The Corporate & Commercial Law Society Blog, HNLU

Author: HNLU CCLS

  • From Hearsay to Hard Facts – SEBI’s Crackdown on Rumour Verification

    From Hearsay to Hard Facts – SEBI’s Crackdown on Rumour Verification

    BY RITUNJAY SINGH AND SEJAL SINGH, FIFTH-YEAR STUDENTS AT RMLNLU, LUCKNOW

    Introduction

    On May 17, 2024, the Securities Exchange Board of India (‘SEBI’) announced a pivotal change by notifying the SEBI (Listing Obligations and Disclosure Requirements) (Amendment) Regulations, 2024 (‘2024 Amendment’). The amendment brings notable updates to the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘LODR Regulations’) by mandating Market Rumour Verification (‘MRV’) by listed companies, particularly those that lead to material price movement (‘MPM’).

    Understanding the Regulation and its Evolution

    The 2023 Amendment focused on triggering rumour verification upon a ‘material event’ occurrence but failed to define ‘material event’, leading to unclear compliance requirements. Consequently, SEBI proposed the formation of an Industry Standards Forum (‘ISF’) by industry associations in July 2023. By August 2023, the ISF, a collaboration between the Associated Chambers of Commerce, the Confederation of Indian Industry, and the Federation of Indian Chambers of Commerce and Industry, was established to formulate standards for implementing specific circulars and regulations. This collaboration resulted in a Consultation Paper released in December 2023, which laid the groundwork for the 2024 Amendment.

    The 2024 Amendment builds on this foundation, which initially mandated MRV but delayed its enforcement. The new regulations mandate rumour verification for the top 100 listed entities from June 1, 2024, and aim to extend it to the top 250 listed entities from December 1, 2024. The entity must verify specific market rumours reported in mainstream media that lead to MPM, usually within 24 hours from the trigger of MPM. General or vague rumours do not necessitate a response. It shall be specific to the industry consisting of unpublished information. 

    Mainstream media includes Indian newspapers with substantial circulation and readership, their digital versions, designated online news sources, and select international newspapers and news channels. It excludes news sources behind paywalls, news aggregators, and social media platforms, except for verified accounts of recognised news sources. Such focused delineation may presumably provide entities with a manageable scope to monitor. However, excluding social media platforms may leave gaps in differentiating facts from fiction, as seen in the Sadhna Broadcast pump-and-dump controversy, where rumours on social media and YouTube videos artificially inflated stock prices, causing investors losses once the stock inevitably crashed. A similar scenario occurred in the infamous Reddit-fuelled GameStop frenzy, where a coordinated effort by retail investors caused an unexpected stock surge, defying traditional market expectations and forcing hedge funds into massive losses. Furthermore, SEBI’s recent efforts to caution the public against dealing with unregulated entities and clamping down on the association between regulated entities and ‘finfluencers’, SEBI acknowledges this pervasive influence. Excluding such platforms from rumour verification leaves a blind spot in the regulatory framework.

    Having mentioned price volatility, it is crucial to understand MPM. The Bombay Stock Exchange (‘BSE’) and the National Stock Exchange (‘NSE’) introduced the MPM Framework to standardise its assessment, providing clear criteria for its calculation. It considers the cut-off percentage to price variation in share price between the closing price of the previous trading day and the next trading day’s opening price, excluding the benchmark index’s impact (e.g., NSE’s NIFTY 50 and BSE’s SENSEX). Additionally, intraday price movements are analysed, focusing on volatility throughout the trading day rather than just the opening versus closing prices. This responsibility of identifying the MPM rests with the listed entity, which may delegate this role to a designated officer. Owing to the constant fluctuation in stock prices, notifying the listed entity regarding the MPM necessitates a sophisticated technology-based solution. Going forward, service providers will likely offer these alert systems to companies. The lookback period i.e. the timeframe within which companies must retrospectively examine previous market rumours that might have induced an MPM is not specified, allowing companies to tailor their verification procedures flexibly to ensure a thorough and context-appropriate assessment.

    On May 21 2024, SEBI released another circular regarding the “framework for considering the unaffected price for transactions upon confirmation of market rumour.” This framework calculates the unaffected price by excluding the effect of MPM and rumour confirmation on equity share prices. In mergers and acquisitions, if parties’ names are non-disclosable due to confidentiality, the unaffected price is valid for 180 days from rumour confirmation; if names are disclosable, it’s valid for 60 days post-confirmation (Paragraph 5.2.2). If the price variation due to rumour confirmation hits the price band on the next trading day, subsequent trading days’ price variation is included for adjustment until it no longer hits the price band. For example, if ‘A’ trades at Rs. 100 per share and a rumour about acquiring ‘B’ causes the stock price to rise to Rs. 400 per share, later proving untrue and falling to Rs. 50 per share, the rumour period causing the fluctuation is determined. The average stock price of ‘B’ prior to the rumour, over a fixed period (e.g., six months), is analysed. If this average is Rs. 100 per share and market trends align, the unaffected price is Rs. 100 per share. This benefit only applies if the rumour is confirmed within 24 hours of MPM.

    Bridging the Gaps: A Vision for the Future

    The 24-hour timeframe provided under Regulation 30(11) not only seems insufficient to locate the exact source of the rumour in order to effectively address it, given the vast trenches of media requiring navigation; but also, proves to be a very small window to provide the public with the necessary documents that support its confirmation or denial. Something similar took place in the short-selling saga of the Adani-Hindenburg case, wherein even after their quick response within 24 hours, Adani’s stocks continued to tread downwards. Moreover, such a stringent timeline could attract regulatory scrutiny under the PFUTP Regulations in the accidental case of a hasty and, incorrect disclosure. Conversely, the NYSE Manual allows the confirmation of a rumour without the ticking 24-hour time clock, alleviating any pressure and allowing the company to make an accurate statement that verifies the accuracy of a rumour without the risk of any regulatory repercussions for incorrect disclosures.

    Furthermore, in the event of a merger and acquisition, a Non-Disclosure Agreement, which more often than not governs these negotiations, may act as a significant impediment to the Regulation, restricting the information that can be publicly shared. A premature confirmation or outright denial may attract a weaker negotiating position for the entity. While an argument can be made that a rumour may be surfacing owing to an already existing breach, that is not an argument strong enough for intentionally breaching confidentiality agreements. Henceforth, if a company were to deny a rumoured merger and later go through with it, investor trust could still very well be damaged. Some countries, like the United Kingdom (‘UK’), have a standstill period of 6 months under section 2(6) of the UK Takeover Code, in case a company does not verify a rumoured merger within 28 days. However, while this prioritises investor clarity and market stability, it is done at the expense of corporate flexibility and strategic planning. Companies might be forced into premature decisions that misalign with their timelines or negotiation strategies. A premature confirmation could also lead to a failed negotiation and wasted resources in case the deal does not go through.  Nevertheless, missing the 28-day verification window would result in being barred from making any such offers within the next six months, potentially missing out on opportunities.

    A balance can be restored by allowing the company to delay disclosures if an immediate clarification poses potential harm. This postponement ensures that an entity can manage sensitive information without being forced into a premature disclosure that could disrupt ongoing negotiations. The same is ensured by Chapter 3 of the European Union Market Abuse Regulation. However, this ability to delay does not come without oversight. Entities choosing to delay shall have to provide regulators with an explanation for the same, demonstrating how exactly it aligns with their legitimate interests, thereby preventing the misuse of the provision for any unfair competitive advantage. Similarly, vis-a-vis leaving room for corporate flexibility, SEBI can also take note of Part III of Appendix 7A of the Corporate Disclosure Policy of Singapore that carves out exceptions to disclosure due to market rumours: (a) The information to be disclosed doesn’t breach any law (Rule 703(2)); (b) The issuer can temporarily refrain from publicly disclosing particular information if a reasonable person would not expect it to be disclosed, and the information is kept confidential (Rule 703(3)). This comes with the caveat of maintaining the strictest confidentiality to prevent leaks.

    Conclusion

    SEBI’s attempts to balance transparency and accountability are evident, even addressing possible concerns via its Guidance Note, including handling speculations regarding a Managing Director/Chief Executive Officer’s health. Yet, as noted earlier, the indeterminate lookback period tips the scales slightly against corporations. By adopting a more structured approach akin to international practices, Indian entities could be better equipped to safeguard their legitimate interests while maintaining investor confidence. Such regulatory evolution could demystify market speculations, enhance stability, and bring India’s disclosure standards into closer alignment with international standards, safeguarding the truth in trading.

  • Revamping Antitrust for Digital Ecosystems: Exploring ‘The Draft Digital Competition Bill, 2024’

    Revamping Antitrust for Digital Ecosystems: Exploring ‘The Draft Digital Competition Bill, 2024’

    BY GARIMA THAKUR AND AISHWARYA S. NAIR, THIRD-YEAR STUDENTS AT RGNUL, PATIALA

    I.      INTRODUCTION

    The digital realm has become integral to modern society, encompassing activities from banking to shopping and socializing, all conducted online. India’s digital economy is set to nearly double, reaching about 20% of GDP by 2026. While digitalization promotes market contestability and innovation, it also raises concerns about anti-competitive behaviour, unfair business practices, and discriminatory policies by enterprises. 

    In 2022 the Parliamentary Standing Committee on Finance presented the 53rd report on Anti-Competitive Practices by Big Tech Companies which discussed the network effects of large digital markets leading to a ‘winner takes most outcome’. It further identified ten Anti-Competitive Practices (‘ACPs’) undertaken by large digital enterprises abusing dominant positions. In response, the Ministry of Corporate Affairs (‘MCA’) created the Committee on Digital Competition Law (‘CDCL’) to suggest recommendations for regulating competition in digital markets. In March 2024, the CDCL released its report highlighting the fragmented and time-consuming legislative approaches under various legislations towards the digital economy, alongside unveiling the draft Digital Competition Bill, 2024 (the ‘Draft Bill’).

    II.      KEY FEATURES: REPORT OF THE COMMITTEE ON DIGITAL COMPETITION LAW, 2024
          1.         Ex-ante measures in Digital Competition Law:

    The Competition Law in India adopts an ex-post approach in addressing anti-competitive agreements and abuse of dominance, with investigations commencing after contraventions have occurred. However, ex-post investigations might take years to resolve and have proven to be too slow for the fast-evolving digital landscapes. By the time an investigation is underway, the market may irreversibly tilt in favour of the incumbent. Further, this approach provides only for specific claims and is thus unable to address repeat violations or similar conduct by different entities. For example, if an e-commerce giant, say, EcomTech forces suppliers into exclusive deals that harm smaller competitors, a smaller rival, ShopSmall, might file a complaint. This complaint would prompt an investigation by the Competition Commission of India (‘CCI’). However, the process takes years, allowing EcomTech to solidify its dominance in the meantime. By the time the investigation concludes, EcomTech’s market position is even stronger, and the approach only addresses ShopSmall’s specific complaint, not the broader issue. This highlights how the ex-post approach can be too slow and limited for fast-changing markets. 

    In contrast, Chapter III of the Draft Bill introduces ex-ante regulations that pre-emptively address issues by setting broad legal principles. Obligations will be tailored for various digital enterprises following expert consultations. The CCI is empowered to set specific conduct requirements for different business models within Core Digital Services (‘CDS’), which means means any service specified in Schedule I of the Draft Bill and includes major platforms like online search engines and social networks.

        2.         Regulation of Significant Enterprises in the Digital Economy: 

    Established enterprises benefit from larger, data-driven networks and user bases, giving them a competitive edge. New entrants face challenges not only in pricing and service quality but also in overcoming these established user bases. This creates a first-mover advantage for existing enterprises, which, even if not legally dominant, can influence the market similarly to dominant players. 

    The Draft Bill aims to regulate Systematically Significant Digital Enterprises (‘SSDEs’) that wield substantial influence in the digital economy and within the Indian Digital Market. The Draft Bill introduces two methods under Section 3 of the Draft Bill to determine the status of an enterprise as an SSDE. 

    Firstly, the ‘Significant Financial Strength’ test quantifies metrics such as turnover in India, global turnover, gross merchandise value, etc. to ascertain SSDE value. Secondly, the ‘Significant Spread’ test evaluates qualitative factors. The CDCL recommends adjusting these measures to suit Indian markets. Further, Section 3(3) grants the CCI discretion to designate an enterprise based on a set of qualitative criteria encompassing factors like enterprise resources, aggregated data volumes, direct and indirect network effects, and the entity’s bargaining position relative to its business users and consumers.

       3.         Exemptions:

    Chapter VIII of the Draft Bill provides the CCI and the Central Government power to exempt certain SSDEs from some obligations on grounds of national security and protection, economic viability, and other factors as may be prescribed. The committee recommends that such exemptions should be devised with regard to the uniqueness of each CDS, in a similar fashion as Section 54 of the Competition Act.

       4.         Enforcement and Remedies:

    The committee acknowledges concerns about potential overlapping proceedings under the Competition Act and the Draft Bill, which could lead to double or unfair penalties. However, it distinguishes between the regulatory interventions and procedures of both frameworks. The committee suggests that the CCI should handle overlaps on a case-by-case basis, ensuring enterprises are safeguarded from disproportionate penalties.

    The enforcement framework proposed in the Draft Bill draws heavily from the Competition Act, with the CCI being the enforcing authority for both legislations. It includes provisions mirroring the Competition Act, such as empowering the Director General, granting rights to seek compensation for damages caused by SSDEs, and the authority to issue interim orders. Moreover, recognizing the critical role of timelines in the digital economy, the committee has also integrated a settlements and commitments regime into the Draft Bill.

    III.      MAJOR CONCERNS AND CRITICISMS ALONG WITH SUGGESTIONS
          1.         The problem of ‘consent’:

    Section 12 of the Draft Bill prohibits SSDEs from using non-public user data to compete on their CDS, effectively outlawing practices like self-preferencing. However, an exception allows platforms to combine data from other sources with user consent. This implies that enterprises can still collect and utilize user data, including selling it to insurers or sharing it with interested third parties, as long as explicit consent is obtained and it doesn’t directly compete with the platform’s main business users.

    The Draft Bill employs an ‘opt-in’ model, wherein the user must provide express provision for the usage of data. Yet, amid consent fatigue, a consent-based approach may not effectively curb monopolistic behaviours. Moreover, enterprises may leverage tools like artificial intelligence and manipulative design (such as dark patterns) to micro-target and exploit the psychological vulnerabilities of people to give the creating the illusion of choice and consent. This can deceive consumers into making decisions they might not make if fully informed or aware of alternatives.

    The Chinese Antitrust Commission’s guidelines on Antitrust Regulations, which ban algorithms that “violate ethical and moral standards” by “inducing user addiction or excessive spending,” could effectively counteract the dark patterns and strategic models employed by digital platforms to collect consumer information for purposes beyond what is necessary.

        2.         Effect on Startups and Innovations

    The Internet and Mobile Association of India (‘IAMAI’) highlighted that regulations based on financial or size thresholds, might deter Indian tech firms from scaling up to avoid added regulatory burdens. This could impede their global competitiveness and profitability.  Critics also argue that such regulations could stifle digital start-ups and innovation, echoing IAMAI’s comparison to the pre-liberalization Monopolies and Restrictive Trade Practices (‘MRTP’) era. They suggest that the Bill could reintroduce restrictive policies that hinder growth, innovation, and investment in India’s digital sector.

    Further, it may be argued that it is difficult to gauge the effectiveness of ex-ante measures amid fears of economic loss, as there are only a handful of jurisdictions where such laws have been implemented. Comparisons cannot be drawn due to the novelty of these measures even in foreign nations like the EU (Digital Markets Act, 2024), the UK (Digital Markets, Competition and Consumers Act, 2024), and the US (American Innovation and Choice Online Act, 2023). 

       3.         Clarity is required on the exceptions:

    Due to uncertainty about defining the parameters and scope of this exemption, there is room for subjective interpretation during the act’s implementation. This oversight leaves powers arbitrarily with the Central Government, potentially affecting enterprise efficiency and harming consumers. To address these issues, the ‘countervailing benefits exemptions’ in the English Digital Markets, Competition, and Consumers Bill, 2023 (‘DMCC’), can be adopted.

    The “countervailing benefits exemption” in competition law permits practices that might seem to breach competition rules if they deliver substantial benefits that outweigh any potential harm. This exemption applies when the conduct provides clear advantages to users and these benefits exceed any negative impact on competition. Additionally, the conduct must be necessary and proportionate to achieving these benefits without undermining effective competition. Implementing this exemption would prevent arbitrary benefits for financially powerful companies and safeguard businesses from unintended consequences that could harm competition.

    IV.      CONCLUSION 

    Digital economies, benefit greatly from economies of scale and increasing returns. They can expand into related markets easily and utilize data to enhance their competitive edge, often assuming a “gatekeeper” role in the market. Addressing anti-competitive practices and monopolies posed by such technologies is difficult under traditional laws. In India, recent fragmented regulations have targeted big tech for data privacy issues. The Draft Bill, 2024 proposes new ex-ante obligations inspired by global standards to regulate anti-competitive behaviours of SSDEs. The bill’s potential impact on India’s Digital Ecosystem remains uncertain, but in a rapidly evolving industry, these proactive regulations could help align the law with digital innovation.

  • CCI Needs to Reconsider its Approach-Balancing Patent Rights and Public Welfare

    CCI Needs to Reconsider its Approach-Balancing Patent Rights and Public Welfare

    RAVNEET KAUR, THIRD-YEAR STUDENT AT RGNUL, PUNJAB

    Introduction

    Section 4 of the Competition Act, 2002 (‘Competition Act’) lays down the practices, which if undertaken by a dominant enterprise, would amount to abuse of dominant position. One of such practices is ‘unfair’ or ‘discriminatory’ pricing. Generally, unfair pricing of a commodity can have two connotations. It can either be unreasonably high or unreasonably low compared to the expenses incurred in its production.  

    While predatory pricing, dealing with the latter scenario, has been specifically included within the ambit of unfair pricing under section 4(2)(a) of the Competition Act, excessive pricing has neither been mentioned nor defined. Does that imply that an enterprise possessing a dominant position could conveniently impose unreasonably high prices on people, prices that have no rational nexus with the costs incurred? This is certainly not the case. In the Indian context, excessive price forms a subset of unfair price.

    However, this inclusion has not been able to yield any outcome so far. In reality, excessive pricing is rarely considered as an abuse of dominant position. This policy of non-intervention in case of excessive pricing stems from two reasons. Firstly, regulation of prices might cut incentives for new players; secondly, the self-regulatory mechanism is assumed to operate in the market. However, this approach tends to get problematic when applied in the pharmaceutical industry where the commodity in question is an on-patent drug, resulting in the failure of a self-regulatory mechanism.

    Approach Towards Pharmaceutical Industry

    This policy of non-intervention in case of excessive pricing has been time and again applied in the pharmaceutical industry as well. The Competition Commission of India (‘CCI’) has been rather reluctant in making a prima facie case of abuse of dominance against an enterprise where it is accused of charging excessive prices.

    The reluctance of the CCI in this regard could be attributed to two factors-

    1. Research and Development Costs

    In the pharmaceutical industry, particularly, enormous and unwarranted margins between manufacturing cost and market price often go unchecked. This is because there is a general perception that the manufacturing of drugs is preceded by years of research and expenditure that comes with it. Therefore, it is argued that using conventional benchmarks (such as price-cost comparison) could reduce the incentive for further research and development (‘R&D’). It is primarily because if firms expect price regulation to capture a sizable share of a market, their incentives for innovation and entry into new markets will be diminished, damaging consumer welfare in the long run. In the case of Biocon Ltd. v. F. Hoffmann-La Roche AG, the complaint against the ‘excessive pricing’ of the anti-cancer medicine Trastuzumab was dismissed. The grounds cited were that the original drug price increase was justified by the enormous expenditures invested in R&D and innovation.

    • Interface of Patent Rights and Maintenance of Competitive Environment

    The prime argument that is offered to pitch for non-intervention in case of excessive prices is that it is an exercise of lawful monopoly. In the Indian context, the Patents Act, 1970 (‘Patents Act’) guarantees a statutory and time-exclusive right to the patentee to decide upon the commercial exploitation of the patented drug. This right includes the determination of prices. Touching upon the aspect of excessive pricing, it is argued that monopoly prices are an accolade that enterprises get for making uncertain and risky investments. The US Supreme Court, in the context of monopoly pricing, observed that “mere possession of monopoly power, and the concomitant charging of monopoly prices, is not only not unlawful; it is an important element of the free market system”. A situation like this generates a collision between two statutes. While the Competition Act seeks to maintain competitive conditions in the market, the Patents Act safeguards the rights of a patentee.

    Analysing the Problematic Approach

    Regarding the clash between the Competition Act and the Patents Act, it is worth pointing out that while section 3 of the Competition Act provides some sort of exemption under section 3(5) to the actions arising out of rights vested under the Patents Act, no such exemption has been granted under section 4. In simpler words, if a certain action attracts applicability under section 3 of the Competition Act but has arisen out of the rights guaranteed under the Patents Act, it would be exempted from the rigours of the Competition Act. However, an action which results in the abuse of a dominant position would not be exempted even if it stems from the rights guaranteed under the Patents Act. The intention of the legislature is unambiguously clear in not permitting the rights of a patentee to get in the way of a competitive environment. With particular reference to the pharmaceutical industry, this distinction indicates that if the prices imposed by an enterprise qualify as ‘unfair’ within the meaning of section 4, it would amount to an abuse of the dominant position irrespective of the fact that the enterprise has a statutory right to decide upon the determination of prices of an on-patent drug.

    Further, the opinion on non-interference in the cases of excessive pricing is mostly premised on the principle of self-regulation. In the absence of market failures, excessive prices motivate potential competitors to enter the market and are, therefore, self-correcting. However, the application of this principle presupposes the availability of alternatives for the commodity in question and the absence of entry barriers for new players to enter the market. As for the pharmaceutical industry, primary and secondary manufacturing are the two fundamental steps in the production of drugs. Producing a drug’s active pharmaceutical ingredient is known as primary manufacturing. The process of incorporating the active ingredient into a delivery system is called secondary manufacturing. Therefore, it is this Active Pharmaceutical Ingredient (‘API’) that has therapeutic qualities.

    When a new drug is invented, the manufacturing enterprise gets the API patented. Now, in order to manufacture the drug of the same efficiency, the API used in the formerly manufactured drug is a pre-requisite. By patenting the API, the enterprise successfully eliminates the possibility of a new player entering the market and selling the drug at a lower price. The problem aggravates when the drug in question does not have any comparable or reasonable substitutes. In the pharmaceutical industry, ‘therapeutic substitutability’ is a mandatory requirement for some other drug to have the potential to cause competitive constraints over the drug in question.

    This essentially questions if consumers, faced with a price increase, could easily switch to other alternatives without the therapeutic efficiency being compromised. In the case of critical diseases like cancer, the availability of therapeutically substitutable drugs is unlikely. Seeking to reap the benefits of a situation like this, in the absence of competitors or reasonable substitutes, enterprises hike the prices of their drugs manifold. Consequently, the self-regulatory mechanism escapes applicability in a case like such, with heavy entry barriers and no substitutes. A consumer, faced with this adversity of unreasonable prices, is made to choose between life or death. If he chooses life, the financial burden continues to grow heavier until it becomes impossible to endure and if he refuses to pay the exorbitant prices, his life is on the line. Top of FormBottom of Form This clearly flies in the face of the idea behind the recognition of providing access to essential medicines at affordable prices as a core obligation under the right to life in the constitutional context.

    To date, the Indian authorities do not have a developed jurisprudence pertaining to excessive pricing. Owing to this, the authorities tend to seek aid from the jurisprudence developed in foreign countries. United Brands Company and United Brands Continental BV v Commission of the European Communities Brands case, for instance, is the most cited precedent in this regard which has its shortcomings, one of them being the determination of benchmark price. CCI’s indifferent approach towards this lacuna is highly problematic. The only apparent and discernible solution to this problem is establishing an authority to fill the void of undeveloped jurisprudence. CCI should formulate guidelines to govern cases about excessive pricing with special reference to pharmaceutical industries. These guidelines must ensure that public welfare and patent rights co-exist harmoniously.

    Conclusion

    The challenge here is to strike a balance between the rights of a patentee and the obligation towards the public. Allowing the prices of life-saving drugs to go unregulated would mean denying people the right guaranteed to them by the makers of the constitution under Article 21. The enterprises, undoubtedly, enter the market with a vision to gain maximum profits but these profits should not be permitted to come in the way of larger public interest. Going by business wisdom, it is needless to say that the market price of a drug has to exceed the expenses incurred and that there has to be a margin between the cost of production and the market price but this margin should not go unchecked. It is for the CCI to ensure that this margin is reasonable and caters to the interests of both the enterprise and the general public. The regulatory guidelines are the need of the hour to inhibit big players from benefitting from the masses’ helplessness.

  • Telecom Titan: Interplay between Reliance Market Dominance and the CCI 

    Telecom Titan: Interplay between Reliance Market Dominance and the CCI 

    BY Raima and Amishi Jain, SECOND-YEAR STUDENTS AT RGNUL, PATIALA

    Introduction

    The Indian Telecom industry is an influx of service providers, each claiming to bring about a digital revolution while catering to the interests of the consumers. The ethos of competition in India, provided by the Competition Act, 2002(hereinafter, “the Act”),  often proves to be rigorous and rather malleable to the dynamic competition in the country. Creating a storm in the telecom industry is Jio, which recently cemented its position as a leader by gaining over three million users. It has often attracted scrutiny for its anti-competitive practices from various market players, inviting a greater need for better functioning of the Competition Commission of India (hereinafter “CCI”). This article aims to shed light on the working of the CCI, making it imperative to take a look at the decisions of the CCI, with respect to one of the biggest corporations in India; Reliance. 

    Reliance: A Mega Saga of the Market Player

     Reliance is known for employing market tactics to avoid scrutiny for ‘abuse of dominant position’, such as with Jio. However, as discernible in Shanmugam v. Reliance Jio Infocomm Ltd., it has often escaped the scrutiny of CCI. Such strategic measures to control the market are especially evident in this case. Through careful navigation of regulatory allegations, the tactical manoeuvring marks its journey from 2016, to the newly formed Disney+ Hotstar Reliance merger, which is now dominating the market. 

    Predatory behaviour: Reliance Jio 

    Reliance Jio dominates the allegations of predatory pricing in the ‘telecom sector’, a term linked to its entry in the market. Through the massive disruption brought in 2016, Jio reduced the number of competitors in the market from 11 to 3, and also brought huge changes in the price of internet. The entire trajectory of growth of the telecom sector changed with its introduction. Nonetheless, the predatory pricing allegations against the same were dismissed for it was a newcomer.

    Since its launch, other service providers have approached the Telecom Regulatory Authority of India (“TRAI”), with complaints dismissed due to lack of evidence or flexibility. With a latent pattern of growth, such predatory players function with policies based on cycles of sacrifice and recovery, through which they lower prices and eventually increase them to recover losses, thus, harming market competition. 

    Such motivations necessitate close scrutiny of the CCI along with developing a robust and flexible framework to address such problems at the optimal time. Since the merger signifies similar curated patterns of dominance, it becomes imperative to regulate potential threats to the telecom industry.

    The Telecom Titan

    The Disney+ Hotstar Reliance merger raises further concerns about antitrust violations. It would become a media behemoth which could account for over 30% of the market. The issues brought forward by such a merger may invite scrutiny from the CCI due to the stir it has caused in the OTT market of India. 

    Increased dominance and detriment to consumers 

    With the formation of an over $8.5 billion entity, the merger is bound to dominate the sports sector, important in Indian OTT, with a staggering consumer base. This sector, which was largely under the garb of Hotstar is bound to expand due to the wide consumer base of Jio Cinemas. The superiority of the merger, in both sports and cinema, proves to be detrimental to television players who stand at the risk of becoming obsolete. This will further affect price-sensitive consumers, who cannot afford other subscriptions.

    Underlying issues 

    Mergers often lead to a modest increase in price. This is substantiated by the Merger Review Policy laid out by the Federal Trade Commission of the US, as to how the merger of two firms with substituting products results in greater power to increase prices, reducing the alternatives available for the consumers in the market. This merger depicts a similar nature by reducing the alternatives available to consumers in the market and potentially driving the withdrawal of other players. It adds to the existing competition faced by international players in the OTT market, which triggers their removal, ultimately affecting the diversity of the content available to the audience. 

    Wave of further mergers 

    A similar pattern of hegemony was witnessed in 2016, when Jio stimulated a series of mergers in its wake. Vodafone Idea and Bharti Airtel merger in 2017, BSNL and MTNL merger proposed in 2019; all while it further strengthened its pre-eminence. 

    Reliance also sought approval from CCI for a merger of Viacom18 and Star India Pvt. Ltd. (SIPL). The merger can amount to over 40% of the total viewership in India, causing a serious imbalance in viewer distribution.  

    It can be juxtaposed to the Zee-Sony merger, wherein both had to comply with CCI’s action against the merger. CCI had given conditional approval that required the divestment of Zee from certain channels. Without this action, Zee-Sony would have taken charge of 75 channels. Star-Viacom merger is likely to amount to 115 channels as a combined entity, leading to a hegemonic position resulting in Appreciable Adverse Effect on Competition (“AAEC”).

    The Supreme Court of California in Continental Car case observed that an undertaking is in a dominant position when it has the power to behave independently without consideration of its competitors. The same has found relevance in Section 4(2) of the Act, which restricts actions done by dominant enterprises to deny or restrict market access, for abuse of dominance. When the Zee-Sony merger takes 115 channels with 35% of the viewership, other market entities will likely lose market access. Hence, it is probable for CCI to intervene in this merger, similar to Zee-Sony, and pose conditions for a divestment. 

    The Competition Act in the Realm of Development

    A major function of the CCI is elimination of anti-competitive practices that may impede healthy competition in the market. However, a drawback of the Act is that it is curative, rather than preventive. By the time the CCI penalises a firm, market dynamics  change. 

    Mergers are an alternative for firms to dominate the market other than the popular method of predatory pricing. It is regulated by Section 6 of the Act, by the term ‘Combinations’. Due to this, Competition (Amendment) Act, 2023stipulates that any merger needs to be notified to the CCI if it crosses a certain threshold or any of its transactions surpass it in terms of turnover. The threshold takes into account the geographical limits as to the operation of the business. In a hopeful tandem with the Act, Parliamentary Standing Committee presented a report to keep a check on the ‘winner-takes-most’ phenomenon, as a company that reaches a certain number of customers can gain an unfair advantage over other companies by indulging in anti-competitive practices.

    Practices of Reliance serve as a guide for the market on how to operate, and for CCI on how to do its utmost to prevent anti-competitive practices. However, due to overlapping jurisdictions and lenient policies, market dynamics remain at risk of being imbalanced, inviting a need for reforms. 

    The Way Forward

    Coordination between Sectoral Bodies

    The working of the CCI and sectoral authorities like TRAI should be in tandem, rather than promoting a situation of ‘CCI v. TRAI.’ This calls for an enhancement of coordination and interoperability. It is imperative to formulate a pro-consumer business-friendly model as CCI works towards ensuring ease of doing business and the telecom sector ensures service standards. Claiming a single industry as ‘turf’ will lead to overlapping issues between different sectors. To avoid failure of consultations in a situation of ‘CCI v. TRAI’, the regulatory bodies should not draw hard line boundaries and instead work in tandem to avoid deferring cases to further high-powered committees. 

    Cross-Border Benchmarking

    The situation calls for structural and behavioural remedies to be implemented by CCI. In the cases of Holcim v. Lafargeand Sun Pharmaceutical v. Ranbaxy Laboratories, CCI proposed divestment of a few plants to eliminate the anti-competitive element. Behavioural remedies including ‘hold separate provisions’, which ensure that the merger is run as separate from independent businesses,  may be desirable to reduce the anti-competitive concerns which may arise due to such a horizontal merger.

    The CCI is recommended to conduct market surveys, merger impact assessments, and pre and post-merger analysis to ensure fair competition to complement its regulatory framework.

    Complimentary Models

    In consonance with the non-performance of the CCI, a de novo bill such as the proposed Digital Competition Bill, 2023, which is ex-ante as opposed to the ex-post model of the Act, is imperative to implement a rigorous procedure. Instead of correcting, there should rather be prevention of market imbalance. Models should be employed to end monopolistic practices.

    Furthermore, borrowing from the US Model, CCI can use a program to disallow mergers with anti-competitive conduct, which creates an appreciable risk of materially lessening competition and ending platform monopoly. A similar legislation could help protect firms when Indian markets are highly susceptible to create AAEC when new mergers are created, such as the Star-Viacom merger. Monopolistic behaviour allows a company to disadvantage its competitors while hurting small businesses, consumers, and innovation. In a country with a number of upcoming small businesses, such a legislation could prevent them getting pushed out of the market due to platform monopoly. 

    Conclusion

    Reliance, being a widely known and dominating market player for its ensuing market strategies, suggests ways of improving the regulatory framework. Though the Act and its amendments curb misuse of the market, they often fall short or the compensation is not enough. 

    The impending Disney-Reliance and Star-Viacom merger exemplifies the risks of market concentration and consumer interests. In addition to greater coordination between different regulatory sectors, it is imperative to incorporate complimentary models to restrain market imbalances, rather than correcting them post-occurrence. Thus, it remains essential to enhance coordination and adaptability to standardise the actions of dominant players like Reliance. 

  • Examining Loopholes and Challenges in the Draft Digital Competition Bill

    Examining Loopholes and Challenges in the Draft Digital Competition Bill

    BY KASHVI SINGH SHEKHAWAT, SECOND-YEAR STUDENT AT NLU, ODISHA

    Digital platforms have significantly transformed the global economy and society and are central to 21st-century technological advancements. They have introduced innovative products and services that were unimaginable a few decades ago which break down borders to deliver these benefits worldwide. 

    The COVID-19 crisis has highlighted the importance of digital platforms, but also raised concerns about market dominance and anti-competitive practices. In response, the Ministry of Corporate Affairs proposed the Draft Digital Competition Bill (‘the Bill’) on March 12 to curb these practices, promote fair competition, and improve market transparency.

    This Bill, which aims to regulate digital markets and curb anti-competitive practices contains potential loopholes that could undermine its effectiveness. This might impact the Bill’s ability to effectively curb anti-competitive practices, ensure fair competition, and promote market transparency. Thus, there is a crucial need to identify and address areas where the Bill may fall short ensuring a more robust and comprehensive regulatory approach.

    Ex-Ante Regulation

    Ex-ante regulation involves setting rules and guidelines in advance to prevent market issues before they arise, as opposed to addressing problems after they occur (which is ex-post regulation). It’s a proactive approach aimed at maintaining fair competition and preventing market failures from the outset. This is typically used to address market failure but this is not the case with India. As per the ITIF’s Hamilton Index Report, India is a top producer in key industries with a thriving digital market and the third-largest startup ecosystem. However, concerns about market power in digital markets persist with claims that consumer data feedback loops, network effects, and economies of scale favor incumbents, potentially leading to market concentration. While network effects can benefit consumers, market concentration is not an inevitable outcome. Digital markets often exhibit multi-homing, where consumers use multiple platforms, enhancing competition. Market power in dynamic markets can drive innovation, reflecting Schumpeterian “gales of creative destruction” where firms continually innovate to compete.

    Even if market failure exists, ex-ante bans as proposed by the Bill must demonstrate that they improve the current system. The ITIF report suggests that ex-ante regulation might hinder market forces essential for correcting failures and enhancing consumer welfare. The report also highlights that the current ex-post enforcement model has limitations but that does not prove that ex-ante regulation would be better. The complementarity between ex-ante and ex-post regimes does not necessarily enhance consumer welfare and could maintain administrative costs while risking false positives. Thus, the questions arise that whether the benefits of an ex-ante regime outweigh the potential harms.

    Tailored Regulatory Approach

    The approach of implementing more tailored, company-specific rules, as seen in the Bill following the UK’s Digital Markets, Competition and Consumers model aims to mitigate false positives in theory. This strategy gives regulators the discretion to craft individualized conduct codes for each company rather than imposing blanket rules across entire industries. However, this strategy poses challenges. Firstly, it runs the risk of generating high administrative costs that the ex-ante regime was meant to avoid. For instance, the Bill anticipates extensive non-compliance inquiries involving costly processes like discovery, detailed fact-finding, and potentially adversarial proceedings. Secondly, as noted previously, such an approach could lead to concerns about regulatory capture, where regulatory decisions might favor established players over new entrants. This could result in disparate treatment within the digital market ecosystem. Thirdly, the government’s ex-ante regulatory approach could impose significant burdens on digital companies, potentially making operations untenable and stifling venture investments in tech startups. High regulatory risks can deter investors by affecting returns and business conditions, with increased compliance costs and scrutiny especially challenging for resource-limited startups. 

    In essence, instead of effectively addressing market failures, the Bill could potentially create a regulatory framework that escalates administrative expenses and selectively benefits certain digital entities while disadvantaging others.

    Systematically Significant Digital Enterprises

    The Bill’s definition of Systematically Significant Digital Enterprises (‘SSDE’) is problematic. Firstly, its quantitative threshold targets companies solely based on their size, without considering whether they possess market power—a necessary though not sufficient condition for market failure. Additionally, the Bill includes a vague and ambiguous qualitative test for identifying SSDEs if quantitative criteria are not met. This test vague because it involves assessing broad and subjective factors, such as a company’s influence on digital markets or its potential effect on competition, without clearly outlining how these factors should be measured. The absence of precise definitions makes it difficult for companies to understand the criteria they must meet, leading to inconsistent application by regulators. This uncertainty can result in varying interpretations, leaving digital firms unsure of how they will be classified.

    This could lead to an ad hoc regulatory regime, granting excessive discretion to regulators and creating uncertainty for many digital firms. This uncertainty is further compounded by the Bill’s company-specific approach to rulemaking, which raises concerns about regulatory capture and the potential for the Bill to be used to pick digital winners and losers in India.

    According to the Competition Commission of India, at least 580 companies from the digital service and e-commerce sectors alone would qualify as SSDEs in India. This contrasts sharply with the European Union’s Digital Markets Act (‘DMA’), which designates only 6 gatekeepers. Thus, this large number of designated SSDEs would impose significant compliance burdens on these companies, potentially hindering their ability to introduce new services and innovate. 

    Innovation

    The Bill proposed in India raises significant concerns regarding its potential impact on innovation. Firstly, unlike the EU’s DMA and the UK’s Digital Markets, Competition and Consumers Bill, the Indian Bill does not mandate a finding of market power as a prerequisite for applying its quantitative tests. This omission suggests that the Bill could target companies purely based on their size, rather than addressing genuine market failures, which regulation should ideally target. Moreover, the Bill’s provision for a three-year designation period with automatic renewal, coupled with limited opportunities for revocation, fails to account for the dynamic nature of market power in digital markets, potentially leading to regulatory overreach. Secondly, while the Bill proposes company-specific restrictions, its approach of imposing per se bans on various common business practices is likely to stifle pro-competitive behavior. For instance, prohibitions on practices like self-preferencing, where digital platforms prioritize their own products over third-party offerings could hamper innovation and reduce consumer choice. Such practices often enhance user experience and foster competition among digital platforms, as seen in cases where companies like Google leverage scale to improve search quality and compete effectively with rivals.

    Thus, the lack of clear market power criteria, broad SSDE designation criteria, and per se bans on common business practices raise significant concerns about the Bill’s potential negative impact on innovation in India’s digital economy.

    Cost- Benefit Analysis 

    The Bill in India raises critical questions about its potential impact and necessity in the digital sector. One fundamental concern is whether the costs and benefits of digital competition regulation have been adequately assessed. As it currently stands, the objectives of the Bill appear to diverge from traditional competition law principles, which aim primarily to safeguard consumer welfare. Instead, akin to the EU’s DMA, the Bill seems more focused on assisting competitors rather than directly benefiting consumers. This shift could open the door to rent-seeking behaviors from private entities with vested interests, potentially leading to demands for extensive product-design changes that may not align with consumer preferences. Thus, the costs of the Bill are palpable. In the EU, similar regulations have delayed products like Meta’s Threads due to compliance uncertainties. Consumer experiences have also been impacted, such as Google’s changes to search result functionalities under DMA rules, which affect user convenience and business outcomes.

    While proponents argue the Bill addresses digital market risks, India already has robust competition laws and sector-specific regulations under the Competition Commission of India (‘CCI’). Introducing the Bill would mark a departure by using size-based criteria reminiscent of older regulatory regimes which could potentially disrupt India’s current approach aligned with international best practices.

    Enforcing the Bill would demand significant resources and expertise across multiple domains, similar to challenges faced by the European Commission with the DMA. There are grounds for revisiting or reevaluating the proposed legislation unless the benefits of the Bill clearly outweigh its costs in enhancing public welfare. This includes ensuring regulatory interventions support innovation and do not unduly burden digital businesses in India’s dynamic market landscape.

    Conclusion

    There is a need to enhance the collaborative nature of enforcement by establishing regulatory dialogues involving gatekeepers, business users, end-users, and external stakeholders such as experts and auditors as designating SDSE’s will lead to more litigations. This inclusive approach aims to encourage gatekeepers to comply with regulations without allowing regulatory capture. Such dialogues are seen as essential for improving compliance monitoring. This dialogue should be meaningful and not merely procedural, ensuring that the obligations outlined by the CCI are genuinely developed through these interactions. CCI should also take a more proactive role in assisting and resolving complaints from businesses. This proactive stance would enable quicker and more effective resolution of issues, strengthening overall compliance with the Bill Furthermore, alongside enforcement efforts by the CCI and national authorities, there is a call for greater private enforcement. This would allow businesses using gatekeeper services to initiate legal actions in courts, seeking injunctions and damages for bill violations. Private enforcement mechanisms can swiftly identify infringements and act as a robust deterrent, thereby bolstering overall Bill compliance.

  • Redefining Derivatives: India’s Speculative Turn on Futures And Options Taxation

    Redefining Derivatives: India’s Speculative Turn on Futures And Options Taxation

    BY TAPAS JOSEPH AND ADITYA S. NAIR, FOURTH-YEAR STUDENTS AT NUALS, KOCHI

    Introduction

    Up until the early 2000s, derivatives revolutionized spot and futures markets, disrupting natural market relationships and attracting regulatory scrutiny due to potential negative effects. This increased leverage made futures leading indicators. Derivative markets, employing futures and options, became pivotal for trading stock risks, with legally binding contracts specifying asset transactions. Future contracts involves buyer and seller being legally bound to the purchase and sale of a specific asset at a specific price by a certain time. On the other hand, options contracts involve the buyer being given a right but not a responsibility to buy or sell a specific asset at a specified price before a given time, where the seller is also bound to fulfil the buyer’s right if they choose to exercise it. The income derived out of futures and options (‘F&O’) trading has always been classified in the realm of non-speculative business income for levying tax. However, due to recent increase in the retail participant trade activity, there is a plan to move the F&O income to speculative business income under the Income Tax Act, 1961 (‘Income Tax Act’). This reclassification would put F&O transactions under deterrent tax laws and tax deducted at source (‘TDS’) which will harm the traders to one extent or the other by implementing a niggardly tax system.

    The Indian government’s proposed reclassification of F&O trading reflects growing concerns over unprecedented retail investor participation in derivatives. This regulatory shift aims to address potential systemic risks from unchecked retail F&O trading. Regulators worry that a major market correction could cause significant losses for retail investors, leading to widespread financial distress at the household level. This could have profound implications for market sentiment and economic stability. To mitigate these risks and ensure long-term market health, the government is considering reclassifying F&O trading income as speculative.

    What is Speculative Transaction?

    A speculative transaction is a transaction of purchase or sale of a commodity, being stocks and shares, and includes (section 43(5) of the Income Tax Act) a transaction that is not completed by the actual delivery of or by the transfer of the commodity.

    Section 43(5) defines ‘Speculative Transaction’ as a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scripts. For example, intra-day trading in shares could be one such kind of trade that comes under the head of speculative transaction.

    Understanding F&O Contracts in Financial Markets

    F&O are types of financial derivatives that enable traders to speculate on the price movements of an underlying asset without owning it. A futures contract binds the buyer to purchase and the seller to deliver the asset at a set price and future date. Conversely, an options contract grants the buyer the right, but not the obligation, to buy or sell the asset at a specified price by a certain date, while the seller is required to fulfil the contract if the buyer opts to exercise their right.

    Fiscal Implications for F&O Transactions

    An eligible transaction in respect of trading in derivatives referred to in Clause (ac) of section 2 of the Securities Contracts (Regulation) Act 1956 carried out in a recognized stock exchange is not a speculative transaction.

    Related to this, the Income Tax Act under section 43 (5) classifies F&O transactions as business income. This condition provides an exemption for trading in derivatives under clause (d). The section also includes subsection 5, which has clauses (a) to (e), and it specifically excludes speculative transactions. These include:

    • Hedging contract with respect to raw materials or merchandise.
    • Hedging contract with respect to stocks and shares.
    • Forward contract.
    • Trading in derivatives.
    • Trading in commodity derivatives.

    This makes trading under derivatives like F&O fall under the ambit of non-speculative business income, which is taxed under tax slabs based on the trader’s annual turnover.

    In essence, the profits from F&O trading are taxed like other business income, allowing taxpayers to claim deductions for expenses incurred, such as telephone bills, electricity bills, internet bills, etc.

    Prior to the addition of Clause (d) to the proviso of sub-section 5 of section 43, the Bombay High Court in Commissioner of Income Tax v. Bharat R. Ruia, determined that exchange-traded derivative transactions carried out by the assessee before January 24, 2006, were deemed speculative transactions. With the insertion of Clause (d) in section 43(5), an explanation was also introduced to define the term ‘Eligible Transaction’ as used in Clause (d). According to this explanation, only specific types of derivative trading transactions conducted on recognized stock exchanges are classified as non-speculative transactions. This was formalized by Notification No. S.O. 89(e) dated January 25, 2006. In this regard, from the date of Securities and Exchange Board of India (‘SEBI’), both Bombay Stock Exchange (‘BSE’) and National Stock Exchange (‘NSE’) were officially accorded recognition only for this particular purpose. Therefore, any derivative trades that were carried out in those exchanges and any others that may be entered in the future under the provision of this section are, in effect, non-speculative if they meet the conditions in the explanation of section 43 (5). These classifications apply to each of the transactions that satisfy the above conditions after January 25, 2006. The fact that for eligible derivative trades, there is a change of status from speculative to non-speculative is a major overhaul in tax and regulation.

    Analytical Assessment of Derivatives Taxation Reclassification: Implications for Market Participants

    F&O trading is considered a non-speculative business, and loss from its trading is allowed to be set against income from any other resource except salary income. This has been vividly described under section 71(2A) of the Income Tax Act.

    Unadjusted losses can be offset against income from other sources, except salary. Any remaining loss can be carried forward for up to eight years. In these subsequent years, the carried forward loss can only be offset against income under “Profit and Gains of Business and Profession.”

    Under section 73A, if a taxpayer incurs a loss from a speculative business transaction, they can only set off this loss against profits earned from other speculative business transactions. This means that a taxpayer cannot use a speculative business loss to offset gains earned from non-speculative business transactions, such as income from salaries, rent, or interest.

    In case a taxpayer is unable to set off the entire speculative business loss against profits earned from other speculative business transactions in the same financial year, they can carry forward the unabsorbed loss to the subsequent year. The unabsorbed loss from speculative business can only offset profits from similar transactions and be carried forward for four assessment years, as per section 73. This differs from non-speculative business losses, which can be carried forward for eight years.

    Examination of the Potential Impact on Market Behaviour and Investor Sentiment.

    The imposition of increased taxes on F&O trading could potentially reduce liquidity and trading volumes in these markets by dissuading active traders. While there are numerous drawbacks associated with such changes, they may also serve to influence market participants. For instance, the growing presence of retail investors in derivatives markets raises concerns about their vulnerability to significant losses during market corrections. Reclassifying F&O transactions as speculative could function as a deterrent, aiming to mitigate these risks and dissuade retail investors from exposure to substantial losses.

    However, there is also a risk that heightened taxes could redirect retail investors towards unregulated and potentially riskier investment alternatives. While these alternative channels offer the potential for greater profits, they operate outside the regulatory framework of traditional markets. This lack of oversight may expose retail investors to increased risks, potentially compromising their financial security. Institutional investors, who constitute a substantial segment of the F&O market, may reassess their strategies in response to these developments. The increased tax burden might influence their assessments of risk versus reward, altering market dynamics and potentially increasing volatility. Moreover, smaller market participants could face heightened operational costs and complexities as a result of these changes.

    Conclusion and a Way Forward

    The proposed reclassification of F&O transactions from ‘business income’ to ‘speculative income’ in India aims to protect retail investors but risks driving them to unregulated alternatives. To balance investor protection with market vitality, we propose:

    1) A tiered tax structure with lower rates for small investors and higher rates for large traders, curbing speculation while maintaining liquidity;

    2) Partial reclassification to a hybrid category, retaining some non-speculative tax benefits while introducing restrictions;

    3) Extending the loss carry-forward period beyond four years for speculative transactions. These amendments could foster a stable yet dynamic F&O market, ensuring fairness without unduly burdening traders. A robust regulatory framework remains crucial for maintaining transparency and investor confidence.

  • Navigating Open Market Purchases Under The Competition (Amendment) Act, 2023

    Navigating Open Market Purchases Under The Competition (Amendment) Act, 2023

    BY BIANCA BHARDWAJ, A THIRD-YEAR STUDENT AT NLU, JODHPUR

    [Note: The following post is Part-II in a two-part series]

    Having expounded upon the merger control regime in India along with the dilemma of open market purchases as well as compliances in the previous part, the following part details the impact of the draft combination regulations along with the global position and suggestive solutions.

    V. Impact of the Draft Combination Regulations, 2023 

    The CCI Draft Combination Regulations, 2023 further clarify the rights that can be safely acquired in such transactions. Under Regulation 6, the acquirer would be allowed to avail certain rights such as dividend, subscription to rights issue, bonus shares, etc. The acquirer can also dispose the shares or securities acquired and exercise voting rights only to the extent of liquidation and/or insolvency proceedings. 

    These regulations are crucial because they adequately address the problem of acquiring de facto control through such transactions. By specifying that the voting rights of the acquirer would only be allowed in limited circumstances, it does away with the problem of acquisition of control in public bids.  The European Commission, for example, recognised this issue in the case of Marine Harvest ASA, whereby it was held that exemption to a public bid would not be provided if the seller acquires a significant block of shares amounting to de facto control. The element of de facto control is adjudged based on the votes cast at previous ordinary and extraordinary general meetings. Lastly, even the proviso to Regulation 6 also states that exemption would not apply where the acquirer directly or indirectly, influences the target enterprise.

    VI. Global Position 

    A quick sojourn of international antitrust laws would also reveal that similar dispensations have been made worldwide.Article 7(2) of the European Union Merger Regulation (‘EUMR’) provides that standstill obligations shall not prevent the implementation of a public bid or of a series of transactions in securities including those traded on a stock exchange and Article 7(3) gives the Commission the power to grant derogations. However, statistics reveal that the EU has rarely granted such exemptions. These derogations are subject to a twofold-criteria: (1) high degree of urgency in the transaction and (2) the lack of any plausible competition issues raised by the proposed transaction. Moreover, the EU has repeatedly held that while acquiring voting rights is not prohibited on securities purchases, the exercise of these rights is actively discouraged to prevent gun jumping. 

    Similarly, in Brazil, the transactions made through stock markets or organized over the counter market do not need the approval of the antitrust authority for their consummation. On the other hand, certain sophisticated merger regimes of UK and Italy do not impose any standstill obligations and parties are free to implement transactions without approval 
    by undertaking a self-assessment of the potential competition concerns. 

    In comparison, the Indian regime reflects a balanced approach as the regime retains its suspensory character without any absolute derogations. At the same time, there is no absolute ban on exercise of voting rights attached to shares bought in such transactions like in the EU. Moreover, there is sufficient scope for the parties to provisionally implement their transaction and subsequently wait for clearance while retaining certain rights. 

    However, a suggestion must be noted in this regard. It is not clear why the amendment did not adopt the CLRC report’s recommendation to mandate an escrow account. If the transaction is later disapproved by the CCI, the reversal of the transaction could be eased by selling the shares in the escrow account and undo any competitive harm.  

    VII. Way Ahead

    The rationale behind merger control in antitrust is to promote economic efficiency and enhance the process of corporate restructuring in the country. In this context, the amendment is welcome as it aligns with international best practices and will boost transactional efficiency in India. However, there is still uncertainty regarding how the Takeover Code would complement the amendment, given the requirement of obtaining a statutory approval for open offer still stands. In the meantime, as fertile jurisdictional ground develops and the Draft Regulations are adopted, it is crucial that parties tread with caution and avoid acquiring beneficial rights before securing the watchdog’s approval and attract potential scrutiny. 

  • Navigating Open Market Purchases Under The Competition (Amendment) Act, 2023

    Navigating Open Market Purchases Under The Competition (Amendment) Act, 2023

    BY BIANCA BHARDWAJ, A THIRD-YEAR STUDENT AT NLU, JODHPUR

    [Note: The following post is Part-I in a two-part series]

    Introduction

    The merger control regime in India has undergone monumental changes with the recently passed Competition (Amendment) Act, 2023 (‘Act’). One of these changes include the dilution of standstill obligations for open market purchases by way of introduction of section 6A in the Act. This amendment is crucial as it lifts the blanket prohibition on combinations to await the approval of the Competition Commission of India (‘CCI’) before executing a combination and facilitates the ease of doing business. 

    Consider this example: Company A and Company B announce a merger. The merger deal is structured as a multi-stage process where firstly, Company A will acquire 30% equity shares in the target B through an existing shareholder; and secondly, Company A announces a public bid for buying up the remaining shares. The following day the Board of Directors of the respective companies authorize and complete the market purchase and a notice is also filed with the CCI for approval of the merger.

    Earlier, Company ‘A’ would receive backlash for implementing the open offer without clearance from CCI. However, with the recent amendment, the CCI is expected to take a lenient view to open market transactions subject to certain conditions. In this context, this article discusses the ambiguities leading to the amendment and appraises the consequences of the same, especially in the context of the Draft Combination Regulations, 2023.  

    II. Merger Control Regime in India

    In order to understand the development introduced by the Amendment, it is necessary to appreciate the scheme of mergers and combinations in the competition regime. Essentially, the merger control regime in India is a mandatory and suspensory one. In broad terms, this implies that parties that propose to enter into a merger (referred to as ‘combinations’ in India) must first, give notice to the CCI in accordance with the requirements prescribed by Section 6(2) of the Act. Second, as part of the suspensory regime, the parties are pre-empted from carrying out any integration before receiving the approval of the CCI. 

    Section 5 and Section 6 of the Act are the key provisions regulating such mergers.  Any potential merger or acquisition that fulfils the thresholds laid down under Section 5 must be mandatorily notified to the CCI. Thereafter the CCI proceeds to investigate under section 6 to determine if the combination has or is likely to have any adverse effect on competition (‘AAEC’) in India.

    Standstill obligations are embodied under Section 6(2A) of the Act. Before the amendment, the Act prescribed a standstill obligation of 210 days, or until the approval by the CCI – whichever is earlier – on the parties to a proposed combination, from the date of notifying the proposed combination to the CCI. During this period, the parties were prevented from giving effect to the combination and must operate their businesses as independent entities. Notably, this period has now been reduced to 150 days, along with an exemption for open market purchases to implement the acquisition without approval.

    Later on, if the CCI is of the opinion  that the combination is likely to hamper competition, it can modify the combination through remedies, for example, by divestiture of assets, or it can revoke the combination altogether. 

    III. The Dilemma of Open Market Purchases or “Open Offer”

    The relevant laws governing open offers are the Competition Act, 2002 and the Securities and Exchange board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (‘Takeover Code’). An open offer is made by the acquirer to the shareholders of the target company inviting them to submit their shares at a specific price.  As per the Takeover Code, an open offer is triggered when the acquirer takes control over a target company or shares or voting rights in the target company beyond certain threshold limits. There are primarily two threshold limits:

     (i)  Acquisition of 25% or more shares or voting rights 

    (ii) Acquisition of more than 5% shares or voting rights in a financial year

    Further, Regulation 8 (11) of the Takeover Code mandates that the acquirer is responsible for obtaining the necessary statutory approvals before concluding the open offer. In practice, such statutory approvals generally consist of approvals from regulatory bodies like CCI, Reserve Bank of India (‘RBI’), Telecom Regulatory Authority of India (‘TRAI’) etc. 

    Therefore, as soon as the threshold limits were crossed, the acquirer was simultaneously required to notify the open offer to the CCI and await its approval. However, unlike negotiated transactions, market purchases have low liquidity leading to significant volatile conditions. The acquirer has to seize the small window of opportunity on a stock exchange platform before the cost of acquisition rises in a few minutes. Moreover, these obligations also impeded confidentiality concerns as notifying the transaction could trigger public scrutiny and drive the price of the stock. Resultantly, the acquirer was placed in a dilemma- whether to await the CCI’s approval and forego the window of opportunity or to face penalty for gun jumping?

    The rationale behind standstill requirements was stated in the Ultra Tech Cement case, where the CCI was of the opinion “the objective of standstill obligations is to ensure that the parties remain as independent competitors as they were before the proposed transaction”.  As a result, a perusal of CCI’s decisional practice reveals that it had previously adopted a stringent approach against such transactions. For instance, in the combination between Thomas Cook India Limited (‘TCIL’) and  Sterling Holiday and Resorts India Ltd. (‘SHRIL’), the CCI imposed a penalty of Rs. 1 crore. TCIL had issued an open offer to purchase 26% equity shares from public shareholders of SHRIL. The open offer, which was part of an interconnected transaction, triggered the thresholds under Section 5 and was authorized before submitting notice to the CCI. Hence, the parties were held liable for gun jumping under Section 43 of the Act which was upheld by the Supreme Court.  

    In contrast to this stringent approach, the amendment offers several benefits. First, it removes the challenges associated with the volatility of the markets, allowing companies to move quickly in response to market changes, which is crucial in fast-moving sectors like tech and e-commerce. Second, as the EU experience shows, it could improve cross-border investments in the Indian economy. Third, it would also expedite the merger approval process for the CCI with respect to securities transactions and unarguably, quicken the process of combinations. 

    IV. Compliance requirements under the amended law

    As per the newly inserted Section 6A, an acquirer is permitted to implement the open offer or an acquisition of shares or securities by way of a secondary transaction, either as a single transaction or a series of transactions. This is subject to the conditions that:

    (i) the notice for the combination transaction has been given to the CCI as per the Act and the regulations thereunder; and

    (ii) the acquirer does not exercise any ownership or beneficial rights or interest in relation to such shares or convertible securities (including voting rights and receipt of dividends or any other distributions), except as may be specified by regulations, till such time that the combination is approved by the CCI.

    Notably, this amendment is in line with the recommendations of the Competition Law Review Committee (‘CLRC’) Report. The report had identified the dilemma and observed that “…mandating a standstill on acquiring of shares pending the approval of the combination may hamper the viability of acquisitions via public bids”. Accordingly, it suggested that the CCI allow parties to such transactions to purchase securities, provided they surrender all beneficial rights (of dividend and voting) attached to such securities until the combination gets a green signal. However, the amendment does not prescribe that such securities should be placed in an escrow account pending CCI’s approval, a proposal which was put forth in the CLRC report. 


  • The Boundaries of Judicial Intervention In Arbitration: Navigating Section 34

    The Boundaries of Judicial Intervention In Arbitration: Navigating Section 34

    BY MANAV PAMNANI, THIRD-YEAR STUDENT AT NALSAR UNIVERSITY OF LAW, HYDERABAD

    Introduction

    Recently, a three-judge bench of the Supreme Court (‘SC’) in the case Gayatri Balasamy v. ISG Novasoft Technologies Ltd. (‘Gayatri Case’) decided to refer the matter regarding court modification of arbitral awards to a Constitution Bench. This comes in light of the relatively unsettled legal position regarding the power of a court to amend or modify an arbitral award under section 34 of the Arbitration and Conciliation Act, 1996 (‘Act’). Against the backdrop of multiple conflicting decisions over the course of several years, the judgement in the Gayatri case, which is yet to be pronounced, is expected to settle the position. However, there is a discernible trend that can be observed lately with the majority of court decisions holding that the court does not have this power.

    The epitome of this is the landmark judgement delivered in National Highways Authority of India v. M. Hakeem (‘Hakeem Case’), wherein the SC declared that the court under section 34 has no jurisdiction to modify the arbitral award as doing so, will amount to crossing the line (Lakshman Rekha) under the guise of judicial interpretation of statutes. 

    One of the most recent SC decisions that upheld the several precedents mentioned was delivered on 4th January 2024 in the case of S.V. Samudram v. State of Karnataka. The SC, in this case, held that any attempt to modify or amend an arbitral award while adjudicating section 34 and section 37 petitions is not permissible. A modification can be effected only by the SC in the interests of justice under Article 142 of the Indian Constitution, provided such a modification is in tandem with relevant statutory laws.

    The power under section 34 of the Act extends only to the setting aside of an award under the grounds specified in sub-section (2), which include incapacity of the parties, invalid arbitration agreement, lack of proper notice, decisions beyond the scope of arbitration, improper tribunal composition or procedure, or if the Court finds the subject matter non-arbitrable or the award in conflict with India’s public policy. With the intention of analysing the intricacies of section 34, this article explores the rationale behind the restriction on court modification, its implications, and potential solutions to address the inherent challenges.

    The Rationale Behind the Restriction on Court Modification

    The most plausible rationale is the express exclusion of such a power from the purview of section 34 of the Act. This power was explicitly included under section 15 and section 16 of the erstwhile Arbitration Act of 1940 but has been omitted under the current statute. As explained in  Larsen Air Conditioning and Refrigeration Company v. Union of India, this reflects the intention of the Legislature to amend the law pertaining to modification. Adopting a contrary approach would undermine the very purpose of excluding this power, making such an interpretation unsound. An analysis of the law in other jurisdictions like England, Singapore, Australia, and the United States reveals that such power has expressly been conferred under the respective statutes, which is not the case in India. Moreover, the purpose of Section 34 is to set aside awards on the basis of procedural or jurisdictional issues, whereas modification involves re-evaluating the substantive merits of the tribunal’s decisions, which deviates from the provision’s principal intention. This reasoning was given in the Hakeem Case mentioned previously, wherein the SC held that section 34 is not like an appellate provision. Considering it to be so is fallacious since it will violate section 115 of the Civil Procedure Code 1908, which deals with revisional jurisdiction. Moreover, the Court stated that since the right to get the award set aside is itself very truncated, the enforcement of such a right should also be very limited in nature. The SC further observed that section 34 of the Act aligns with the UNCITRAL Model Law,  which confers no modification power to a court hearing a challenge to an award, as well as the legislative policy of minimal judicial interference in arbitral awards.

    A deeper substantive analysis of arbitration’s fundamental tenets also results in the same conclusion. Firstly, arbitration aims to provide a speedy and cost-efficient resolution to disputes, and allowing courts to modify awards would undermine this objective by leading to protracted litigation involving high costs akin to traditional court proceedings. The grant of such a power would also vitiate the core principle of party autonomy,  by allowing external interference in the parties’ agreed-upon process of resolving disputes through chosen arbitrators, thus potentially undermining their autonomy to determine the terms and conditions of the resolution process.

    Additionally, it would be against the interests of efficiency and specialisation to give this power to courts since arbitrators are often chosen for their specific subject matter expertise, and judicial modification could devalue this specialised knowledge, as judges may lack the same expertise level in the given subject matter. Lastly, on a practical level, limiting court intervention to setting aside awards rather than modifying them, helps conserve judicial resources and reduces the burden on the court system. 

    Implications

    The restriction on this power ensures the finality and certainty of arbitral awards, promoting confidence in arbitration as a preferred dispute resolution method. Parties can rely on the arbitral process knowing that awards, once issued, are less susceptible to judicial interference beyond specified grounds for setting aside, which can also be cured by the Tribunal itself under section 34(4) of the Act, thus reinforcing the pro-arbitration approach. This stability enhances the enforceability of arbitral awards, both domestically and internationally, which is crucial for businesses operating in a globalised economy. 

    However, the restriction also presents challenges, particularly in cases where an award contains minor errors or miscalculations that do not warrant setting aside the entire award but still require correction for fairness. Parties may feel aggrieved if they cannot seek judicial correction of such errors, potentially leading to dissatisfaction and increased challenges to awards. Although they have the right to approach the SC for modification under Article 142, this is not feasible if the modification required is not substantial. Moreover, the power under Article 142 is also restricted.

    Thus, the binary approach of either upholding or setting aside the entire award limits available remedies, potentially leaving parties with incorrect or unfair outcomes. This may compel them to initiate fresh arbitration proceedings to rectify errors, increasing costs and delays, and undermining arbitration’s efficiency goals. Furthermore, dissatisfaction with limited recourse may lead to more appeals and litigation, increasing judicial workload and contradicting arbitration’s purpose as a swift and efficient dispute resolution method. Balancing finality with the need for fairness and efficiency remains a critical challenge in the arbitration landscape, necessitating thoughtful reforms and procedural enhancements to address these concerns effectively.

    Potential Solutions

    Legislative clarity through well-drafted guidelines should be achieved through amendments that grant courts limited powers to correct errors in awards. This would align with international practices, allowing selective corrections without compromising award finality. This is the practice in the United Kingdom wherein the power of courts to modify awards is largely restricted to limit judicial intervention and uphold fundamental principles of arbitration. Additionally, emphasising enhanced arbitration agreements can empower parties to include internal review mechanisms, such as appellate arbitration panels or expedited procedures, to address errors or ambiguities. This approach would minimise judicial intervention.

    Opting for a three-member tribunal instead of a sole arbitrator can also improve decision quality and reduce the need for modifications. Moreover, ensuring that arbitrators have relevant expertise is crucial for sound decisions. Judicial guidance should also clearly differentiate between grounds for setting aside an award and situations needing corrections, thus ensuring consistency and transparency in judicial decisions.

    An increased use of section 34(4), allowing the tribunal to make necessary modifications, can also be beneficial since it limits judicial intervention, alongside effectuating the required changes. This balancing act, along with other solutions, if effectively implemented, will contribute towards a robust arbitration framework.

    Conclusion

    The evolving jurisprudence surrounding section 34 underscores clear judicial intent to preserve the finality and autonomy of arbitral awards by restricting courts from modifying the same. The accepted position is largely clear, with numerous precedents establishing that courts do not have this power. The Gayatri Case, as mentioned in the beginning, is likely to follow this established norm.  While this approach bolsters the integrity and efficiency of arbitration, it also presents challenges that necessitate thoughtful reforms, particularly in addressing minor errors that do not justify setting aside an award. A more balanced and effective arbitration framework can be established by implementing legislative amendments, enhancing arbitration agreements, providing judicial guidance, and leveraging the tribunal’s powers under section 34(4). Such measures will ensure that arbitration remains a preferred method for dispute resolution, combining finality with fairness and efficiency, thus bringing about a balanced framework. 

  • Settlement Agreements and Section 12A Withdrawals: A Comparison with Section 230 of the Companies Act, 2013

    Settlement Agreements and Section 12A Withdrawals: A Comparison with Section 230 of the Companies Act, 2013

    BY ARSHIA ANN JOY AND ADITI SINGH, FOURTH-YEAR STUDENTS AT NUALS, KOCHI.

    Introduction

    A liquidation order is passed as per the Insolvency and Bankruptcy Code 2016 (“IBC“)  when the Corporate Insolvency Resolution Process (“CIRP“) falls through, and the company cannot be revived within the stipulated timeline. However, courts, over time, have interpreted that issuing a liquidation order is not to be treated as a death sentence to the company and its operations. This is because the ultimate aim of the IBC is to facilitate the revival of the company if it is a feasible option. This further implies that the order permitting an entity’s liquidation can be reversed if the petition initiating CIRP proceedings is itself withdrawn. Section 12A was introduced in the IBC in 2018 to allow settlements between the Corporate Debtor (“CD“) and the creditors by allowing withdrawal of proceedings, with 1035 such withdrawals recorded till December 2023.

    This article explores the legality of allowing the withdrawal of proceedings after issuing the liquidation order, when a settlement agreement is reached. The authors also look at how the lack of procedural clarity surrounding the acceptance of the settlement agreement leads to difficulties in reviving the CIRP if the settlement agreement fails. Further, solutions are suggested through a comparison with section 230 of the Companies Act, 2013 (“CA”), which facilitates arrangements aiming at debt restructuring and thereby resolving the financial crisis of the company. The authors argue that allowing the Adjudicating Authority (“AA”) to thoroughly analyse the settlement agreements while admitting section 12A applications, similar to the procedure envisaged in section 230 of CA, would be a step in the right direction in addressing the ambiguities surrounding the withdrawal of CIRP and revival of proceedings, if need be.

    Reversibility of a Liquidation Order and Withdrawal of Proceedings Post Issuance of Liquidation Order

    The parties are said to have arrived at a settlement agreement if the CD agrees to pay the creditor an agreed sum to resolve the conflict. Once a settlement agreement is reached after a liquidation order is passed, the parties can approach the AA under section 12A and withdraw the proceedings initiating CIRP. The primary intention behind introducing section 12A is to recognise post-admission settlement cases in line with statutory provisions. 

    The NCLAT, in Navaneetha Krishnan v. Central Bank of India, settled the law on reversibility of a liquidation order. It was held that even during the liquidation period, if any person satisfies the Committee of Creditors (“CoC”) , and CoC accepts the said offer with a 90% voting share, such a person may apply for a withdrawal of the proceedings before the AA.

    In 2019, the NCLAT, in a similar case, emphasised the importance of allowing the promoters/shareholders to arrive at a settlement as per section 12A. In such cases, the application seeking initiation of CIRP can be withdrawn. The Supreme Court in Vallal RCK v. Siva Industries held that the wisdom of the CoC in approving a settlement plan must not be interfered with by the AA unless such a decision was wholly ‘capricious, arbitrary, irrational and de hors the provisions of the statute or the Rules.’ In this case, the CoC had failed to approve the proposed resolution plan with the requisite 66% majority. Subsequently, the Resolution Professional filed an application under section 33(1)(a) of IBC seeking liquidation of the entity pending which the promoter of the CD approached the AA with a settlement plan. The AA had, in turn, refused to approve it without giving due regard to the 90% majority decision of the CoC to go ahead with the settlement plan. 

    More recently, in 2022, the NCLT analysed the rationale put forth in Navaneetha Krishnan and Vallal RCK to conclude that even after the order of liquidation is passed, the application for withdrawal of proceedings may be allowed. In this case, the liquidator had received a settlement proposal from the promoter of the CD duly approved by the CoC with the requisite majority. 

    The NCLT Chennai Bench rightly noted:

    “Thus, it could be seen that even during the liquidation process, the parties have arrived at a settlement, then the application filed under Section 7, 9 and 10 can be withdrawn. Consequently, the CIRP and the liquidation initiated against the CD also stand withdrawn.”

    Thus, the order of liquidation already passed does not hinder the AA from passing an appropriate order of withdrawal as per section 12A if all the requisite conditions are satisfied.

    The Dilemma: Applying Section 12A Post Issuance of Liquidation Order

    Although the law seems to be settled regarding the impact of section 12A on a liquidation order, the lack of procedural clarity has led to contradictory results in the past few years. 

    In Jayashree Mohan v. Pathukasahasram Raghunathan, the NCLT laid down the limited scope available for reviving an entity undergoing liquidation. It was stated that once the liquidation process is initiated, the entity cannot come out of the process except through the two avenues, namely, by way of a scheme under section 230 of CA or by sale as a going concern. In this case, section 12A is not seen as a potential avenue which could result in the revival of the entity once liquidation is initiated.

    Similarly, the NCLT Chennai bench in Narayan Maheshwari disallowed the withdrawal application made under section 12A while the liquidation process was going on. It was emphasised that section 12A was inserted in Part II of the IBC, which deals exclusively with CIRP and not liquidation. Since no specific amendment is made in the liquidation process regulations, an application for withdrawal under section 12A cannot be allowed post-issuance of a liquidation order. It was further held that in Navaneetha Krishnan, the application under section 12A was never filed during liquidation and that the ex-promoter of the CD had filed an application under section 230 of CA for approving a scheme of compromise. In this case, the NCLT has voiced its concerns regarding allowing withdrawal of proceedings once the order of liquidation has been passed as it might potentially lead to every suspended Director/Promoters waiting till the liquidation order to enter into a settlement agreement at a ‘throw away price.’

    The above rationale of the tribunals could hamper the prospects of reviving a company through settlement, just because the order of liquidation has been initiated against it, thus defeating the purpose for which section 12A was included in the IBC. The application of section 12A to Part III of the IBC has to be specifically inculcated in the regulations to put a rest to these contradictory judgements.

    Revival of CIRP in case of Failure of Settlement Agreement

    In  the cases where withdrawal of proceedings was allowed after issuing the order of liquidation, the stakeholders had agreed on a one-time settlement (“OTS”) or a settlement agreement. In Sudip Dutta, the NCLT, while analysing a catena of decisions including Navaneetha Krishnan stated that:

    “In the instant case, no application was filed under Section 12A of IBC since there was no OTS that was acceptable to the Respondent No. 2 bank.”

    As noted above, the application for withdrawal under section 12A is considered after the issuance of the liquidation order only when the CoC approves a settlement agreement with the requisite majority. 

    However, the procedure for accepting or analysing such a settlement agreement is not specified in the statute or the relevant regulations. As seen above, the commercial wisdom of the CoC is given primacy and judicial intervention is permitted only if the decision of the CoC was wholly arbitrary or capricious. Analysing whether the decision itself was arbitrary or capricious would, in turn, require the settlement agreement to be on the record, which might not happen in most cases, especially when the statute/regulations fail to mandate the same, as was noted by the NCLAT in Krishna Garg. 

    In this case, the CD did not adhere to the terms of the settlement agreement after the CIRP proceedings were withdrawn. The NCLAT refused to revive the CIRP proceedings because the settlement agreement terms were not filed or brought on record before it. The NCLAT in SRLK Enterprises categorically stated that IBC is not a recovery proceeding where parties can repeatedly approach the AA owing to the non-repayment of debt. Proceedings can be revived only if the settlement agreement has been brought on record and has been made a part of the order of withdrawal. The AA can revive the CIRP proceedings, if the settlement agreement has a clause which provides for the revival of CIRP proceedings upon failure of setttlement agreement. The AA need not specifically grant the liberty to revive the proceedings in such cases. This would also imply that if there is no such clause allowing revival, the parties may be granted the liberty to do so specifically, by the AA. These recent orders suggest that the settlement agreement need not always become a part of the order allowing the withdrawal of proceedings, thus complicating the revival of proceedings under the IBC later when the parties fail to adhere to the settlement terms.

    Additionally, in Vallal RCK, the Supreme Court noted how the CoC has entered into many ‘deliberations’ before accepting the settlement plan, and stated that the CoC decision is not ordinarily subject to judicial scrutiny. The analysis done by the court gets confined to checking whether the CoC has done enough ‘deliberations’ before approving the settlement agreement. This seems to be in stark contrast to the procedure followed under section 230 of CA, where the AA is empowered to delve deeper into the actual contents of the proposed scheme.

    Comparison with Section 230 of the Companies Act, 2013

    Even after passing the order of liquidation, if a scheme of Compromise demonstrates viability, feasibility, optimisation of the CD’s assets, and equitable consideration of creditors, the liquidator may submit an application under section 230 of the CA to the AA in a bid to revive the company. As per regulation 2B of the Liquidation Process Regulations 2016, a scheme of compromise and arrangement may be completed within 90 days post the order of liquidation. 

    Furthermore, clauses (2) to (10) of section 230 puts forth the powers of the AA in overseeing the admission of the scheme of compromise and arrangement. The AA is to be made aware of the latest financial position of the entity, the creditor’s responsibility statement, the auditor’s report on the fund requirements, the valuation report on the assets of the company, etc. Further, in SREI Equipment Finance Limited, the NCLAT observed that sections 230-232 cast an obligation on the AA to ensure that the scheme is not contrary to public policy and not prejudicial to the company’screditors and members. Greater checks and balances are put in place under section 230 of the CA while admitting a proposed scheme of compromise and arrangement even after a liquidation order is passed.

    Conclusion and Recommendations

    A similar procedural clarity on the AA’s oversight is absent when it comes to the role of the AA in a section 12A application involving a settlement agreement. Section 12A must specifically be made applicable to Part III of the IBC. Further, a time period may be mentioned in section 12A, similar to section 230 of CA, for accepting and analysing the settlement agreement once the AA has issued the order for liquidation. The regulations must also specify that the settlement agreement entered into must mandatorily be brought on record while withdrawing the proceedings so that revival of the CIRP can be made possible without much hassle if the said agreement falls through at a later stage.