Author: HNLU CCLS

Enforcement of Foreign Seated Emergency Arbitration Award in India: Unboxing the Pandora’s Box
By Prerna Mayea, fifth-year student at Institute of Law, Nirma University

I. Introduction

Emergency arbitration has been a buzzword in the last few years in India since the ruling in Amazon.com NV Investment Holdings LLC v. Future Retail Ltd. The Supreme Court of India held that Emergency Award (‘EA’) in India-seated arbitration can be enforced under Section 17(2) of the Arbitration and Conciliation Act (‘the Act’). This is certainly a big step for creating a pro-arbitration environment in the country. However, this case did not provide authority for the issue that EA in foreign seated arbitration is enforceable in India. This is because Section 17 cannot be relied upon to enforce the EA since Part I of the Act does not apply to foreign seated arbitration.

II. Judicial Stance On Enforcement Of Foreign Seated EA In India

The matter regarding enforcement of EA in foreign seated arbitration firstly came before the Delhi High Court in Mr. Ashwani Minda & Anr. V. U-Shin Ltd. & Anr. In this case, the applicant tried to avail the remedy of EA in foreign seated arbitration which was denied to him. Subsequently, the applicant tried to seek interim relief under Section 9 of the Act, which was denied by the court on two premises:
1. The dispute resolution clause in the agreement excluded the applicability of Section 9.
2. The applicant had already failed before the emergency arbitrator, and there were no changes in the circumstances.
The court cited the continuing mandate of the emergency arbitrator to deny the relief under section 9. This suggests that the court considered EA in a foreign seated arbitration as an effective remedy to disallow relief under Section 9.

In HSBC PI Holdings Ltd. v. Avitel Post Studioz Ltd and Ors., even though the court did not enforce the EA directly, it granted relief under Section 9 of the Act to the party by reproducing the EA verbatim. This suggests an alternate mode of enforcement of the EA by obtaining similar interim reliefs under Section 9. However, this might not be an efficacious remedy since it would require re-adjudication by the court leading to duplication of proceedings and wastage of time.

In Raffles Design International India Pvt. Ltd. v. Educomp Professional Education Ltd., the court denied enforcement of EA in foreign seated arbitration citing a lack of authority, and insisted on filing a fresh application under Section 9 of the Act. The court however also added that a party cannot be denied interim relief simply because a similar relief has been obtained through EA. Further, the decision to grant the relief will be independent of the interim order in foreign seated arbitration.

III. Enforcement Of Foreign Seated EA Under The Act
- Section 44 and 48 – Enforcing as foreign award
Arbitral award has been defined under Section 2(1)(c) to include an interim award. However, this definition under Part I of the Act cannot be applied in the case of foreign seated arbitration. Section 44 of the Act does not define ‘arbitral award’. However, Section 44(a) applies to arbitral awards arising out of arbitration to which the New York Convention (‘NY Convention’) applies.

Under the NY Convention, Article 1(2) defines ‘arbitral award’ to “include not only awards made by arbitrators appointed for each case but also those made by permanent arbitral bodies to which the parties have submitted.” This definition is inclusive and wide enough to encompass emergency award made by the arbitrator. It must be noted that emergency arbitrators are appointed by arbitral tribunals and thus such award must be considered to be made by arbitral institutions only and subsequently be included under the definition of an arbitral award. For example, Schedule 1(3) of the SIAC Rules, 2016 states that emergency arbitrator shall be appointed by the president of the institution upon the filing of an application by parties.

Further, Article 3 and Article 5(1)(e) of the NY Convention have been interpreted to consider ‘binding effect’ and ‘finality’ as prerequisites for enforcing an award under the NY Convention. This has raised concerns regarding the non-finality of EA as it can be overridden by arbitral tribunal after its constitution. In Yahoo! Inc v. Microsoft Corporation, the US court observed that the emergency arbitrator’s order was final in nature. It reasoned that while deciding to grant a specific interim measure, the emergency arbitrator duly considered all necessary information to resolve the merits of that request. Further, urgent interim reliefs provided in EA have been considered as ‘final’ across several jurisdictions such as Germany and Egypt. Since EA provides a definitive ruling regarding the interim measure, the ‘finality’ requirement under NY Convention must be expansively articulated to include interim measures granted in EA.

This leads to the conclusion that EA falls within the scope of Section 44 and can be subsequently enforced under Section 48 of the Act.
- Section 27 (5)- Contempt of Court
Section 27(5) gives the power to the arbitral tribunal to punish for its contempt. The punishment is alike the offences in suits tried before the court. It is a reprimanding and novel provision that does not trace itself from UNCITRAL Model Law.

In Alka Chandewar v. Shamshul Ishar Khan, the Supreme Court has ruled that in case any party fails to comply with orders of the arbitral tribunal, this act will be considered to be contempt of court. The aggrieved party can seek relief under Section 27(5) by making representation to the court. The court will be competent to deal with the matter under the provisions of Contempt of Courts Act, 1971, or under Order 39 Rule 2A of the Code of Civil Procedure, 1908.

After the amendment in 2015, Section 27 is also applicable to Part II of the Act. Thus, Section 27 (5) can be used to ensure the enforcement of EA in foreign seated arbitrations as well. This line of reasoning was raised and rejected in Raffles case. The court reasoned that a person in contempt of interim order passed by tribunal in foreign seated arbitration cannot be punished by Indian courts. This reasoning by the court seems to be flawed to the extent that the party or its assets would be located in India and therefore would be within the jurisdiction of Indian courts, which would have power, even at the instance of a foreign seated arbitral tribunal.

IV. International Perspective

Various commercial jurisdictions such as Singapore and Hong Kong have a legislative framework that provide more certainty in enforcement of foreign seated Emergency arbitration award. For instance, in Hong Kong, Section 61 of the Arbitration Ordinance, 2011 requires to obtain the leave of the High Court to enforce interim measures granted by foreign tribunals. The party seeking enforcement needs to substantiate that the order falls within the description of an order or direction that may be made by an arbitral tribunal seated in Hong Kong. This mechanism has also been extended to emergency arbitration under Part 3A of the Arbitration (Amendment) Ordinance, 2013.

In Singapore, the International Arbitration Act, 1994 (IAA) includes emergency arbitrator within the definition of ‘arbitral tribunal’. Recently, the Singapore High Court in CVG v. CVH has also ruled that ‘foreign awards’ under the IAA would also include foreign interim awards made by an emergency arbitrator, thus allowing for enforcement of foreign seated EA. Further IAA also provides for grounds refusing recognition of EA including breach of rules of natural justice and exceeding the jurisdiction of emergency arbitrator.

V. Framework For India

It is evident that countries are moving towards an arbitration-friendly approach in terms of enforcement of foreign seated EA and interim measures while also providing for safeguards to honor their national public policy. The most effective legislative solution for India is to incorporate in the Act a provision similar to Section 17H of the Model Law, which provides for recognition and enforcement of interim measures by arbitral tribunals irrespective of the country of issuance. Such enforcement must also be paired with appropriate safeguards such as:
1. Vesting of power to in the court where enforcement is sought, to order for provision of adequate security from requesting party.
2. Specify grounds for recognition and enforcement of interim measures keeping in mind the public policy of India.
Such safeguards will help to maintain a balance between party autonomy and public policy of India. It will also make the enforcement of EA faster and easier. Parties must also be cautious while drafting the arbitration clause to ensure that it does not exclude the applicability of Section 9 of the Act. Courts adhere to predetermined procedures when deciding on interim measures. EA, on the other hand, can provide such relief in a more expedient and confidential manner, saving both money and time. Justice Srikrishna Committee Report (2017) and the 246^th Law Commission Report have also suggested including emergency arbitrators within the definition of ‘arbitral tribunal’. However, given the existing position of Indian courts refusing to enforce EAs, parties should exercise extreme caution when relying on emergency arbitral awards obtained in a foreign jurisdiction to defend their rights in an emergency
November 28, 2022
Revisiting the ‘Adverse effect’ factor in unilateral commissions: ZOMATO/ SWIGGY CASE

BY PRANAY AGARWAL, THIRD-YEAR STUDENT AT GNLU, GUJARAT

Introduction

Unilateral terms of an agreement are seen with suspicion and are often subjected to legal challenge on the grounds that it is arbitrary and unreasonable in nature. The unilateral terms which are abusive and are imposed on others under a‘compelled’      agreement, are also covered within the purview of ‘practice’ encouraging anti-competitive agreements under Section 3(3) of the Competition Act, 2002 (“the Act”). Such a broad interpretation can also be traced to the judgment of BMW Belgium SA v. Commission of European Communities , where the European Court of Justice (“ECJ”) defined the scope and validity of the agreement promoting unilateral conduct of a party. The principle was even adopted for Indian market in Aluminium Phosphide Cartel case to recognise bid rigging as a ‘practice’. However, for the application of the Section, the conduct should have an Appreciable Adverse Effect on Competition (“AAEC”).

In a recent letter addressed to Competition Commission of India (“CCI”), the Jubilant FoodWorks, the holding firm of Domino’s have indicated their intention to pull out from the deals with food delivery platforms like Zomato and Swiggy due to high commissions charged by these food delivery giants. The letter is a shockwave of the allegations of National Restaurant Association of India (NRAI) against exorbitant commissions charged by the food delivery platforms which ranges between 10% to 30% and the resultant investigative raids by CCI.

In the case that ensued, the CCI made the order in favour of the food delivery giants to hold their unilateral conducts not anti-competitive. While normally, the judgment of CCI is in accordance with the principles enshrined in the Indian Contract Act, 1872 (“Contract Act”), the Indian watchdog neglected in taking note of the future outcome of such unilateral terms and the adverse impact it may have on the competition in the market.

In view of these contemporary developments, this article analyses the status of the unilateral conducts like charging of high commissions, which are however part of the agreement and are therefore valid under the Contract Act, in light of the competition laws and principles of the country. The article then investigates deeper into the facets of AAEC and the importance held by ‘public interest’ in the determination of the case, thus giving a critical analysis of the CCI’s stance.

Unfair terms of agreement and unilateral conduct

Unfair terms of a contract have been a contentious issue in the contract law of every jurisdiction. While some protection has been offered under Section 23 of the Contract Act which considers contracts with objects opposed to public policy     ,reliance is often placed by both the consumers and the courts upon the principles of equity and justice embodied under Article 14 of the      C onstitution to escape its pre-conditions. In the recent case of NRAI v. Zomato Ltd. & Anr., one of the major contentions of NRAI was related to the one-sided terms of the contract, particularly      the commission clause. However, from the principle given in the United States v. Parke Davis & Co., the concurrence by even an unwilling party will result into a valid contract.

This makes it apparent that Section 23 will not be applicable in the present case, even if the Restaurant Partners (“RPs”) did not have any choice but to agree with the unilateral terms. However, the unilateral conduct of the dominant players and unfair trade practices has been a      major issue in the country since the initiation of debates around the Monopolies Restrictive Trade Practices (Amendment) Bill, 1983. The legal void in the contract laws was also recognised in the 103 ^rd Report of the Law Commission of India which recommended the insertion of the provision dealing with unconscionable conducts.

     Given the above legal position, the CCI’s order seems legally justified. However, the order will have dire consequences on the market competition in the future due to its economic and legal value. The problem however could have been avoided if CCI had interpreted Section 3 of the Act from a broader perspective like the ECJ did in BMW Belgium SA case . Although it can be inferred that the provision has been applied in the CCI’s order, the commission made a narrow interpretation of the adverse effect factor by failing to note of the provision, thus showing its ignorance of its prior legal instance and relevant circumstances of the case. This mistake can have a huge impact on not only the market and RPs, but also their customers, thus affecting the economic structure as a whole.

Looking from a broader perspective: A Review of the ‘Adverse Effect’ factor

Section 3(1) of the Act introduces the principle of Appreciable Adverse Effect on Competition       violation of which prohibits the enterprises from entering into anti-competitive agreements. It refers not to a particular list of agreements, but to a particular economic consequence, which may be produced by different sort of agreements in varying time and circumstances. It majorly deals with the acts, contracts, agreements, conducts and combinations which operate to the prejudice of the public interests by unduly restricting competition or unduly obstructing due course of trade.

However, for the factor to be applicable, reliance has to be placed upon the words ‘appreciable’ and ‘effect on competition’. In the present context, therefore, it is pertinent to       effectively analyse           the food delivery market of India, especially with respect to the separate relevant markets of both Zomato and Swiggy. Moreover, the nature of the restraint and conditions in the respective relevant markets before and after the restraint also has to be judged for giving a proper application to the principle of AAEC.

The term ‘appreciable’ has been defined by ECJ in Volk v. Vervaeke, where reliance was placed upon the probability ofthe pattern of trade such that it might hinder the very objective of the competition law. Similarly the Commission Notice on Agreement of Minor Importance provides for the circumstances under which actions are not viewed as significantenough to appreciably restrict competition. This further gives a concrete meaning to the term ‘appreciable’.

Unlike the term ‘appreciable’ which has been given restricted to certain circumstances, the phrase ‘effects on competition’ has to be judged with reference to the market share in the relevant market and thus it becomes an important task to define ‘relevant market’. In the present context, the mammoth task was attempted by both NRAI and Zomato/Swiggy giving narrow and wider interpretations respectively. But in this aspect, it is safe to accept       the position of CCI to simply refer Zomato/Swiggy as online intermediaries for food ordering and delivery.

Zomato and Swiggy are the biggest food delivery platforms in India, who conjointly holds      90-95% of the Indian food delivery business. Further, as on January 2022, the market valuation of      the se giants stood at $5.3 billion and $10.7 billion respectively which shows the dominant position enjoyed by them, which is also prima facie evident by the circumstances of the case.

Bad news for consumers? Highlighting the significance of ‘Public Interest’

While the economies of scale can be achieved with the reasonable commissions and the reduced costs will benefit the customers in the form of higher quality and lower prices, exorbitant prices will instead result in the reduction of the profits. The impact of such losses will then be passed down to the ultimate customers, thus having a negative effect on the consumers and RPs. Hence, the unilateral act of charging high commissions without any formal communication to the RPs hurts the interests of the general public and also takes away the ability of RPs to compete independently if they come out of the contract.

In light of the above, the public interest test cannot be ignored while considering the economic consequences the AAEC may cause. Therefore as indicated in Standard Oil Co. v. United States, the factor of AAEC operates on the prejudice of the public interests. Public interest in this sense is the first consideration before the courts while considering the validity of the agreements under Section 3 of the Act. Moreover, Section 19(3) of the Act which provides for factors determining AAEC under Section 3 gives due regard to the accrual of benefits to the customers.

However, the term ‘public interest’ has to be constructed from a wider perspective with respect to the circumstances of every case. This proposition was made clearer in Haridas Exports v. All India Float Glass Manufacturers Association, where the Apex court clarified that public interest does not necessarily mean interest of the industry but due regard has also to be given to all possible customers in the market for ensuring that the law achieves its objective of fair competition and public justice.

Conclusion

Unilateral fixing of commission rates by the players like Zomato and Swiggy who enjoy a dominant position in the food delivery market in India has been declared by the CCI to be not anti-competitive. However, such narrow application of Section 3 of the competition act influenced by the provisions of contract laws of the country does more harm than good and has the potential to defeat the object of the competition laws. In such scenario, the importance of AAEC factor and test of ‘public interest’ should be relied upon to secure fair competition in the market as well as the interests of both the producers and the customers. While the decision has huge ramifications, one can only hope that the position is rectified in the subsequent decisions.

November 9, 2022

Regulating The Fees Of Insolvency Professional: A Hit Or A Miss?

BY SANYAM GUPTA, FOURTH YEAR AT NLIU, BHOPAL

Introduction

Since the advent of the Insolvency and Bankruptcy Code (“the Code”) in 2016, the Code has been evolving through various dictums given by the judiciary and regulations by the Insolvency and Bankruptcy Board of India (“the Board”) to ensure that it works in tandem with the current economic situation of the nation. These regulators ensure that the main spirit of the Code, i.e., value maximization and speedy resolution in a ‘creditor-in-control model’ is upheld and its scope is enhanced. In order to maximize the payment of the debt to the relevant stakeholders, it becomes incumbent to minimize the Insolvency Resolution Process Cost (“IRPC”). The remuneration of the Insolvency Professional (“IP”) forms a relevant portion of the IRPC; therefore, it must be regulated.

The IP plays a crucial role in the Corporate Insolvency Resolution Process (“CIRP”). He not only acts as the catalyst facilitating resolution but also runs the Corporate Debtor (“CD”) during the CIRP. It is his expertise that ensures the successful and profitable resolution of the CD. In the case of Essar Steel, the CD reported a profit gain of 5% during the CIRP and reported the highest production as well, under the supervision of the Resolution Professional (“RP”), which further lead to most Financial Creditors realizing 100% of their principal outstanding and 90% of their claim. The credit for this can surely be given to the RP running the CD.

The Adjudicating Authority (“AA”) has on numerous occasions reiterated that there should be some regulations w.r.t. the remuneration of the IPs. Starting from the case of Madhucon Projects Limited, wherein the fees of the Interim Resolution Professional (“IRP”) were 5 crores by the first meeting of the Committee of Creditors, while the total amount of debt was 4.45 crores; to the case of Variscon Engineering Services Pvt. Ltd. Vs. Pier-One Constructions Pvt. Ltd. wherein the AA specifically pointed out the need for regulations governing fees of the IPs. There are also instances wherein the IP quotes fewer fees in order to get the CIRP assigned to them, following which they add substantial miscellaneous expenses through advisors/support staff to inflate their dues. All this leads to further unnecessary bleeding of the CD. Thus, regulations and guidelines to regulate the remuneration of the IP become quintessential.

The Board introduced such regulations and guidelines by uploading a discussion paper titled, “Discussion Paper on Remuneration of an Insolvency Professional” which discusses various aspects of how the Board plans on regulating the remunerations of the IPs. The contents of this paper further went on to amend the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (“IRP Regulations”), to provide incentives to meet the spirit of the code i.e. timely resolution and value maximization in addition to providing for a base pay for IRPs and IPs. The author of this article has criticized this approach of the Board of setting a base pay, while not regulating the extensive expenses charged by IPs that lead to unnecessary bleeding of the CD. The author further goes on to analyze the ‘ratio of cost of the process to recovery rate’ of insolvency proceedings in India, highlights the problems in the amendment, and provides solutions to improve the same.

The Regulation

The Board, vide notification No. IBBI/2022-23/GN/REG091 published the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) (Third Amendment) Regulations, 2022 (“Amendment”) on September 13, 2022. By this notification, the Board has amended IRP Regulations, in order to facilitate the regulation on the remuneration of IRPs and IPs, appointed on or after 1^st October 2022. The Board has followed a two-pronged structure, wherein a minimum/base pay is set up on the basis of the quantum of claims admitted, followed by incentivizing the fees based on performance towards; i) timely resolution and ii) value maximization. The minimum pay scale will be as follows:

Quantum of Claims Admitted	Minimum Fee (Rs. Lakh) per month
(i) <= Rs. 50 crore	1.50
(ii) > Rs.50 crore < = Rs.100 crore	2.00
(iii) > Rs.100 crore < = Rs.500 crore	2.50
(iv) > Rs.500 crore < = Rs.1,000 crore	3.00
(v) > Rs.1,000 crore < = Rs.2,500 crore	3.50
(vi) > Rs.2,500 crore < = Rs.10,000 crore	5.00
(vii) > Rs.10,000 crore	7.50

Since time efficiency and value maximizations are the essence of the Code and the IPs play a major role in its realization, the board has added that apart from the minimum or floor fees, the IPs would be incentivized on the basis of i) resolution of CD in the prescribed timelines as given in the Code, and ii) achieving value maximization of CD. Thus, the Amendment provides a performance-linked fee structure for the timely completion of CIRP, wherein a certain percentage of actual realizable value shall be given to the IP as an incentive based on the time taken to resolve the CD. This ranges from 1% for resolution in less than or equal to 180 days to 0% for resolution after 330 days. Furthermore, a variable fee of 1% of the positive difference between the actual realizable value and fair value will be paid as an incentive to IPs who work towards value maximization. These sums must not exceed Rs. 5 crores and must be approved by the CoC.

The Amendment in the IRP Regulations ensures that all IPs are paid adequately and are incentivized for following the Code to its essence. While the same is beneficial for the creditors, it is detrimental and might lead to unnecessary bleeding of the CD.

Critique

The Bankruptcy Law Reforms Committee in its report mentioned the prodigal nature of any constraint to be imposed on the fees of the RP. It further mentions that due to a competitive market for IPs (where the lowest bidder gets the CIRP), the fees to manage the insolvency resolution process will converge to the fair market value for the size of the entity involved.

Even though the board has ensured that the IPs be paid a minimum (floor) payment for their services based on the quantum of claims, however, as stated earlier, during the process of appointment of the RP, the IPs quote fewer fees in order to get the CIRP assigned to them, following which they add substantial miscellaneous expenses through advisors/support staff to inflate their dues. Regulation 34 of the IRP Regulations provides for the fees and expenses incurred by the RP which shall be fixed by the CoC and shall be a part of IRPC. While fixing this cost, the RP indicates the approximate estimation of the expenses that would be incurred by them during the CIRP. It shall be assumed that since the RP is a professional, he would quote expenses with a reasonable understanding of the general expenses that would be incurred during CIRP. The RP’s exorbitant expenses should thus be regulated to avoid unnecessary bleeding of the CD and wrongful gains to the RP. The board should fix a maximum criterion (like 250% of the approximate cost stated) in order to ensure that the RP does not get illicit benefits. In cases wherein the RP crosses this statutory limit, they should bear these over-the-top expenses on their own, as a penalty.

The Board has also failed to address the issue of exorbitant fees charged by the IPs during the CIRP. The following is a list of countries along with their recovery rate during insolvency proceedings (cents on every dollar) as well as their cost of process on the basis of the percentage of the estate of the debtor as per data given in the Doing Business Data published by the World Bank in 2019 :

Name of the Country	Recovery rate (cents on every dollar)	Cost of the process (% of estate)
India	26.5	9%
United Kingdom	85.3	6%
United States of America	81.8	10%
Norway	92	1%
Sweden	78	9%
Slovenia	88.7	4%
Singapore	88.8	4%

It is quite evident that India has one of the highest costs of the process as well as one of the lowest recovery rates when it comes to insolvency regimes in the world. Thus, it becomes essential for the Board to regulate the IRPC as well as set a maximum limit on the remunerations filed by the RP, similar to the laws in Canada and the USA. The Board may propose different maximum limits on remuneration for different valuations of claims, similarly as it has done for minimum (floor) pay. Further, these limits can be relaxed for a speedy resolution and value maximization, as has been proposed by the Board.

The Board has also failed in providing a revision mechanism for these minimum (floor) pay scales as well as for the rate of incentivization. For the same purpose, the board may constitute a committee that may meet on an annual or bi-annual basis. The committee should analyze the prevailing market situation and the fair market value of the fees of IPs for various categories of CIRPs based on the quantum of claims, following which the minimum (floor) pay scales as well as the maximum pay scales of the IPs shall be revised by this committee.

Conclusion

The Amendment is merely a start to regulating the fees of IPs and subsequently the IRPC, but it is a long road ahead. While the IP plays a crucial role in the running of CD during the CIRP, they also have to ensure that the CIRP is completed in a timely manner with the aim of value maximization. The Amendment has tried to ensure that the IPs get a minimum pay as well as an incentivization towards the realization of the core values of IBC. This was done in order to reduce the burden of litigation between parties and on the AA. Yet, the Board should consider practical scenarios which lead to the bleeding of CD and hamper the spirit of the code and its core values and ensure rules and regulations such as regulating the maximum fees charged by the IPs, penalty for charging exorbitant expenses after quoting minimal expenses while getting the CIRP assigned to them, ensuring that these minimum (floor) pay rates and maximum rates are revised in a timely manner to be in tandem with the prevailing market rates are put in place to avoid such scenarios.

November 2, 2022

Interplay Between SEBI Regulations and Liability of Financial Influencers (FinFluencers)
By VARUN MATLANI and Vaibhav Gupta, THIRD-year students at GNLU, GANDHINAGAR

Introduction

The massive growth of social media influencers coupled with high internet penetration for a country with the world’s youngest population, particularly in the earning age bracket has given birth to the rise of a new segment of financial influencers or popularly known as ‘FinFluencers’. These FinFluencers claim to advise and teach people about making quick bucks through stock markets. This article examines the legal liability of their advice, to what extent they should be bound by relevant Securities and Exchanges Board of India (‘SEBI’) regulations and what accountability they have for their content to their followers who rely on them and are frequently their source of income from commercials, stock broker affiliate marketing, and the sale of their courses. Further, the article compares the newly evolving jurisprudence internationally especially in Netherlands and Germany by comparing their regulations and guidelines for FinFluencers with that of SEBI in India.

Are FinFluencers bound by SEBI?

The majority of FinFluencers operate outside of SEBI’s purview and prima facie do not adhere to its regulations, operating in a grey space or on a thin line of difference of definition as research analysts. SEBI, staying committed to its tagline “strength of every investor” has voluminous regulations binding those giving investment advices in order to protect the gullible and first-time investors from falling into dubious schemes. The author contends that these FinFluencers would fall within the ambit of definition of ‘Research Analyst’ under Regulation 2(u) of SEBI (Research Analysts) Regulation, 2014 making them accountable for their content as per the relevant regulations.

The definition holds a person to be considered as Research Analyst if they prepare or publish content of research report or provide research report or offer an opinion with regards to a public offer or give price targets also. These regulations also require them to be technically qualified and pass National Institute of Securities Market (‘NISM’) exams, providing a safety net for investors and fulfilling the fundamental purpose of SEBI.

Interestingly, the word ‘Research Report’ under Regulation 2(w) includes any kind of electronic communications and generally exempts opinion on overall market trends or generalised opinions. Therefore, the videos and posts of these FinFluencers does not escape the definition of report.

In light of these regulations, one may scrutinize the “top FinFluencers” (in terms of their follower base on social media platforms), and can broadly ascertain a pattern of content that is posted by them, i.e., giving analysis on IPOs, fundamental analysis of stocks, recommending stocks for long term or short term. A major problem that arises here is that till the time the end user watches the video, the information can be converted into misinformation due to time variation gaps (for instance, an Instagram reel being uploaded today and end user considering it relevant when it reaches him/her, but the substantial time has elapsed for the user to act correctly) and information asymmetry causing heavy losses to the viewers. SEBI Regulations provide for regulation(s) for publication of report public media whereby the said regulations are directly applicable in literal manner. Electronic communication which is perceived through various social media with a massive reach to the audience may also be categorised similar to appearance before public media whereby too, as per Regulation 21, there exists a requirement for disclosure and assurance of reasonableness and fairness in creation of such report.

Liability if FinFluencers are made to register as Research Analyst

Many of the “top FinFluencers” would not qualify under technical requirements (for example, possessing the 5-year experience, professional qualification, or postgraduate degree) for education under the regulation. Further, NISM exam mandate would ensure not anyone with access to the internet can start giving opinions on the internet.

Once considered as Research Analyst, Regulation s 16 and 18 shall restrict these FinFluencers from trading into scrips.

The contents of the research report would need more precision in terms of rating and time horizon benchmarking (i.e., the validity of such advice) along with a disclaimer and persuasive liability on publishers to ensure reliable facts and information forming part of their research as per Regulation 20.

Regulation 24 makes research analysts responsible for maintaining an arms-length distance from taking up promotional activities and ensuring that the members involved in publishing of such content are complying with Regulation 7 (with regards to technical qualifications).

Regulation 25 would require keeping a record of all their research along with the rationale of providing so, thereby preventing any escape by any deletion of such reports and also subjecting these records for inspection.

International Comparative Analysis of Existing Regulatory Frameworks for Social Media Influencers Pertaining to Financial Information

In this segment, the regulatory frameworks of Germany’s German Federal Financial Supervisory Authority (also known as BaFin) and Netherland’s Authority for Financial Markets (Autoriteit Financiële Markten – AFM) – the SEBI’s counterparts of their respective countries, are analysed with respect to their regulations and evolving legal framework with administrative actions for FinFluencers.
- Netherlands
The Dutch authority, AFM, conducted exploratory study to understand the legal landscape of FinFluencers and has even adopted the term FinFluencers for referring to those giving financial advice on social media platforms. The study found that FinFluencers lack neutrality and transparency, promoting risky products, and thereby keeping their own interests first. AFM also flagged the risk of non-compliance of regulations in Dutch that require influencers/finfluencers/third-party advertisers for license (s)/registration with AFM which can be drawn parallel to SEBI’s regulations in India.

There is a Dutch ban on third-party inducements, which further prohibits FinFluencers from charging referral fees or advertisement fees. It was also noted that merely posting a disclaimer does not allow an escape route from regulations if they provide such services de facto. In the recent case of Grinta Invest, AFM issued notices to the company as well as FinFluencers for not holding appropriate licenses and promoting highly risky instruments such as foreign exchange and CFDs.
- Germany
The German authority ‘BaFin’ too requires FinFluencers to comply with the ‘Unfair Competition Act’ in terms of advertising products within the ambit of competition law and secondly, to comply with Market Abuse Regulation along with specific requirements from Delegated Regulations on the Market Abuse Regulations which directs any person recommending investment or investment strategy and presents himself as financial experts to comply with transparency, disclosures, fairness and other relevant provisions of Market Abuse Regulations. Non-compliance with these regulations can lead to fine and other punishment within the ambit of German Securities Trading Act. Unfair practices with regards to these regulations can also make the financial companies directing FinFluencers liable.

Evolving Jurisprudence in India

SEBI has taken note of the the impact of social media influence on stock markets, price discovery, and losses of the gullible new investors falling for “tips” or recommendations. Lately Telegram groups, which were the biggest direct contributor to these factors have been cracked down upon. In Re: Stock Recommendations using Social Media Channel (Telegram) (SEBI) it was held that those running the channel were not registered as Research Analysts or Investment Advisors and had unfairly charged fees. The number of members and quantum of tips/recommendations did have an impact though for a short time since there was a spike in trading of a particular scrip which also involved Prevention of Unfair Trade Practices regulations. This has been a leading step against social media influence on Indian traders and stock markets. But, deliberation on indirect harm to the new/gullible investor community by FinFluencers needs to be done at the earliest.

Conclusive Analysis with Indian Regulations

In light of international regulatory framework, the authors opine that SEBI must draw inspiration from international bodies in terms of conducting research and identifying the impact of these FinFluencers on Indian markets and the stakeholders. The SEBI regulations already in place are an example of an effective and well thought rule of law, but its implementation intertwined with the rapidly growing social media needs to be closely examined. It must be also noted that SEBI, to a great extent, has been successful in introducing changes with regards to telegram tips and trades, but cognisance of these FinFluencers and their growing popularity must be taken.

Interestingly, in the Telegram case, SEBI took note of how a huge subscriber base can lead to manipulation of stock prices and has been actively taking steps (like imposing a ban on Telegram channels, issuing show-cause notices to offenders, etc. to prevent practices promoting unhealthy and unfair trade practices. In contrast, the US markets have lately faced a lot of such manipulations which went uncontrolled by the Securities Exchange Commission (SEC) in cases such as Reddit’s WallStreetBets’ pump and dump of particular scrips, which is an appreciative comparison of the effective management of SEBI to keep up with the objective of securing Indian investors.

Further, though cryptocurrency hasn’t been a domain of SEBI, the dark reality of FinFluencers can be quantitatively examined. For example approximately Rs. 5 Lakhs almost all the famous Indian Finfluencers promoted Crypto-FD, a highly risky product of Vauld, which lately stopped all withdrawal activities, a close look into the functioning would have made it evident, that the product they promote has fundamental flaws, especially in uncertain crypto markets.

More often than not their target audience is the first-time investor, who can lose faith in markets forever with one such instance, and these are usually those who themselves have a little safety net of earnings. This example must be boldly noted to examine the ill impact that FinFluencers have the power to bring about.
September 24, 2022
Robinhood: A Case Study against Mandatory Consumer Dispute Arbitration

BY PRATEEK, GRADUATE FROM ARMY INSTITUTE OF LAW, MOHALI

Introduction

Arbitration has seen a meteoric rise in adoption in the United States of America (“The USA”). This can primarily be attributed to the arbitration friendly approach taken by the courts while interpreting statutes like the Federal Arbitration Act, 1925. A manifestation of this became the arbitration friendly approach taken towards arbitrability of disputes. Consumer dispute arbitrability is a glaring example of this. While Indian courts have taken a cautious approach towards consumer dispute arbitrability, ruling against the mandatory enforcement of pre-dispute arbitration agreements, courts in the USA have allowed mandatory enforcement of pre-dispute arbitration agreements. This case study of arbitral proceedings against Robinhood provides an analysis into the problematic aspects of mandatory consumer dispute arbitration.

Background

Robinhood Market is a trading platform founded in the USA in the year 2013. The platform is primarily populated by day traders and retail investors consisting of primarily small portfolios of shares and options trading.

Retail investors identified that stocks like AMC and GameStop were being betted against by some Wall Street Hedge Funds. Against such backdrop, the community aimed at pumping the stock to sky-rocket its price till they achieve a short-squeeze through buying and holding shares. This caused a frenzy of online memes, sounding calls for retail investors to cause a short-squeeze, and earned these stocks the designation of “meme stocks”. Robinhood saw massive trading volumes since the retail investors were primarily driving this surge. This allegedly caused a major liquidity crisis for the platform creating an inability for Robinhood to meet collateral requirements for trades with National Securities Clearing Corporation (‘NSCC’), their clearing house. Due to this, Robinhood restricted trading on these “meme stocks”, causing substantial losses to customers.

The FINRA Way of Arbitration

Alleging damages due to missed-opportunity for making profits through trading said “meme stocks”, caused by Robinhood’s trading restrictions, a few users decided to raise their claims against the platform. Claims were raised through disputes governed by Section 38 of the Robinhood Consumer Agreement , which contains a pre-dispute arbitration clause whereby all disputes between parties to the agreement are to be mandatorily submitted for arbitration before Financial Industry Regulatory Authority (‘FINRA‘) Dispute Resolution in the State of California.

In January 2022, Jose Batista, a retail investor aggrieved by Robinhood’s actions, was awarded approximately $30,000 through the FINRA Dispute Resolution Mechanism. While this award is seen as a victory for the average retail investors, the mechanism through with the award was won creates a barrier that systematically isolates the approach to remedy for every consumer. Robinhood’s actions caused losses to multiple customers but due to arbitration being the mandate, the dispute cannot be resolved through any form of class action. This barrier is further solidified through the FINRA Code of Arbitration Procedure for Consumer Disputes, under which Rule 12204 posits that class action claims cannot be arbitrated under the code.

American Position on Consumer Dispute Arbitration

In the USA, arbitration is primarily governed at the federal level by the Federal Arbitration Act, 1925 (“The FAA”). Under this statute, once the mandatory arbitration clause is established, the court is required to refer the dispute to arbitration. This mechanism has been radically interpreted by the Supreme Court in Moses H. Cone Memorial Hospital v Mercury Construction Corp., where the court mandated a presumption in favour of arbitration when faced by an arbitration agreement. The doctrine of unconscionability does provide respite to parties in cases where the contract is clearly tarnished by unfair terms, and deficient or imbalanced bargaining powers between parties. But this test has been held in Zapatha v Dairy Mart Inc., to be applicable only on a case-to-case basis since the court posited that no all-purpose definition of unconscionability was possible. Further, the already limited grounds for escaping mandatory arbitration, restricted to prima facie unconscionability, fraud, misrepresentation, coercion, incompetence, and illegality of consideration being established through a bare reading of the agreement, were held to be subject to the doctrine of separability in the case of Prima Paint Corp. v. Flood & Conklin Mfg. Co.. Application of the doctrine of separability meant that tainted sections of an arbitration agreement could be excluded, to allow a consistent and legally binding reading of the mandatory arbitration agreement, as long as the agreement was not entirely vitiated or defeated by such exclusions. Consequently, all claims of fraud and unconscionability are also to be adjudicated upon by the arbitral tribunal.

Exceptionalism of arbitration forms the centrepiece of judicial jurisprudence on the subject in America. This overriding prioritization is manifested through the sections under the FAA, and with the case of Southland Corp. v. Keating, the Supreme Court ruled that the FAA pre-empts all state laws on the subject. Consequently, statutes like the Mont. Code Ann. § 27-5-114 (1993) providing safeguards to protect consumer interests, were struck down by the court while holding the law restrictive of arbitration. This exceptionalism is especially mind-boggling as the prohibitively expensive nature of arbitration and its deterrent effect on a consumer’s ability to bring disputes to court has been noted by courts. While exorbitant and incapacitating cost of arbitration was acknowledged as grounds for escaping arbitration, in Green Tree Financial Corp.-Ala. .v Randolph, the Supreme Court held that the burden to prove the prohibitive nature of costs was on the consumer who is seeking to escape mandatory arbitration.

With respect to class action arbitration, in cases where the agreement is silent on the issue, the Supreme Court in Green Tree Financial Corp. v. Bazzle delegated the task of determining the issue to arbitral tribunals. Through subsequent decisions, this power was significantly curtailed. In the case of AT&T Mobility L.L.C. v. Concepcion, the Supreme Court held that the FAA pre-empts the use of unconscionability as means to allow class action consumer arbitration. The court further expressed displeasure against the concept of class action arbitration itself.

Shortcomings of Consumer Dispute Arbitration Praxis from an Indian Perspective

The Robinhood case study can provide interesting insights from an Indian standpoint into the following possible ramifications of a liberal approach towards consumer dispute arbitrability:

A. Lack of Precedent Value:

Some arbitration agreements, like in the Robinhood case, may not require a reasoned order. In any case, even if a reasoned order made, this cannot be used as precedent in arbitral proceedings by other aggrieved consumers under the same issue. This is primarily due to mandatory confidentiality requirements and further lack of precedential value of awards. This may create deterrence for smaller claims being raised. Since facts are usually similar in consumer disputes arising out of unfair business practices, creation of precedence defeats the impediment created by class action waivers. This is due to the creation of certainty in outcome.

B. Prohibitive Cost:

The public policy argument against arbitration is premised on the comparative inferiority of arbitration in comparison to court adjudication. On this subject, in Vidya Drolia v Durga Trading Corp. The Supreme Court of India reiterated the observation made in Union of India v. Singh Builders Syndicate, stating that arbitration is expensive for parties in comparison to judicial adjudication.

This prohibitive cost creates a virtual barrier against consumer arbitration. Consumer disputes largely involve smaller claims, and recognition of this fact is evident from the regime of costs under the Consumer Protection Act, 2019. This issue is magnified under consumer disputes where the claimant is usually an individual consumer who may not anticipate the grant of compensation to extents that would justify the risk of undertaking expensive arbitration proceedings.

C. Unequal Bargaining Powers in Standard Form B2C Agreements:

Indian courts have observed limited acceptance of the doctrine of unconscionability as grounds for nullifying agreements under public policy. In these cases, the doctrine of unconscionability was based on unequal bargaining power. Similar inequality is observed in standard form B2C contracts, especially in a country like India. This inequality is exasperated by widespread digital illiteracy and a lack of legal awareness. Thus, there is scope for applying the principles of unconscionability in India under public policy for denying enforcement of mandatory arbitration agreements.

D. Express and Implied Class Action Waivers:

Since arbitration attains legitimacy through party autonomy, any breach in privity of contract would compromise such autonomy and consequently, the whole process of arbitration. This structural barrier can be avoided if Business to consumer agreement (‘B2C‘) agreements allow for class action lawsuits, but businesses lack the incentive to allow such provisions. Due to the inequality in bargaining power regarding standard form B2C agreements, class action waivers become a part and parcel to protect business interests.

Class action becomes an essential tool for vulnerable parties to attain equality in bargaining power while seeking redressal of disputes. While in cases of victories, the overall compensation may not be as high as individual claims due to their division amongst a large class, the risk value being low rationalises the trade-off. This is because raising disputes is itself expensive, and class-actions allow division of costs. Such metrics are particularly relevant for arbitration, while is an uncertain and expensive process.

The Way Forward

While class-actions may provide some respite to consumers from above-mentioned issues, business incentive to include class-action waivers in standard form contracts is very high. Further, lack of precedent on legality of these waivers in India makes this argument moot for now.

Interestingly, the pro tem solution to this issue is possible through elimination of the incentives that businesses have for undertaking consumer arbitration. In Manchester City Football Club Ltd v Football Association Premier League Ltd., an English court published a confidential arbitral award in the name of public policy. Such publication of awards impacting a larger class of people under the direction of courts may be useful for arbitral tribunals engaged in similar disputes against the same unfair business practice. While arbitral awards are not binding precedents, persuasive value can surely be derived. This is especially true since the award in such cases is granted higher legitimacy due to recognition of public interest by the court. Eliminating reduced publicity of claims is a disincentive for businesses to promote expensive arbitration with consumers since the biggest ace up their sleeves is rendered useless.

September 19, 2022
Antitrust Implications of Dual Role Played by Food Intermidiaries vis-a-vis the Recent Tussle Between NRAI and Zomato-Swiggy

BY PRIYAM INDURKHYA AND RITURAJ SINGH PARMAR, THIRD-YEAR STUDENTS AT NLIU, Bhopal

Introduction

CCI, the antitrust watchdog of India, has ordered a probe against food service aggregators like Zomato and Swiggy (FSAs) on a complaint filed by National Restaurant Association of India (NRAI) for the violation of section 3 of the Competition Act. Out of the several anticompetitive malpractices alleged by NRAI, the CCI, vide order dated April 4, 2022, has observed that a prima facie case exists against Zomato and Swiggy on the following three conducts— (i) dual role played by FSAs by listing their own cloud kitchen brands exclusively on their platform, akin to private labels, thereby creating an inherent conflict of interest in their role as an intermediary on one hand and as a participant on the other hand, (ii) entering into exclusive contracts with restaurant partners, (RPs) thereby compelling them to be exclusively listed with FSAs, (iii) imposing price parity terms on the RPs, thereby restricting them to offer lower prices or providing better terms to customers on the platforms other than that of the FSAs.

In light of the recent developments, this article attempts to analyse the anticompetitive concerns arising out of the dual role played by Zomato and Swiggy. The authors, in addition to examining the violation of section 3, also delves into the violation of section 4 of the Act.

Analysis of probable violation of s. 3(4) read with s. 3(1) of the Act

The Act, under s. 3(1), prohibits enterprises from entering into an agreement which causes or is likely to cause appreciable adverse effect on competition within India. Furthermore, s. 3(4) of the Act defines vertical agreements as those agreements which are entered into between enterprises which operate in different markets, and at different levels of the production chain. In the present case, the agreement between the FSAs and the RPs is in the nature of vertical agreements since both of them are in different markets and at different levels. The FSAs are in in the market of application-based food delivery platforms in India, while the RPs cater to the market of providing food services.

Vertical agreements are not per se anticompetitive and they require a rule of reason analysis to determine their legality. The rule of reason analysis under s. 19(3) of the Act entails weighing various procompetitive and anticompetitive effects of the agreements. The authors herein contend that the vertical agreements entered into by Zomato and Swiggy with a select few RPs fail to pass the rule of reason test, and are therefore, in violation of section 3(4) read with s. 3(1) of the Act.

The anticompetitive effects arising out of the dual role played by the food intermediaries significantly outweigh the procompetitive effects, if any. The anticompetitive effects listed under s. 19(3)(a)—(c) include creation of entry barriers to new entrants in the market, foreclosure of competition, and driving existing competitors out of the market. It is contended that the listing of cloud kitchens on their own platform certainly causes these anticompetitive effects.

Having their own vested interests in the downstream market, the food intermediaries are more inclined towards those RPs which are either their private labels or those which pay huge commissions to them. This inclination can be manifested in a host of ways which include, but are not limited to, skewed search results, customer reviews, favourable listings, among others. The data masking and lack of transparency in sharing the modus operandi of the intermediaries further exacerbates the situation. Given such a background, it becomes extremely difficult for the new entrants to cross the entry barrier and break into the market. Moreover, such a conflict of interest is also detrimental to the interests of the existing players in the market. The vested interest of the intermediaries in favour of a select few RPs puts other players in a disadvantageous position, and has a potential to drive them out of the market. Thus, Zomato and Swiggy acting as a participant as well as an intermediary, gives rise to anticompetitive effects listed under s. 19(3)(a)—(c). Moreover, such a dual role neither promotes any technological innovation, nor does it lead to accrual of benefit to consumers.

In fact, the Competition Commission of India (CCI) had earlier released a Market Study on E-Commerce. The study focused on competition aspects pertaining to e-commerce marketplaces and platforms. Out of the five major concerns identified by CCI, the first one was the Platform Neutrality (or lack thereof). The other concerns included, deep discounting, i.e., discounts of preferred sellers being selectively funded by the platform, price parity clauses in the agreements,  exclusive agreements, and the skewed search rankings along with misuse of data The study delineated two major issues concerning the neutrality of e-commerce platforms. The first is the intermediary’s access to competitively sensitive transaction data on its platform. This data is utilised by the intermediaries to enter into and strengthen their position in the downstream market through private labels. The second is the intermediary’s control over search parameters and results which gives preferential listing and favoured placement to its own brands and preferred sellers on the website. Interestingly, the concerns identified by the CCI in the Market Study are similar to those which are identified by the Commission in its prima facie order against Zomato and Swiggy.

Analysis of probable violation of s. 4 of the Act

It is to be noted that the prima facie order passed by the CCI only suspects the probable violation of section 3 of the Act due to the dual role played by the intermediaries. However, the authors herein contend that the said conduct of Zomato and Swiggy also attracts section 4 of the Act.

For analysing the violation of section 4 of the act i.e., Abuse of dominance, it is indispensable to firstly, delineate the relevant market, secondly, show that the enterprise is dominant in the relevant market and thirdly, it has abused its dominant position.

Relevant market

Unlike section 3, section 4 in strict sense requires delineation of relevant market to assess the competitive constraints that the enterprise faces. The relevant market in the present case is the ‘market of application-based food delivery platforms in India’. The market has two major players viz., Zomato and Swiggy. The said delineation of relevant market is justified because, firstly, there is substitutability in the delineated market, which is an essential criterion for the relevant product market under section 2(t) of the Act. The service of app-based food delivery is user friendly and unique as it allows customers to order food hassle free from any location. It also provides an array of choices to the consumers in terms of budget, cuisine, restaurant partner ratings, mode of payment and safety classifications. These attributes make app-based food delivery services non substitutable with other services of like nature viz., dine-in, take out, direct orders and vertically integrated food chain services. Secondly, the market of app-based food delivery also satisfies touchstone of section 19(7), like the consumer preferences, and price of goods or services. Furthermore, CCI has also approved this delineation of relevant market in the case of In Re Prachi Agarwal & Ors. v Swiggy..  In this case, it was alleged by the informant that Swiggy was abusing its dominant position in the market by charging unreasonable and unfair prices. CCI, in that case, had delineated the relevant market as “App based food delivery with restaurant search platform across territory of India”. Given that Swiggy is involved in the present case as well, the delineation of the relevant market should be on similar lines in this case as well. The relevant market delineated in the present analysis, i.e., “Market of application-based food delivery platforms in India” is similar to that of the market delineated by the CCI in the Prachi Agrawal case. Therefore, the said delineation of the relevant market is justified.

Dominance

After establishing relevant market, the next stage is to assess dominance of Swiggy and Zomato in the relevant market. There is a twofold approach in assessing dominance of any enterprises under the Act viz., the definition of dominance under section 4 and the factors enunciated under section 19(4) of the Act. The definition provides that dominant position means position of an enterprise which enables it to operate independently of competitive forces prevailing in the market. In the much-celebrated DLF case, CCI has held that the presence of one-sided agreements generally results in loss of customers, however, if such agreement doesn’t result in loss of customers, then this amplifies the ability of enterprise to operate independently of the competitive forces. Zomato and Swiggy also entered into one-sided terms and conditions with the RPs, like committing them exclusively to be listed on their respective platforms, charging exorbitant commission ranging upto 25%-30%, imposing price parity terms, and compelling the RPs to fund the discount provided by platforms. Despite these unviable conditions, Zomato and Swiggy have duopoly in the market of food delivery business with a cumulative market share of 95%.This shows the dependence of consumers (RPs) on these platforms which in turns reflect their ability to operate independently of competitive forces prevailing in the market.

The conduct of Zomato and Swiggy also satisfies factors mentioned under section 19(4). The first factor is market share of an enterprise. Market share of around 50 per cent could be considered large enough for an undertaking to be presumed as dominant. The market share of Zomato and Swiggy is 52% and 43% respectively. The second factor to be considered is the creation of entry barrier in the market. It is pertinent to note that there has not been an entry of any significant player in the food delivery market from the last three years. The application-based food delivery market requires huge fleet in order to deliver food on time. Both Zomato and Swiggy have a fleet consisting of 1.5 lakh and 1.3 lakh drivers respectively. Mobilising such a huge fleet of drivers on a pan India level is not a cakewalk for a new entrant. The third factor is the countervailing buying power. The presence of duopoly between Zomato and Swiggy in the relevant market left RPs with a Hobson’s choice because despite of anticompetitive practices of Zomato and Swiggy, RPs have no other option but to keep availing services of these FSAs. This reflects the sheer absence of countervailing buyer power in the relevant market. Moreover, the acquisition of Uber Eats, Blinkit, and other app-based food delivery platforms by Zomato further reflects upon its dominance in the relevant market. Thus, the cumulative factors of market share, entry barrier, countervailing  buying power, and the acquisition of existing market players establish the dominance of Zomato and Swiggy in the market of application-based food delivery platforms in India.

Abuse of dominance

The next and final stage is to prove abuse of dominance as dominance per se is not prohibited under the Competition Act. The market of application-based food delivery platforms in India provides wide array of food choices to customers and they have to choose in accordance with their taste and preferences.  But it is not that easy because human character is tuned in a way that it directs more attention towards the thing it sees and the entire advertisement industry is cashing on this tendency.  Thus, a product’s visibility is directly proportional to consumer’s propensity to purchase it. Both Zomato and Swiggy have equity participation in their platforms through their cloud kitchens and their private labels. It is alleged that they manipulate the search results and divert user traffic to increase visibility of these kitchens. Furthermore, the platforms provide access to data like consumer preferences and patterns to their cloud kitchens and private labels. The cumulative effect of all these is that it puts the other RPs in discriminatory conditions for sale and therefore the act of FSA squarely falls under section 4(2)(a)(i) i.e., imposing discriminatory condition in sale of goods.

The conduct of FSA also violates section 4(2)I of the Act, i.e., using dominant position in one relevant market to enter into another relevant market. As discussed earlier, Zomato and Swiggy are dominant in the market of app-based food delivery. In addition to their principal role of acting as a medium between customers and RPs, they also list their own cloud kitchen brands exclusively on their platform, akin to private labels. These private labels like the Bowl Company, Homely and Breakfast Express fall under the relevant market in which the other RPs are operating. Thus, FSAs like Zomato and Swiggy use their dominant position in the market of app-based food delivery to enter into another relevant market in which the other restaurant partners are operating in the first place.

It is clear from the above analysis that the conduct of Zomato and Swiggy perpetrates abuse of dominance in the market of application-based food delivery platforms in India.

Conclusion

It is pertinent to note that Zomato has not denied the allegations of listing its own cloud kitchen brands on its platform. In its defence, it has only contended that, “…it does not have any ownership in any of the restaurants listed on its platform nor own or operate cloud kitchens or private labels or restaurants. Thus, no claims for discrimination and preferential treatment can be made against it.” The CCI did not find merit in Zomato’s contentions as they solely relied upon the ‘ownership’ of the RPs and cloud kitchens to argue that there can be no anticompetitive malpractice.

As highlighted by NRAI, in lieu of providing access to the Kitchen Spaces, Zomato charges a commission from the RPs, on the rents as well as on the orders received by them through the Kitchen Spaces. Therefore, even though Zomato does not ‘own’ the Kitchen Spaces, or the RPs which function through those Kitchen Spaces, the revenue structure employed by Zomato for this arrangement has a potential to attract anti-competitive concerns and thus calls for a deeper scrutiny. Moreover, the Commission should not limit its examination only for the violation of section 3 of the Act. Instead, it should also consider the dominance of the FSAs to enquire into the possible violation of section 4 of the Act.

September 14, 2022
Institutionalizing Social Impact: The Scope Zero Coupon Zero Principal Instruments

BY RITU RAJ, THIRD-YEAR STUDENT AT GNLU, Gandhinagar

The Ministry of Finance, through a gazette notification dated 15th July 2022 has recognized Zero Coupon Zero Principal Instruments as securities within the purview of the Securities Contract (Regulation) Act, 1956 (‘SCRA’). Envisioned under the Securities and Exchange Board of India’s (‘SEBI’) Framework for Social Stock Exchange, Zero Coupon Zero Principal Instruments (‘ZCZP’) are bonds issued by Not for Profit Organizations (‘NPOs’) for the purpose of raising funds through the newly established Social Stock Exchange (‘SSE’) segment of authorized Stock Exchanges. They resemble debt bonds but are devoid of any interest or principal repayment obligation upon maturity. The investors can subscribe to ZCZP instruments to fund specified social impact projects and indicate the same on their balance sheets as assets. Upon maturity, they have to be written off from the books, and the investors are not entitled to receive any interest or repayment of principal. The return on investment is in the form of the social impact created by the underlying project.

NPOs (except those incorporated under section 8 of the Companies Act, 2013) like Trusts and Societies are not defined as ‘body corporates’ under the Companies Act, 2013. Consequently, before this notification, the instruments issued by them for raising funds did not qualify as securities under the Securities Contracts (Regulation) Act 1956. This, coupled with their non-profit making nature and non-availability of audited information pertaining to the actualized social impact of the projects undertaken by them, impeded their access to institutionalized funding and restricted the maximization of their social impact potential. The Ministry of Finance, through this notification, has attempted to circumvent this impediment by facilitating the channelization of funds from the capital market to social impact projects through ZCZP.

This post analyses the scope of this newly introduced instrument by assessing the implementational framework, understanding the advantages it offers for both issuers and investors, and gauging the challenges it faces in the Indian market. It further attempts to undertake a comparative analysis of similar projects in other counties to understand the structural impediments and proposes measures to circumvent them while operationalizing ZCZP instruments in India.

Understanding Zero Coupon Zero Principal Instruments

The NPOs demonstrating social impact and intent as their primary goal can get registered on the Social Stock Exchange segment of authorized Stock Exchanges and consequently raise funds from the capital market for specified social development projects by issuing ZCZPs. ZCZP comes with a maturity period which will usually be determined on the basis of the tenure of the specified development projects. Upon maturity, they can be written off from the books of the investors. While the investors are not entitled to any repayment from the NPOs, they bear a risk to the extent that the NPOs might not deliver the proposed social impact (Fundraising instruments and Structures for NPOs, Framework for Social Stock Exchange).

The issue of ZCZP will be regulated by SEBI under the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) (Third Amendment) Regulations, 2022. The NPOs must demonstrate expertise in the targeted areas through the social performance of past projects by making disclosures as mandated in Annexure III 2(d) of the SEBI’s Technical Group’s Report on Social Stock Exchange. The registered NPOs will be obligated to make periodic public disclosures with regard to the utilization of funds and the social impact of the projects vide realized annual impact report to ensure transparency. For the purpose of periodic disclosures, a new Chapter has also been introduced in SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 through SEBI Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) (Fifth Amendment) Regulations, 2022. These disclosures shall be based on the social audits conducted by institutions/firms of high standings in the domain employing auditors certified by the National Institute of Security Markets (‘NISM’). Moreover, to ensure authenticity and procedural fairness, a proposal has been made to establish a sustainability directorate under the Institute of Chartered Accountants of India (‘ICAI’) to act as a Self-Regulatory Organization (‘SRO’) for the Social Auditors.

While the trading potential of ZCZP instruments is limited, their recognition and the subsequent listing, coupled with the extensive disclosure requirements, offer an efficient framework of checks and balances. It enables an independent and objective assessment of the utilization of funds and the actualized social impact of the associated projects. Consequently, this makes the functioning of NPOs transparent and mitigates the informational asymmetry between the issuers and the investors.

The availability of authentic impact assessment will aid both the retail and institutional investors in gauging the operational efficiency of the NPOs and help channel the funds to the ZCZP with higher social impact potentials. This will further incentivize the NPOs to improve their operational efficacy and adopt the best practices facilitating the maximization of the social impact of the projects funded through ZCZP.

The ZCZP instruments offer a scope of altering the fundamental nature of funding social development projects by inducting liquidity. While the NPOs have no obligation to repay the principal received by them, the ZCZP can be freely traded on Social Stock Exchanges. The investors can liquidize their investment by selling it to other investors on the exchange who can continue to hold it as their contribution.

Gauging The Challenges

The recognition of ZCZP as securities is a significant step toward the institutionalization of funding opportunities available for social development projects which continues to remain driven by individual philanthropists and state-sponsored grants. However, its successful operationalization faces multiple challenges.

Similar attempts to channel funds from the capital market for social development projects by enabling the listing of securities issued by NPOs were made in Canada, the United Kingdom, Singapore, Brazil, South Africa, Portugal, and Jamaica. However, they failed to take off in four (i.e., Brazil, Portugal, South Africa, UK) out of seven countries.

In the United Kingdom, a lack of investor and donor appetite for securities issued by social impact enterprises led to the failure of the Social Stock Exchange, which was founded in 2013 to facilitate social impact investment. The exchange had to restructure itself as a licensing body, and has been reduced to a directory of enterprises that have passed the social impact.

In South Africa, South Africa Social Investment Exchange (‘SASIX’) facilitated the listing and trading of securities issued for funding Social Impact projects. However, before closing its doors in 2017, SASIX could only raise $ 2.7 Million for 73 social impact projects in 11 years of its operation.

Similarly, a lack of interest on the part of investors forced Bolsa de Valorous Socioambientais (‘BVSA’), Social Stock Exchange launched by Brazil’s stock exchange Bolsa de Valores (‘BVS’) in 2003, to act as a facilitator between NPOs seeking funding and social impact investors to discontinue operations and make its official website inaccessible in 2018. After raising merely 2 million Euros in the first four years of incorporation, Portugal’s SSE Bolsa de Valores Sociais was also forced to shut its operations in 2015.

It is evident that the absence of mass transactions and a limited investor base made their business models unsustainable, as the exchanges could not generate the revenue required to cover their operational expenditures.

Beyond the structural challenges of raising funds for development projects universally, in India, the proposed model appears skewed towards large NPOs with resources to comply with the required eligibility and periodic disclosure mandates. Effectively leaving out small/rural organizations working at the grassroots level out of its scope.

The Way Ahead

To materialize the envisaged goal of bringing ‘the capital market closer to the masses’ and democratizing funding for social development projects. It is imperative for the Government to navigate the challenges that might impede the successful operationalization of ZCZP Instruments in the Indian capital market. The Government needs to learn from the failure of similar models in other countries and adopt mitigating measures curated for the Indian context. There is a need to develop investor and donor appetite in institutionalized social impact investments and curate a sustainable revenue stream for the hosting SSEs.

Going beyond recognition of ZCZP as securities, there is a need to accept other recommendations of SEBI’s Working Group. The Group proposed incentivizing the investors through 100 percent tax deduction for investments made through ZCZP in NPOs with 80G certification, waiver of Securities Transaction Tax and Capital Gains Tax on investments in ZCZP, and making the Corporate Social Responsibility expenditure made by the corporates through investment in ZCZP deductible from their taxable income.

The knowledge capital, credibility, and network of established exchanges can be leveraged to develop investor and donor appetite in the country. They can carry out awareness programs targeted at educating and sensitizing potential investors about ZCZP and curate networking opportunities for the NPOs.

Further, in the spirit of inclusive growth and financial inclusion, there is a need to establish a framework enabling small NPOs working at grassroots levels to raise funds through ZCZP. This can be facilitated by providing pro-bono services through the proposed Self-Regulatory Organization of Social Auditors within ICAI.

Conclusion

The notification designating ZCZPs issued by NPOs as securities to enable the channelization of funds from the capital market to social development projects is a laudable step in the positive direction. It has the potential to circumvent the traditional ideas of collective risk aversion, valuation, and wealth maximization and materialize the goal of bringing the capital market closer to the masses by inducing the concept of social impact investments, financial inclusion, and sustainable economic growth. However, learning from the fate of similar initiatives in other nations, there is a need for the Government to ensure its successful operationalization by providing for efficient implementational framework, attractive incentivizing measures for investors, and structural support enabling the small/rural NPOs to access this avenue of fundraising.

September 6, 2022
The Divisive AICOA Weighed: Possible Takeaways for India?
BY RANJUL MALIK, third-year student at ail, mohali

Introduction

Competition regulators across the world including places like Europe, the USA, Australia, Japan and even India are eyeing major amendments in their respective legislatures to better equip themselves in dealing with new and rising antitrust challenges. While there can be a combination of factors leading to this phenomenon, there can be no denying of the inability of regulators to control big tech as the primary factor for such global shifts. To this effect, the Competition Commission of India (‘CCI’) conventionally is likely to implement some changes along the lines of the Digital Markets Act introduced in the European Union.

It may also be of value for the CCI to draw inference with some provisions from developments taking place in rather far West, in the USA. The American Innovation and Choice Online Act (‘AICOA/the Bill’) is a proposed antitrust legislature which is touted as the tool to regulate ‘selective big tech players’. Though still to be cleared on floor by the Senate, this article aims to focus on facets of AICOA, which might be adopted by the CCI to solve some problems of the Indian antitrust ecosystem, especially with respect to big tech.

A Look Into the AICOA- Parallels With India

The bill on the back of bipartisan support in the senate provides new channels to deal with issues like the privacy of users, providing a definition for big tech players that are considered to be a threat to the competition and importantly, the issue of self-preferencing. A breakdown of these three issues vis-à-vis the Indian picture is as follows:
- Defining big tech (covered platforms)
Big tech in antitrust has often been constituted by large companies like Amazon, Apple, Google, etc. By quantifying the definition and referring to them as ‘covered platforms’, the AICOA is surely a mechanism provided against tech giants operating digitally. Most of such enterprises thrive on user data and algorithms based on user-generated data. Due to such instance, the new draft has left both telecommunication and financial services outside the ambit of the legislature, effectively applicable to only core tech enterprises dealing with user data. The AICOA shall apply to companies with either a market capitalization of $1 billion in the last one year or a user base of over 100 million users, to ensure both private and public companies are covered within the ambit.

Secondly, it restricts itself to companies with online platforms either generating user data, involving information queries basis the user, or involving transactions. The Competition Commission of India on the other hand has often failed to regulate big tech due to its inability to define relevant markets in the digital space, largely due to the fact that it still is sticking with the interchangeability or substitutability tests which do not always depict the correct picture with digital and tech-heavy cases.

Additionally, there is no definition with CCI with regards to big tech, with the Chairman of CCI once going on record to refer to big tech as “centres for entrenched and unchecked dominance“. Therefore, in case of there being difficulty in defining a relevant market for such players and a need to restrict their activities, the proposed definition within the AICOA with its quantitative nature ensures stricter compliance and regulations to such players.

At the same time, it is necessary to implement such provisions after negating their negative halves. For example, the AICOA definition will be practically limited to domestic players, with the threshold of 50 million US users or 1 lakh business users from USA, thus ousting from its realms the likes of Tencent, Huawei, etc. for USA. To elaborate further, WeChat, whose parent company happens to be Tencent, has only about 1.3 million users in USA while its global userbase is a whooping 1.3 billion. This step is a big drawback as it is pro-competitive for foreign players while impairing domestic competitiveness via restrictions.
- Selective preferencing
The issue of self-preferencing by giants like Google, Apple, Amazon has been in contention of many debates and discussions. Self-preferencing has been defined as “a digital platform giving preferential treatment to its own products and services when they are in competition with the products and services provided by other companies”. While conventionally an enterprise’s foray into a vertically related business is known to have pro-competitive and pro-consumer impact, it is only the rapid expansion by big tech and digital enterprises into multiple domains at once that has compelled policymakers to think over the practice of selective preferencing.

The example in the Senate was of Amazon Alexa promoting Amazon Basic products over its search results for queries related to products, in cases where they might be of sub-par quality to those of third-party sellers too. In the Indian regime questions of self-preferencing have been raised in cases like Matrimony.com Ltd and Google LLC and Ors, Umar Javeed and Ors v. Google LLC and Ors and in complaints received against likes of Apple. But because the self-preferencing is not per se violative under section 4 of the Competition Act, it has led to no strict actions against such enterprises.

In contrast, the AICOA proposes to impose a fine of 10% of the total revenue of the past year generated within the USA, in case enterprises were to be found engaged in self-preferencing. This thereby ensures that the referred covered platforms need to be neutral in their regular conduct so as not be discriminating against other third-party service providers present on their platforms. While the bill proposes standard exceptions like that for cybersecurity, the more interesting addition is two-layered criteria as an exception. The criteria check an activity vis-à-vis its importance to the core function of the company and comparing it with any less harmful method which could have been used to achieve a similar outcome. The two points as given are:
1. If an activity seems to be anti-competitive, then to check whether or not such an act is being done to maintain or substantially enhance the core functionality of the covered platform.
2. And that the conduct could not be achieved through materially less discriminatory means, meaning there is no alternative which provides equal or effective results while being less discriminatory.
Hence the bill provides a strong framework which is mechanised with craft to treat unfair self-preferencing.
- Data and Privacy
The bill has introduced many terms which remain undefined and abstract and might be responsible for some high stake litigation in the upcoming times if it were to be enacted. Terms like ‘materially harm competition’, ‘generated data’, or ‘core functionality’ might not be defined, yet anyone can join the dots to point out the direction being aimed at is user data and its privacy. Lummis for example highlights how big tech companies use data generated on their platforms to their unfair advantage. This has explained by FTC and Privacy International in two ways, one by big tech having large data sets about consumers in different markets which help them design products of the future, and acting as gatekeepers to other companies who are in need of such user data and are ultimately made to adhere to unfair conditions to acquire such data. The Google Fitbit merger at its helm was again a timely importance of such data to Big Tech, with google looking to grab hold of the data aquired by Fitbit over the years

The bill hands down the regulatory powers in entirety to the Federal Trade Commission (‘FTC’). While the powers given to the FTC are an effective step, the term ‘data’ has been broadly and vaguely used and hence the scope of the powers remains undefined and will require regulation in continuance with section 5 of the FTC Act, but the bottom-line is that the FTC is tasked to restrict commercialisation of sensitive user data to unfair advantage and ensuring building of user interfaces which facilitate sharing of such data with the FTC itself, effectively chartering the path to what might be USA’s first central data regulator.

In India, CCI has often recognized the role of data and IT as an evolving factor to analyze anti-competitive behavior, with the WhatsApp suo moto order talking of need to regulate collection and allocation of excessive data and in the context of platforms like Facebook having ability to process significant data. While data has been recognized by the CCI to be a non-price competitive parameter and even proposes a theory of harm for the same, the powers of the CCI have been at loggerheads with jurisdictional powers of the proposed Data Protection Authority (‘DPA’). A provision solidifying data regulating powers of the CCI in competition pretext would accordingly be a step in the right direction for regulation of this important little space at the hinge of data protection and competition law.

Conclusion

The AICOA is not perfect and is far from it, but that should not stop us from implementing some of the unconventionally creative solutions it poses. The bill falters and is criticized for its vague and unclear terminology which can be defined better for perusal in India. In fact, there can be a combination of provisions from a combination of foreign legislatures. For example- on the front of data privacy, creating a data regulatory body and allocating it powers similar to those given to th FTC while properly defining the term data similar to the Digital Markets Act and ultimately reaching a more concrete and multidimensional provision shall ensure better compliance. The possibilities are endless, and while the Competition (Amendment) Act of 2022 is awaited, the amendments across the world seem focused to put fair restrictions upon unfair practices which have been carried out by ‘the big tech’ for a considerable time. From this uniform complexity come uniform new solutions, which if implemented selectively, fit well into the scheme of things of various nations, as is the case of AICOA and implementation in the Indian regime on the front of data privacy, selective preferencing, and demarcating big tech.
September 1, 2022
Vidarbha Industries v Axis Bank: A Slumping Case for Financial Creditors
By Neelabh Niket and Nitish Dubey, fourth-year students at HNLU, Raipur

Introduction

The Hon’ble Supreme Court (the Court) recently in the case of Vidarbha Industries Power Limited Vs Axis Bank Limited has held that the power of the National Company Law Tribunal (NCLT) to admit an application for initiation of CIRP by a financial creditor under section 7(5) of the Insolvency and Bankruptcy Code, 2016 (IBC) is only directory and not mandatory in nature. This ruling, in simple words, signifies that even if an application is complete under section 7(5)(a), the Adjudicating Authority (AA) in exceptional cases such as where an impending order lies in favour of the Corporate Debtor (CD), may not accept such an application and keep the CIRP in abeyance to protect the entity from being resolved. The Court was of the opinion that the legislature intended section 7(5) to be discretionary in nature as the word ‘may’ has been used in the provision as opposed to the word ‘shall’ used in section 9(5) which postulates a mandatory requirement in the case of operational creditors. The authors through this article intend to revisit the judgement from critical lenses and would lay down the implications of the judgement.

Facts

The Court, in this case, was considering a Special Leave Petition of the Vidarbha Industries Power Limited (VIPL/defaulting Company) which had defaulted on a loan from Axis Bank Limited,, i.e., the financial creditor. The appellant pleaded that the default was on account of a dispute relating to the price of the electricity which was to be settled by the Maharashtra Electricity Regulatory Commission (MERC) and upon which the appellant was expecting to receive a substantial amount which would enable the appellant to pay off the debt. The appellants have gotten a favourable order from the Appellate Tribunal for Electricity (APTEL), however the same has been challenged in the Supreme Court whose order on the issue is awaited.

Analysis

Before we delve into the nuances of the judgement, it is imperative to make it clear that the discretion conferred upon the Adjudicating Authorities to give a breathing space to the CD cannot be asked as a matter of right but can only be granted by the AA when there exist extraordinary circumstances. The authors however will argue that even this step of the Hon’ble Court is unwarranted and will open up Pandora’s box in an otherwise smooth IBC jurisprudence. The same has been done under four heads which are as follows-
- Overlooking Past Jurisprudence
Prior to the instant case, it was well settled through the verdict in E.S. Krishnamurthy vs M/S Bharath Hi Tech Builder judgement that the AA had only two options when an application under section 7(5)(a) came for adjudication: (i) accept it; (ii) reject it. A judgement on similar lines was also expressed impliedly in the landmark case of Innoventive Industries Ltd vs ICICI Bank wherein the Hon’ble Court held the following,

“The moment the adjudicating authority is satisfied that a default has occurred, the application must be admitted unless it is incomplete…” (emphasis supplied)

However, the present judgement has in effect provided for a third option for the AA— to keep the insolvency proceedings in abeyance. Such an interpretation is not only against the established jurisprudence but also has little backing from the statute itself as neither the IBC nor the rules therein provide the AAs with the power to defer proceedings on account of an external/unrelated event.
- Diluting the Cash Flow Insolvency Test
The Supreme Court’s decision to read discretion into section 7(5)(a) is not simply a simple shift in AA’s routine power but has the potential to disrupt the entire insolvency regime in India. The regime which was built on the solid foundation of a certain and determinable occurrence of a default has been unsettled and may attract bogus excuses by CDs to escape CIRP, causing prolonged litigation. In doing that, the Court has inadvertently dumped the Cash Flow Insolvency Test and allowed facets of the Balance Sheet Test in the Indian insolvency jurisprudence. Before delving into the tests, it becomes imperative to understand their scope and meaning.

There exist majorly two tests for determining an entity’s solvent status i) The Cash Flow Insolvency Test and; ii) The Balance Sheet Test. The Cash Flow Insolvency Test concentrates on whether the company can meet current debts from cash and other assets which can be readily realized; if it defaults in such repayment then it is considered insolvent. As long as an entity keeps paying its dues, and does not default no action can be taken against it under this test. Thus, the triggering point in the Cash Insolvency Test is an event of ‘default’. On the other hand, the Balance Sheet Insolvency Test requires the courts to pierce deeper into the company’s balance sheet and gauge its medium to long term liquidity, taking into account the company’s wider circumstances and be satisfied of the company’s insolvency if the company’s assets are less than its liabilities.

The IBC strictly follows the ‘Cash Insolvency Test’, terming an entity insolvent only when it accounts for defaults. However, the Court via the judgement has digressed from the determination of insolvency from defaults to assessing whether there are other available assets of the company which may be utilized for repayment of debt at a later stage. This approach, as discussed earlier, inclines towards the Balance Sheet Insolvency Test which has not been prescribed or advocated by the IBC.

The erstwhile section 433(e) of the Companies Act, 1956 was based on the pretext of Balance Sheet Insolvency as it did not determine insolvency on the basis of defaults but on the entity’s inability to pay dues- a scenario which occurred when the company’s liabilities were greater than its assets. In simple words, according to this section, an occurrence of default was insufficient in attracting the provisions of insolvency. This was however rejected and replaced by the IBC which ushered significant changes in the Indian Insolvency Regime. Importantly, the Court in Swiss Ribbons Pvt. Ltd. vs Union of India indirectly approved the Cash Flow Insolvency Test and noted that in a situation of financial stress, the cause of default is not relevant; and protecting the economic interest of the CD is more relevant.
- Proper Usage of Discretion
The authors are of the opinion that the usage of ‘may’ in section 7(5)(a) shall be construed to confer discretion to AAs in rejecting a CIRP application only when a mala fide intention is detected and such discretion shall not extend to provide weightage to any extraneous matter which is independent of the loan availed. The discretion in this sense is necessary to curb malicious attempts of financial creditors and CDs in deliberately forcing a Company into insolvency. The same is somewhat prevalent in the IBC jurisprudence and can be traced in few cases. For instance, the NCLAT in the case of Hytone Merchants v. Satabadi Investments Consultants rejected a section 7 application which had fulfilled all pre-requisites on the ground that the debtors and the financial creditors colluded and were acting against the interests of the company.

Further, the legislature’s usage of ‘shall’ for operational debt can also be justified on the same premise; the operational creditors are third parties who are not concerned with the entity and hence the chances of such collusion between the CD and operational creditors is very slim and unlikely. The Court has failed to delineate properly the different expressions used in the sections and has wrongly expanded the scope of the word ‘may’ on this premise, which in the authors’ view is wholly unnecessary.
- Abridging the Powers of the CoC
If there is a possibility that the CD may get a favorable order or award, then there is always an option of settlement available with the debtor and the Committee of Creditors(CoC) to settle their claims and withdraw the resolution processunder section 12A of IBC. In any case, it is the Committee of Creditors who after assessing the financial condition of the company, shall decide the best course of action for the Company’s revival. The IBC has not conferred any powers to the NCLT to prima facie decide, at the stage of admitting a petition under section 7, whether a Company is solvent or not. It is counterintuitive to say that an order or award will operate to save the debtor and confer the NCLT the power to stall the very commencement of the CIRP.

Thus, authorizing the NCLT and deferring the initiation of the CIRP on account of an uncertain event in the future may adversely affect the interests of all stakeholders, as with time other assets of the debtor may depreciate for the lack of investment and proper management.

Conclusion

The Insolvency & Bankruptcy Code has been built upon the detection of insolvency upon the occurrence of a default or the Cash Flow Test. The Hon’ble Court via this judgement has diluted this Test and has allowed some element of the redundant Balance Sheet Test to again creep into the regime. The authors herein believe that the broad interpretation of the word ‘may’ in section 7(5)(a) by the Supreme Court will create unnecessary confusion and chaos in the Insolvency scenario in India. One must also not forget that in a commercial setup, there is a chain of transactions which are dependent on each other and a major delay in repayment may culminate in a domino effect, disrupting cash flow across sectors. On an optimistic note, it may however be hoped that such discretion does not become the rule and is only exercised in exceptional cases by the AA.
August 26, 2022
Asymmetric Jurisdiction Clause: A note on determining transnational jurisdictional dispute

By Manan Mondal, An SLS, HYDERABAD law graduate

In general a jurisdiction clause dictates the forum where parties want their disputes arising under the terms of the agreement to be determined before a Competent Court with necessary jurisdiction. However, with present day drafters of finance agreements containing a limited jurisdiction clause, termed asymmetric jurisdiction clause, have created an unnecessary stir in determining the competent jurisdiction. The present analysis sheds some light towards deciphering the jurisdictional turmoil.

What is Asymmetric jurisdiction?

Herein parties decide the jurisdiction of the Court or Courts to adjudicate the dispute, allowing one party, usually the lender, to sue the other party, generally the borrower, in any Court of law but preventing the borrower from proceeding in any Court except the one with exclusive jurisdiction.

For instance, through the terms of the contractual arrangement, in an Asymmetric Jurisdiction Clause between X and Y, Y has limited authority over particular designated jurisdiction named A, while X has jurisdiction to sue in any Court under such a clause. Hence, the terms of an Asymmetric Jurisdiction can also be understood as an exclusive choice of Court or devolving a choice of jurisdiction upon a particular Court, as opposed to the essential factors followed in our domestic Civil Procedure Code, 1908.

Now, this liberty of choosing any Court to refer the dispute by the party with broader jurisdiction casts a few fundamental questions, i.e., whether such a Court will be stricto sensu ‘any Court’ or a Court of ‘Competent Jurisdiction’? And whether there exist any judicial opinion to determine the competence of a ‘Court’ in a transnational dispute?

Generally, a non-symmetric jurisdiction draws its sustenance from two primary legislation of the European Union- the Brussels Regulation (Recast) and the 2005 Hague Convention. However, following the Brexit, the Brussels regulation is no longer a valid authority post-December 2020 in the United Kingdom. Parties are constrained to find shelter under the 2005 Hague (Choice of Court Agreement), making it difficult for them to navigate through turbulent jurisdictional waters.

The Dissonance between Exclusive jurisdiction and Asymmetric jurisdiction

The Hague Convention relates to an ‘exclusive’ choice of Court arrangement under article 3(a). This exclusivity must be mutual, and a clause stipulating the parties to either sue in a limited jurisdiction or in any other Court will not be an exclusive choice of court, since it designates more than one Court as the venue for dispute resolution. However, different types of arrangements are still valid in determining the suitable jurisdiction, and the 2005 Hague Convention does not protest such domestic legislations towards determining of Court’s adjudicatory authority. Therefore, ‘Exclusive Jurisdiction’ is when the Court of one contracting party is designated to decide the dispute to the exclusion of other jurisdictions, provided the transaction is international. An asymmetrical clause makes this choice of Court a contractual agreement, with the chosen forum applying its laws and procedures, even if the proceedings are running concurrently in another jurisdiction. And the party resisting the choice of agreement needs to establish exceptional circumstances to save itself from this jurisdictional bargain.

In the English case of Commerzbank AG v Liquimar Tankers Management Inc, (‘Commerzbank AG‘) the issue before the Hon’ble High Court was whether the asymmetric jurisdiction clause is akin to the exclusive jurisdiction clause within the Brussels Regulation (Recast). As per article 31(2) of the Brussels 1 Recast, the jurisdiction agreement confers exclusive jurisdiction on the Courts of an EU member state; but this notion is true when any EU member state has been granted a limited jurisdiction, as in the instant case. Furthermore, Etihad Airways PJSC v Flother [2020] confirmed that the agreements conferring jurisdiction on the Courts of member states through an asymmetric clause would be akin to an exclusive jurisdiction clause. Thus, dictums flowing through article 31(2) of the Brussels 1 Recast will render concurrent judicial processes in other destinations redundant, an absurdity under the 2005 Hague Convention.

Hence, according to Justice Cranston in Commerzbank AG, the asymmetric jurisdiction is akin to the exclusive jurisdiction clause, and the parties can sue only in the agreed or designated Court, deriving the ratio from Mauritius Commercial Bank Ltd v. Hestia Holdings Ltd ], where it is rightly held the party with the broader jurisdiction can sue in any Court with ‘competent jurisdiction’ the term ‘any Court’ symbolizes a Court with the necessary authority to hear the same.

Conferring Jurisdiction in Asymmetric Clauses

An asymmetric choice of court agreements, where only limited freedom to determine the courts having jurisdiction is allowed, should be respected. The jurisdiction of any alternative court depends on whether that Court has personal or subject matter jurisdiction.

In the seminal decision of Apple Sales International v eBizcuss: Cass. 1ere Civ, (‘Apple Case‘), a dispute between companies incorporated in France and Ireland, respectively, arose. They entered into an agreement containing an asymmetric clause and agreed that disputes would be decided by the Courts of the Republic of Ireland. However, the clause also allowed the Irish company to resolve disputes before the Court of counterparty’s registered office or in ‘any country’ where it suffered loss caused by the counterparty. The Irish entity then argued that the French Commercial Court did not have the necessary jurisdiction vide the asymmetric clause, and Courts in Ireland had the sole jurisdiction. Under these circumstances, following the afore-established rule of jurisdiction and competency, Ireland must have had broader jurisdiction. In contrast, the French entity had limited jurisdiction over Courts in the Republic of Ireland.

However, the French Supreme Court took a different stance on the issue of asymmetric jurisdiction in X v Banque Privée Edmond de Rothschild. It observed that the asymmetric clause would be upheld provided there is no unilateral jurisdiction clause, failing the core purpose of the clause. In the Apple Case, it was not open to the entities with the benefit clause to choose jurisdiction in any country; the flexibility of selecting jurisdiction is limited to the registered office or where any loss was caused, and the other party has suffered. The French Supreme Court made it clear that asymmetric clauses are to be avoided that allow a single party to apply to any jurisdiction of its choosing unless other possible forums with competent jurisdiction can be objectively determined and applied.

These French dictums might appear contrary to the notable English decisions in the Commerzbank AG and the Hestia Holdings case. Still, we can establish a faint connection that the flexibility of wider jurisdiction in the hands of one party is not an infinite ray of jurisdiction. It bends before the need of necessary subject matter to such unimpeded jurisdiction.

Conclusion

Let’s take an illustration wherein X is conferred the wider jurisdiction to unilaterally approach any Court through the asymmetric clause and Y to the limited jurisdiction A. Whether in such circumstances, it is fair for the transnational parties in an agreement to choose any Court, destination B, which is outside the knowledge of Y? And would the decision by the Courts of such country B have any bearing on the parties? It is a visible hurdle in these limited jurisdiction clauses.

In the case of Dr Jesse Mashate vs Yoweri Museveni Kaguta , theEnglish Court has tried to answer this riddle. In this case, an overseas party was subjected to the jurisdiction of the English Courts, and necessary summons was served. However, the overseas party failed to submit the necessary defence or any document intended to protect; consequently, the Court issued a default judgment under the English Civil Procedure Rules.

The Court of Appeal construed that before involving a party to the jurisdiction of the English Courts, i.e., destination B, the party A, with flexible jurisdiction, must explain why such Court has an authority over the dispute and the party be subjected to such jurisdiction. Otherwise, an overseas party must not be vexed with proceedings lacking substance, who bear no other allegiance to the English Courts’ jurisdiction must not be vexatiously subjected to service upon them of process issued out of English courts. Therefore, an applicant to serve out of the jurisdiction must explain the reason behind conferring jurisdiction and how the overseas party is subjected to the exorbitant jurisdiction of that unilaterally chosen Court.

Hence, the term ‘any Court’ and ‘competent jurisdiction’ are intertwined in financial agreements containing asymmetric clauses. The asymmetric clause is not an agreement to confer jurisdiction where none would otherwise exist; rather it limits the power of one party to approach a certain court, and expands for the another to ‘any Court’. It preserves the right to sue in any court which would reserve itself as competent by establishing a link with the subject matter; otherwise, an infinite ray of broad jurisdiction will be unnecessarily exorbitant on the parties to the agreement.

July 13, 2022