responsibility and Trust Act of 2004 (‘SPARTA’) and the Uniform Athlete Agents Act of 2015 (‘UAAA’) are in force to protect the duties of student-athletes signing with sports agents, in addition to the various state-specific laws. SPARTA delineates the duties of the agent, revolving around truthfulness and transparency. This creates an additional layer of obligations for sports agents, with unfair or deceptive acts being treated as violations of the Federal Trade Commission Act, subject to civil penalties. The UAAA in turn, is a model state law that provides for standardization, registration and certification of agents representing student-athletes. It also mandates express written contracts which include specific clauses, as stipulated under S. 10. Violation of the UAAA results in civil, as well as criminal penalties. However, it is to be noted that the SPARTA and UAAA are solely applicable to student-athletes, thereby excluding other professionals from its purview. There is no doubt that the SPARTA and UAAA suffer from several deficiencies, including their limited applicability. However, it cannot be said that this weakens the case for the regulation of cricket agents in India, which is negligible at present- the flaws in the application of a certain law cannot overshadow the need for regulation in another jurisdiction. 

    The Way Forward and the BCCI’s Prerogative

    Since the need for separate regulation of cricket agents has been clearly established, it is important to devise an effective and sound implementation system. Such a structure must account for accreditation, conflict of interest complications, transparency and ethical conduct. Currently, the BCCI is recognised as a private body registered under the Tamil Nadu Societies Registration Act. In BCCI v. Cricket Association of Bihar, the Supreme Court asserted that while the BCCI might be a private body, it discharges public functions with the tacit recognition of the State. The Court also observed that it possesses “complete sway over the game of cricket”, making it incumbent upon the BCCI to operate in the interests of justice and fair play. Therefore, the onus of introducing such regulations is on the Board itself due to its monopoly status in the field and Court-imposed responsibility of transparency and probity. These rules must be in the best interests of cricketers and must include several core regulatory measures. 

    Firstly, agents should be accredited as per the Lodha Report. It would not be unsuitable to prescribe certain qualifications for such agents and require them to pass licensing examinations. Though the BCCI announced an agent accreditation scheme in 2014 to regulate agents in cricket, there is little evidence of its implementation. According to news reports, the BCCI has failed to enforce the scheme effectively, and there is no information available about its actual enforcement, leaving cricketers vulnerable to unregulated agents. A major concern in the sports agent industry is the risk of conflicts of interest. Rules must explicitly prohibit agents from representing multiple parties with conflicting interests in the same transaction. A mandatory code of ethics should govern all accredited sports agents.

    Secondly, incorporating the American and French mandates of express written contracts is also a viable solution to ensure standardisation. The role played by agents in Indian cricket is vastly different from that of American or French agents since negotiations with clubs or franchises generally do not feature as a part of the agent’s functions in Indian cricket. Such global practices are effective when they are adapted to Indian standards. Agency contracts should clearly outline the duties, services, duration and financial terms, including commission rates. This provision would protect both athletes and agents by providing a legal framework for disputes. 

    Thirdly, all financial dealings between agents and athletes should be documented and subject to regular audits by an independent authority such as a Committee constituted by the BCCI for this purpose. A European Commission Report on Sports Agents identified the pressing need to ensure transparency in all financial flows between athletes and their agents. The link between financial crimes such as money laundering, and sports leagues has also been well-established, therefore exacerbating the threat of mismanagement and unscrupulous conduct. External auditing is a suitable mechanism to deter such activities, and this has been pinpointed in a 2021 study that incorporated a law and economics approach. 

    By making such agreements compulsory, athletes, especially young or inexperienced ones, will have a clear understanding of their relationships with agents and avoid exploitation or ambiguous commitments. To ensure compliance, the law must incorporate strict penalties for violations by sports agents, including fines, suspension, and license revocation. The BCCI must also constitute a forum for the investigation and redressal of such complaints and disputes. Encouraging Alternate Dispute Resolution mechanisms is a more athlete-friendly measure, considering the fiduciary relationship between the principal and agent, as well as the surrounding pressures of the cricket world. 

    Conclusion

    The current reliance on the ICA is insufficient to address the complex and high-stakes nature of agency contracts in cricket. As sports agents wield significant power in managing an athlete’s endorsements, sponsorships, and other commercial ventures, the absence of regulatory safeguards leaves players vulnerable to exploitation, unfair contractual terms, and conflicts of interest. 

    Through proactive regulation, it is possible to safeguard the interests of its cricketers, promote ethical conduct among agents, and elevate the professionalism of sports management. This, in turn, will foster a fairer, more accountable system that protects the rights and careers of athletes, ultimately ensuring that the business of cricket aligns with the values of integrity and fairness.

  • Centralised Fee Collection Mechanism: Sebi’s Move To Shield Investors

    Centralised Fee Collection Mechanism: Sebi’s Move To Shield Investors

    BY SUKRITI GUPTA, THIRD-YEAR STUDENT AT NLU, ODISHA

    INTRODUCTION

    The Securities and Exchange Board of India (“SEBI”), has recorded around 33,00 registered entities according to its recognised intermediaries data. Amongst these, SEBI has close to 955 registered Investment Advisors (“IA”) and 1381 Research Analysts (“RA”) as of September 2024. 

    In common parlance, an IA is an entity that provides investment advice to the investors and an unregistered IA is simply the one who provides such advisory without having registration from SEBI. Interestingly, around 35% of IA are unregistered in India which entails a violation of the SEBI (Investment Advisers) (Amendment) Regulations, 2020.

    Additionally, RA also plays a pivotal role in preparing research reports by conducting investigations, research, and evaluation of financial assets. They provide advisory to investors to assist them in making decisions regarding investing, buying, or selling off financial securities, and they are administered by the Securities and Exchange Board of India (Research Analysts) Regulations, 2014.

    It was observed by SEBI through several accusations and grievances reported by investors that there is an incremental rise in the misconduct of unregistered analysts who falsely portray themselves as registered IA and RA to facilitate investment services. These entities exploit investors by giving them fake and unrealistic securities advisories to encourage investments. 

    Thus, pursuant to this, SEBI issued a circular dated 13th September 2024 to set in motion a uniform system for fee collection by IA and RA, known as the “Centralised Fee Collection Mechanism”. This initiative, co-drafted by BSE Limited followed rigorous consultations from common people and feedback from several stakeholders.

    The author in this post delves into the significance and objectives of SEBI’s new mechanism by highlighting its broader implications. Furthermore, the author critically inspects the potential concerns and queries related to this initiative. 

    HOW DOES THE CENTRALISED FEE MECHANISM WORK?

    Under this mechanism, SEBI has established a supervisory platform for IA/RA to offer a uniform and centralised fee collection process. It provides a portal through which the investors can pay the fees to registered IA/RA which will be overseen by a recognised Administration and Supervisory Body (“ASB”). Every transaction will be initiated by assigning a virtual account number, with the availability of various modes of payment like UPI, net banking, NEFT etc. For using this facility, there is likely to be a system where IA/RA shall enroll themselves in this platform and provide fee-related details for their clients and the fee collected will then be transferred to these registered entities. It is made optional for both investors and IA and RA. 

    It aims to increase the participation of investors in the securities market by creating a transparent and riskless payment environment to curb the activities of unregistered IA/RA from taking dominance of investors under the guise of regulatory compliance.

    SAFEGUARDING INVESTORS INTERESTS: NEED FOR A CENTRALISED FEE COLLECTION MECHANISM

    By introducing a Centralised Fee Collection Mechanism, SEBI aims to mitigate all possible misleading and fraudulent activities of the unregistered IA/RA. To ensure that the investor’s money is in safe hands, it is imperative to save them from becoming a victim of illegitimate entities. Since many investors may not know how to inspect whether an entity is a registered one or not, therefore, it is the onus of SEBI, being a market regulator, to guard the interests of investors by introducing such an appropriate mechanism. 

    In the author’s view, by providing a centralised platform for payments, SEBI might ensure that the investor’s personal information and data remain fully confidential and safe since there will be a very minute chance of data leakage due to all the services being provided in one designated sphere. Secondly, through various digital payment modes being facilitated, there remains a minimal chance of disruption in the payment mechanism, ensuring a seamless and steady payment. It will also keep a check on the fees charged by these registered entities concerning  SEBI’s guidelines regarding the fees charged by IA, thereby helping to reduce exorbitant charges. Additionally, investors will not be charged any platform fee thus reducing unnecessary expenditure.

    Also, by operationalisation of this centralised payment system, investors will easily identify which entity is a registered entity. This will in turn be beneficial to IA and RA because they will get due recognition as they will be distinguished from unregistered ones. This will help them to attract genuine clients seeking their assistance. Furthermore, it will also help IA/RA who do not have any automated platforms of their own, thereby saving time and reducing burden

    CRITICAL EXAMINATION OF THE MECHANISM

    To delve deeper into the implications and analysis of the Centralised Fee Collection Mechanism, it is essential to ponder on three major points. Firstly, for what purpose the mechanism is kept optional, Secondly, whether such an initiative enhance investor’s vigilance when hailing services from unregistered entities? Lastly, how will this mechanism ensure the security and privacy of investor’s data?

    Discussing the first point, in the author’s view, it is essential to note that keeping the mechanism optional for users to pay and IA/RA to collect fees, is providing a flexible choice by giving them time to adapt and integrate into the new framework of the mechanism. By not mandating its use, SEBI is trying to ensure that they don’t feel that it is being involuntarily imposed upon them. Rather, they have the discretion to avail it. Additionally, potential shortcomings, challenges and doubts can also be identified for allowing further incorporation of necessary amendments and improvements based on the experience and feedback of the users and entities. 

    Therefore, the main idea behind keeping it optional is to grab the attention and trust of the investors and entities in this platform and make them familiar with the procedures for gradual adoption. This flexibility will enable a smoother transition and necessary adjustments. According to the author, SEBI might eventually make it compulsory in the near future. 

    Gauging on the second point, while this mechanism has significant potential to reduce the number of unregistered entities and heighten investor’s attentiveness, it is crucial to recognise that not all users may be aware of the reforms and regulations brought by the regulator. Thus, according to the author, to attain the full purpose of the mechanism, SEBI needs to prioritise its promotion through advertisements, webinars, awareness activities etc., via authorised channels. If the targeted audience becomes aware of such a facility, the likelihood of success of such an initiative would increase, eventually serving a larger segment of the investing public.

    One concern of IA/RA regarding this mechanism could be the reluctance of investors to provide their personal information while paying fees. Many of them may not be comfortable sharing their details on an online platform like such. To cater to this, SEBI must ensure transparency by rolling out certain procedures for safeguarding investor’s privacy and trust. One approach could be to give a unique identification number to each investor for aid in digital enlisting. E-receipts, payment tracking and reconciliation could also be enabled. SEBI can also launch a portal alongside, which will enable the investors to report any issue encountered by them during transactions. It may operate like a customer care center to deal with and sort out the grievances faced by them. 

    While it appears that this mechanism is viable to ensure adequate safety and privacy of the investors, yet, there is a need for vigorous regulation to fully reassure the investors of their privacy and trust in IA/RA. 

    CONCLUSION

    SEBI’s introduction of Centralised Fee Collection Mechanism is a double-edged sword, safeguarding both investors and entities. By offering a compliant and centralised system for fee collection, it is not only protecting investors from deceitful and unauthorised entities but also fortifying the credibility of registered IA and RA. It also marks a noteworthy step towards establishing a transparent, viable and secured space in security’s advisory sphere. However, for initiatives like this to become successful, it is crucial to focus on its continued promotion, awareness, investor education and robust privacy safeguard standards to entrust confidence in the platform. Eventually, this mechanism aims to build a safer, systematic and coherent environment that benefits both the investors and advisory entities alike. Let us see whether it will be welcomed or feared.  

  • Assessing the Deal Value Threshold: Shortcomings and the Way Forward

    Assessing the Deal Value Threshold: Shortcomings and the Way Forward

    BY DHRUV MEHTA, FIFTH-YEAR STUDENT AT JINDAL GLOBAL LAW SCHOOL, SONIPAT

    introduction

    Recently, the Parliament passed the Competition Amendment Act, 2023, which makes substantial amendments to the Competition Act, 2002 (‘Act‘). Amongst the plethora of amendments, the most prominent amendment is the introduction of the deal value threshold (‘DVT‘). DVT is the additional threshold that requires notification (in the absence of any exemption) of a merger or acquisition with a deal value threshold of INR 2,000 crores (USD 0.24 billion) where either of the party to the deal has ‘substantial business operations in India’ (‘SBOI‘). Through the introduction of the Competition Commission of India (Combinations) Regulations, 2023 (‘Draft Regulations‘), the Competition Commission of India (‘CCI‘) has brought more clarity with respect to the ‘transaction value’ and ‘substantial business operations’ under the DVT framework. Through this blog post, the author examines the limitations in the CCI’s interpretation of the DVT and offers recommendations to enhance its clarity and effectiveness.

    Once the Amendment Act was passed, the onus was now on the CCI to quickly define what constitutes ‘value of transaction’ and ‘substantial business operations’. The CCI has followed the footsteps of Germany and Austria by rightly defining what exactly constitutes ‘value of transaction’ and ‘substantial business operations’. However, there are a few shortcomings as to how transaction value has been interpreted and defined by the CCI.

    Transaction Value: Shortcomings and Recommendations

    a. Incidental Arrangements

    Regulation 4(1)(c) of the Draft Regulations requires the value of a consideration to include ‘incidental arrangements’ for calculating DVT. The definition of ‘incidental arrangement’ is confusing and excessively broad. Examining whether a transaction is notifiable would be difficult if an incidental arrangement is accepted in its current form as it may encompass unconnected transactions that weren’t anticipated by the parties when entering into the main transaction.

    To ensure certainty for parties involved in a transaction and to reduce ambiguity in applying the DVT, the CCI should limit ‘incidental arrangements’ to those arrangements foreseen by the parties when the transaction was initiated. Such arrangements should also be explicitly documented in the transaction records. Furthermore, under Regulations 9(4) and 9(5) respectively, read along with Regulation 4(1)(b), the CCI has the power to review interconnected steps of a single transaction when the transaction meets the test of interconnection. In the past, the CCI has exercised its powers by reviewing interconnected transactions in proceedings against the Canada Pension Plan Investment Board and ReNew Power Limited under Section 43A of the Act.  

    This makes the proposed provision unnecessary if ‘incidental arrangements’ are linked to the transaction because the CCI already has the power to look at subsequent transactions that are interconnected. It is recommended that given CCI’s ambit to assess interconnected transactions, it should reconsider the need for incorporating ‘incidental arrangements’  under the value of a transaction. Furthermore, in the event that the CCI decides to retain the said clause, ‘incidental arrangements’ should only include, transactions foreseen by the parties which are included in the transaction documents during execution.

    b. Uncertainty in the Valuation of Non-Compete Clauses

    The draft regulations require that the value of any non-compete clauses be included while calculating the value of a transaction for DVT. There are a few shortcomings with the said requirement.

    Firstly, it is often difficult to attribute value to non-compete clauses. The value of such non-compete clauses is often reflected in the purchase price listed in the transaction documents. When a non-compete clause is not listed in the transaction document, it is often challenging to assign an exact value to such a clause, and assigning an exact value would compromise the DVT’s inherent predictability and clarity. This would be against the ICN Recommended Practices for Merger Notification and Review Procedures, which highlight how important it is for merger control systems to have clear, transparent rules- especially in light of the growing number of deals happening across several jurisdictions.

    Secondly, the value of the transaction is the value that is attributed to the non-compete provision. If the CCI wants to attribute a separate and distinct value to a non-compete agreement that is separate from the value of a transaction, it should not speculate on assigning the value to the non-compete agreement. Rather, when the board of directors of the acquirer or the seller gives a specific value to the non-compete agreement at the time of the transaction, the CCI should also value the non-compete at the same specific value as given by the board of directors.

    It is recommended that the CCI amend the Draft Regulations to include the value of non-compete clauses and agreements as part of DVT as listed in the transaction documents. It should also be made clear in the Draft Regulations that the CCI can only assign a value to a non-compete agreement if it has been given careful thought and approval by the boards of directors of the target company and the acquiring company.

    c. Valuation of Options and Securities

    According to the Draft Regulations, the whole value of the options and securities to be acquired, along with the assumption that such options would be exercised to the fullest extent possible, must be included in the consideration for the DVT for a transaction.

    It is observed that by including the whole value of options, DVT could be breached or relatively small transactions could also be flagged. Moreover, including the full value of options that could potentially be exercised may lead to an overstatement or understatement of their value, as the price at the time of exercise could differ from the price when the option is initially granted. In the USA, the Hart-Scott-Rodino (‘HSR‘) rules state that valuation reports presented to the board of directors would be used as a point of reference for determining the value of a consideration when the same value is unknown but capable of being estimated. The CCI could adopt the practice as stated by the HSR rules, where it could consider the value of an option not on the basis of assumption but instead based on valuation reports presented to the board of directors.

    In line with the stance in other countries and the CCI’s own decisional practice, it is advised that the whole value of shares received upon exercising an option be considered only if and when the option is exercised. Further, to eliminate any doubt regarding the value of the options, the CCI could only take into account the entire value of the options if they are exercised at the per-share price paid to shareholders (perhaps as a way to assign a portion of the transaction value to particular persons).

    Substantial Business Operations: Shortcomings and Recommedations

    Under the Draft Regulations, SBOI is established if, within the 12 months preceding the transaction, the business demonstrates that 10% or more of either (a) its global user/subscriber/customer/visitor base, (b) global gross merchandise value, or (c) global revenue from all goods and services in the prior financial year, is attributable to India. The author welcomes the CCI’s target-only approach for judging local nexus. However, to ensure that transactions having a limited nexus to the Indian markets are adequately filtered out, the CCI needs to make a few amendments to the SBOI framework in India.

    • Redefining ‘Users, Subscribers, Customers, and Visitors’

    Considering ‘every download’ as a ‘user’ would be an overstatement and therefore the threshold of ‘users, subscribers, customers, and visitors’ could lead to double counting as the said requirement is extremely expansive. For a single product business, such as a social networking website, there is a possibility to have a different number of subscribers than users or visitors, and these subscribers may not be active users or visitors. Thus, such ‘visitors’ might not contribute towards the economic value of the target enterprise and should be discounted from the threshold.

    Furthermore, the CCI could have taken inspiration from Germany and Austria who have provided adequate guidance on how to compute the user threshold for digital markets. The Digital Markets Act of the EU also includes clear definitions for terms such as ‘active end users’ and ‘active business users‘ tailored to various products and services such as online intermediation services, search engines, social networking platforms, video sharing services, and more. The measurement of such users, subscribers, customers, and visitors should be carried out according to industry standards as providing an exhaustive list is nearly impossible.

    The CCI through a guidance note could narrow down the ambit of ‘users, subscribers, customers, and visitors’ to that of ‘monthly active users’, ‘unique visitors’ and ‘daily active users’ in the digital markets for assessing SBOI as done by German and Austrian Competition regulators. The CCI could further bring more clarity to its implementation of DVT by referring to the rulings of Meta’s Acquisition of Kustomer and Meta’s acquisition of GIPHY.

    Under the ambit of ‘users’ the CCI could consider both direct and indirect users. Taking inspiration from the aforementioned cases, the CCI could define direct users as those who were paying for the product as well as who are licensed customers. Indirect users would be considered as those who accessed the application, for example, GIPHY library through third-party mediums/applications such as Facebook, Instagram, Twitter, and Snapchat. Moreover, it is important to highlight that the CCI ought to establish distinct standards for evaluating activities across various sectors, just as the German and Austrian guidelines on transaction value threshold do.

    Thus, the author suggests that the criteria of ‘users, subscribers, customers, and visitors’ be replaced by ‘active users which consists of daily, monthly, yearly, direct and indirect users, and unique visitors’. Further, as specific definitions are provided in the Digital Markets Act for ‘active business users’ and ‘active end users’ the CCI could provide guidance for the same across various sectors.

    Conclusion

    The CCI is seen to be taking some major strides in regulating competition in new-age deals within the digital sphere. Taking inspiration from Germany and Austria, the Competition Act was amended to introduce the deal value threshold, which effectively provides the CCI the jurisdiction to assess those digital mergers with little or no assets or revenue. The CCI has tried its best to bring more clarity with regard to the interpretation of transaction value and substantial business operations under the DVT framework. However, it remains to be seen as to how the practical implementation of DVT would be undertaken by the CCI. As highlighted, under the ‘substantial business operations’ prong, the CCI should bring more clarity by clearly redefining ‘users, subscribers, customers, and visitors’.  Towards the final step, the CCI also needs to streamline its approach to reviewing interconnected transactions and the valuation of non-compete clauses.

  • The Legal Conundrum: Is A New Mandatory Offer Possible During An Existing One? – II

    The Legal Conundrum: Is A New Mandatory Offer Possible During An Existing One? – II

    BY TANMAY DONERIA, FOURTH YEAR STUDENT AT RGNUL, PATIALA

    This article is published in two parts, this is the Part II of the article.

    Having discussed the key provisions under the Takeover Regulations and the conundrum arising therefrom, the following part delves into the interplay of Regulation 3, Regulation 20 and Regulation 26 of the Takeover Regulations while exploring the possible situations that might arise during such a transaction and suggest recourses available to the third party.

    II. Possible situations arising out of the interplay between regulation 20 and 26. 

    As highlighted earlier, we have two possible situations to examine with respect to the issue at hand. Firstly, when the conversion occurs during the period of 15 days and secondly, when the conversion occurs after the period of 15 days but before the completion of the offer period. Let us analyse these two situations in detail.

    –       When the Conversion Occurs During the Period of 15 Days i.e., 12.10.2024

    We shall assume a situation where the conversion of securities held by XYZ Ltd. occurred on 12.10.2024 i.e., during the 15 days provided for competing offers. If we were to undertake a hyper-technical interpretation of Regulation 20(5), we find that it only creates a bar on the announcement of an open offer after the expiry of 15 days provided for competing offers till the completion of the offer period. It does not take into account a situation wherein the obligation to make an open offer arises during the abovementioned 15 days period. But because the intent behind the provision is to prevent overlapping or simultaneous offers, we find that even in situations where the obligation to make an open offer arises during the 15 day period this restriction would be applicable. Hence, we are arriving at the same question, what should the third party do in such a scenario?

    At this juncture, it is important to appreciate the definition of ‘convertible securities’ under Regulation 2(1)(f) of the Takeover Regulations, which provides that the conversion may occur “with or without the option of the holder”. This is extremely relevant to understand as it will help us in determining whether the third party has breached the threshold under Regulation 3(1) willingly or not. This would further result in two different situations i.e., when the conversion happens without the option of the holder (compulsory conversion) and when the conversion happens with the option of the holder (optional conversion). 

    –       Compulsory Conversion

    • Compulsory conversion may occur in the case of mandatory convertible bonds, compulsorily convertible debentures (‘CCDs’), or preference shares (‘CCPS’). These types of securities get converted at a predetermined time without the option of the holder of such securities. This would mean that the third party had not voluntarily triggered the requirement to make a mandatory open offer under Regulation 3(1).
    • In such a situation, it would be appropriate to allow the third party to fulfil its obligation under Regulation 3(1) without engaging in involuntary competition with the original acquirer regarding offer size and offer price. Such an interpretation would be business-friendly and promote ease of doing business. 
    • In this context, it is suggested that the third party should be given a deference or relaxation and be allowed to make a mandatory open offer after the completion of the offer period. Such relaxation can be given to the third party within the ambit of Regulation 11 of the Takeover Regulations, which provides SEBI with the discretionary authority to exempt or provide relaxation from procedural requirements in the interest of the securities market. Regulation 11(2) specifically allows SEBI to “grant a relaxation from strict compliance with any procedural requirement under Chapter III and Chapter IV” upon the receipt of an application from the third party in terms of Regulation 11(3). Since Regulation 13under Chapter III dictates the time when the announcement for the open offer is to be made for Regulation 3, it is possible to grant such relaxation. The same is evident from the TRAC report which states that “SEBI would also continue to have the discretion to give relaxation from strict compliance with procedural requirements”. 
    • For example, in our situation, if XYZ Ltd. acquires shares on account of compulsory conversion and breaches the threshold limit under Regulation 3(1) it shall make an application under Regulation 11(3) to seek appropriate relaxation under Regulation 11(2).

    –       Optional Conversion

    Optional conversion may occur in the case of optionally convertible debentures (‘OCDs’) or optionally convertible debt instruments and other similar types of securities. These types of securities get converted voluntarily at the option of the holder in pursuance of their express choice and not at any predetermined time. Optional conversion is indicative of the holder’s willingness to trigger the provisions under Regulation 3(1).

    In such a situation, it would be appropriate that the third party who has voluntarily triggered the provisions of a mandatory open offer should be obligated to engage in raising a competing offer and conditions with respect to offer size and offer price should apply accordingly. In other words, the requirement of making a mandatory open offer should be complied with by making a competing offer and conditions concerning offer size and offer price as applicable on a competing offer should also apply to the third party.

    This raises another legal question, whether a mandatory open offer can be considered as a competing offer. In this regard, it is pertinent to note that Regulation 20(3) creates a legal fiction that a voluntary open offer made within the 15 day period should be considered a competing offer. The substance of the provision dictates that if an open offer by whatever name it may be called is made voluntarily/willingly within 15 days it should be treated as a competing offer. In furtherance of the same, it is possible to argue that if the requirements of the mandatory open offer are being triggered voluntarily/willingly by the third party on account of optional conversion, the same can be considered within the scope of Regulation 20(3), rendering the mandatory open offer as a competing offer. It is to be noted that in order to accommodate this interpretation appropriate amendments to the Takeover Regulations will be required. 

    Hence, in this context, if XYZ Ltd. acquires shares and breaches the threshold limit under Regulation 3(1) on account of optional conversion, it can be said that XYZ Ltd. had willingly breached the threshold hence, the spirit of the law would dictate that XYZ Ltd. should make a competing offer and conditions with respect to offer size and price shall apply to them accordingly. 

    –       When the conversion occurs after the period of 15 days i.e., 18.10.2024

    If the conversion, whether option or mandatory, occurs after the expiry of 15 days and the obligation to make a mandatory open offer is triggered, the third party who had acquired shares on account of convertible securities cannot make a public announcement for an open offer due to the statutory bar imposed by Regulation 20(5). 

    In such a situation, the third party may take recourse under Regulation 11 as mentioned earlier and make an application to SEBI in accordance with Regulation 11(3) to seek appropriate relaxation and deference in terms of Regulation 11(2) to make the mandatory open offer and comply with Regulation 3 after the completion of the offer period. This will ensure that the third party does not contravene the Takeover Regulations and fulfil their obligation imposed by Regulation 3(1). The same will be consistent with the intent of the provision as it will prevent any overlapping or simultaneous open offers and avoid any unnecessary troubles for the shareholders as well.

    III. Conclusion

    In light of the aforementioned discussion, it can be said that our legal conundrum cannot be expressly solved by simply applying the provisions contained in the Takeover Regulations. But, we can state that the conundrum arising out of the interplay between Regulation 3(1), Regulation 20(5) and Regulation 26(2)(c)(i) can be solved by understanding the underlying intent of the provisions, and applying the rule of contextual interpretation and harmonious construction.

    The interpretation as advanced in the previous sections will accommodate better investor protection, provide exit opportunities to the shareholder and promote ease of doing business in the country by protecting the interests of the acquirer. Currently, such a situation is purely academic in nature but it is not improbable for such a situation to emerge in real-world transactions.