The Corporate & Commercial Law Society Blog, HNLU

Author: HNLU CCLS

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

    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 1st 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 AdmittedMinimum Fee (Rs. Lakh) per month
    (i) <= Rs. 50 crore1.50
    (ii) > Rs.50 crore < = Rs.100 crore2.00
    (iii) > Rs.100 crore < = Rs.500 crore2.50
    (iv) > Rs.500 crore < = Rs.1,000 crore3.00
    (v) > Rs.1,000 crore < = Rs.2,500 crore3.50
    (vi) > Rs.2,500 crore < = Rs.10,000 crore5.00
    (vii) > Rs.10,000 crore7.50

    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 CountryRecovery rate (cents on every dollar)Cost of the process (% of estate)
    India26.59%
    United Kingdom85.36%
    United States of America81.810%
    Norway921%
    Sweden789%
    Slovenia88.74%
    Singapore88.84%

    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.

  • Interplay Between SEBI Regulations and Liability of Financial Influencers (FinFluencers)

    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, Regulations 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.

  • Robinhood: A Case Study against Mandatory Consumer Dispute Arbitration

    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.

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

    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.  

  • Institutionalizing Social Impact: The Scope Zero Coupon Zero Principal Instruments

    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.

  • The Divisive AICOA Weighed: Possible Takeaways for India?

    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.

  • Vidarbha Industries v Axis Bank: A Slumping Case for Financial Creditors

    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. 

  • Asymmetric Jurisdiction Clause: A note on determining transnational jurisdictional dispute 

    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.

  • PCA Framework as an Effort to Contain the Contagion Effect

    PCA Framework as an Effort to Contain the Contagion Effect

    by Abhishkha Moyal, 5th year law student at RGNUL, Patiala.

    Introduction

    A non-banking financial company (“NBFC”) means, (i) a financial institution which is a company; (ii) a non-banking institution which is a company, with principal business of receiving deposits under any scheme or arrangement or in any other manner, or of lending in any manner;; (iii) such other non-banking institution or class of such institutions, as the Reserve Bank of India may, with the previous approval of the central government and by notification in the official gazette, specify.

    Every NBFC in India deals with substantial number of customers as well as with other NBFCs. NBFCs also partners with digital lenders who have restrictions on lending funds on their own accounts by reason of regulatory issues. Hence, the NBFCs form an important part of the financial system of India and enormously impact the economy as a whole. Any default made or any financial discrepancy caused by a single NBFC can create a substantial risk for the financial system of our country, thereby causing a ‘contagion effect’, that is, escalation of economic crisis in one market or region leading to economic downturn in other national or international markets or regions due to interconnectivity between them. . However, the regulatory framework for NBFCs is lenient in comparison to that for the banks due to which the financial system of India in recent times has suffered various jolts like the collapse of Infrastructure Leasing & Financial Services group in 2018, and bankruptcy of Dewan Housing Finance Corporation in 2019 and Reliance Capital in 2021.

    The Reserve Bank of India (“RBI”) introduced the Prompt Corrective Action (“PCA”) framework for NBFCs on December 14, 2021 in order to intervene at the appropriate time to initiate and implement remedial measures in a timely manner, so as to restore financial health of NBFCs which are at risk. The framework will be effective from October 1, 2022, on the basis of financial position of NBFCs on or after March 31, 2022.

    Working of the PCA Framework

    The applicability of PCA framework shall extend to all deposit taking NBFCs (except government companies), and all non-deposit taking NBFCs in middle, upper and top layers
    (except- NBFCs not accepting or intending to accept public funds; government companies; primary dealers; and housing finance companies). The key areas for monitoring in PCA framework will be capital and asset quality, and indicators to be tracked would be Capital to Risk Weighted Assets Ratio (“CRAR”), tier I capital ratio and net non-performing assets (“NNPA”) ratio. The NBFCs will face restrictions when such indicators fall below the stipulated levels.

    The PCA framework provides for three risk thresholds for NBFCs, violation of any of which by any NBFC may lead to invocation of PCA framework by the RBI against such NBFC. The norms which RBI may impose on such NBFC will get stricter as and when such NBFC moves from the first to the third threshold. First risk threshold will be invoked for the NBFCs when the CRAR of such NBFC falls 300 basis points (“bps”) below the regulatory minimum of 15% or when tier I capital ratio falls 200 bps below the regulatory minimum of 10% or in cases where NNPA ratio exceeds 6%. In such cases, it will be mandatory for the NBFC to restrict dividend distribution/remittance of profits. Further, it will be mandatory for promoters/shareholders of such NBFCs to infuse equity and reduce leverage. 

    Similarly, the second risk threshold will be invoked when CRAR falls up to 600 bps below regulatory minimum of 12% or when tier I capital ratio falls up to 400 bps below the regulatory minimum of 8% or in cases where NNPA ratio exceeds 9%. In such cases, it will be mandatory for the NBFCs to restrict their branch expansion, in addition to the restrictions imposed after breach of first risk thresholds. 

    Further, the third risk threshold will be invoked when CRAR falls more than 600 bps below regulatory minimum of 9% or when tier I capital ratio falls more than 400 bps below the regulatory minimum of 6% or in cases where NNPA ratio exceeds 12%. In such cases, it will be mandatory for the NBFCs to impose restrictions on their variable operating costs and capital expenditure, except capital expenditure on technological upgradation within limits approved by their board of directors. In addition to the above restrictions, the PCA framework gives discretionary powers to the RBI to take certain other actions against the defaulting NBFCs relating to governance, capital, credit risk, profitability etc. 

    NBFCs can exit from the PCA framework and the restrictions imposed against them and the PCA framework can be withdrawn under two conditions. Firstly, there should have been no violations of risk thresholds in any of the parameters for four continuous quarterly financial statements, one of which should be annual audited financial statement (subject to assessment by RBI); and secondly, on the basis of supervisory comfort of the RBI, including an assessment on sustainability of profitability of NBFCs.

    Impact

    The PCA framework was introduced for the banking companies in 2002. Eleven public sector unit banks and some private banks were put under the framework; restrictions were imposed on such banks to improve their financial health as a result of which their financial health improved over the years. At present only the Central Bank of India is governed by the PCA framework, however, it has also enhanced its financial position and no longer requires working under the framework. 

    As mentioned earlier, the PCA framework will come into effect from October 1, 2022, based on the financial position of NBFCs on or after March 31, 2022. This will give NBFCs sufficient time to strengthen their financial position, which may have been affected by the Covid-19 pandemic, and avoid any other issues. 

    Imposition of the PCA framework will enable the RBI to (i) regulate NBFCs struggling with financial issues; and (ii) help such NBFCs to resolve such issues in a timely and effective manner. Moreover, empowering the RBI to intervene with the working of struggling NBFCs in order to strengthen their financial position will prevent such NBFCs from advancing risky loans and will encourage them to be more cautious in undertaking lending and other activities. However, this may have a negative impact on the growth of the NBFCs, as imposition of the PCA framework on the NBFCs will tighten their credit norms and their operational focus may shift towards collection activities.

    Conclusion 

    The PCA framework for banks has already been in place since 2002 and has helped the RBI and many other banks to improve their financial health. As NBFCs have become closely integrated with the banking and financial system of India, hence, regulating them is the need of the hour in order to maintain a stable financial system. 

    Moreover, as the Covid-19 pandemic has adversely affected many businesses around the world, it would be rational for NBFCs to lend their funds discreetly in order to avoid financial difficulties at later stages. When remedial measures are implemented in a timely manner for NBFCs at financial risk, it will help in containing the contagion effect on the economy.

  • The Spain-Colombia BIT and What it Holds for the Future of Dispute Resolution

    The Spain-Colombia BIT and What it Holds for the Future of Dispute Resolution

    by Abhay Raj and Ajay Raj, third-year and fourth-year students at Jindal Global Law School and Symbiosis Law School PUNE, respectively.

    On 16 September 2021, the Kingdom of Spain’s Prime Minister, Pedro Sánchez and Republic of Colombia’s President, Iván Duque Márquez singed the ‘promotion and reciprocal protection of investments’ (the ‘BIT’). This has been done with a view to provide legitimate rights to both the parties, to achieve the objective of public interest, and to ultimately secure reciprocal protection for their investments. With that, the BIT aims to ensure more independent, impartial, transparent, and coherent arbitration procedures for dispute resolution. While the BIT is not in the public domain yet, however, once in force, it will replace the 2005 Colombia Spain BIT. Owing to a review process that lasted for more than three years (began in December 2017), there are certainly high expectations with the new Colombia-Spain BIT, including inter alia, substantive protections and procedural rights.

    Over the past few years, Spain and Colombia, two of the largest economies in the world, have undertaken notable reforms in the regime of international investment agreements and its framework. Including but not limited to Colombia’s revamping its Model BIT and Spain focusing on European Union’s investment protection policy. While Spain’s reform has largely been motivated by its experience in investor-State arbitration, Colombia’s reform directly emanates from its inactivity in investor-State arbitration before the year 2006. Common to both is the reform to modernise their investments with a focus on managing their exposure to investor claims. The reforms undertaken by both countries has led to the signing of the BIT.

    Spain’s Outlook

    The Colombia-Spain BIT fits into the narrative of being symbolic and following a systematic reform. The decision to modernise and renegotiate the 2005 BIT appears to follow the coeval discussions in the investment arbitration regime, including the conventional investor-state dispute settlement (‘ISDS’) system, Organisation for Economic Co-operation and Development (‘OECD’), and post-Treaty of Lisbon and European Union framework which authorised the European Commission for negotiating international investment agreements (‘IIAs’) with non-European Union states (regulation 1219/2012). Thus, the Spain government had to obtain authorization from the European Commission, before carrying out the negotiations with Columbia, ensuring a focus on EU objectives and policies.  

    The new BIT, 2021, assists in aligning Spain’s interest in investment commitments governing bilateral relations, with the European Union objectives and principles and European Union’s investment protection policy. These objectives and principles are broader policy considerations, for instance, promotion of democracy, human rights, sustainable development, fundamental freedoms, rule of law, standard of treatment, FET clause, and other features (briefly discussed in the latter part of the article). Despite Spain’s inactivity and non-participation in the realm of international investment, it has been one of the most competitive and attractive markets in the European Union. This is demonstrated by the fact of Spain’s being the third-largest in the investment market in the EU and thirteenth recipient of foreign investments in the world. The 2021 BIT is significant because of the fact that Spain signed a BIT after more than 10 years, and its far-reaching mandate maybe its advent into the area of international investment.

    Colombia’s Outlook

    The Republic of Colombia, following 2006, has been mindful of signing and negotiating BIT’s with different States. Colombia till the year 2006, only signed two BIT’s with Peru (1994), and Spain (2005). Following that, it signed more than fourteen BITs. With that, the Republic of Colombia felt the need to renegotiate the existing BIT of 2005 with Spain to follow the trend after 2006 and the Colombia BIT Model, 2017.

    The investment agreement between Colombia and Spain is symbolic from Colombia’s standpoint. Firstly, it is the first agreement that was renegotiated after Colombia’s Model BIT, 2017. The Model BIT, 2017 itself came after Colombia’s experience with the investor disputes (including, Glencore International AG and CI Prodeco SA v Republic of Colombia, ICSID Case No ARB/16/6; Ame ́rica Mo ́vil SAB de CV v Republic of Colombia, ICSID Case No ARB(AF)/16/5;  Eco Oro Minerals Corp v Republic of Colombia, ICSID Case No ARB/16/41; Gas Natural SDG and Gas; and in total 13 such cases) concerning old BIT’s (Model BIT-2003, 2006, 2009, 2011).

    Secondly, the Colombia-Spain BIT has followed the Colombian Constitutional Court’s judgement (available here), which conditioned on issuance of a joint interpretative note of the provisions entailed in the BIT. According to the Colombian Constitution, the Court’s must assert whether the international treaties signed (and before ratification) are constitutionally valid or not. As such, if the Constitutional Court rules that the treaty’s clauses are unconstitutional, it is unfit to enter such treaty into force.

    Features

    The changes introduced by the renegotiated Colombia-Spain BIT precisely include: (i) Replacing the conventional Investor-State Dispute Settlement with the Multilateral Investment Courts once the treaty comes into force and replaces the 2005 BIT; (ii) Explicitly stating the non-consideration of holding companies as investors, i.e., explicitly excluding companies that merely hold financial interest; (iii) Excluding the fulfilment of the commitments assumed by the Contracting Parties in commercial and economic integration projects and implying that most-favoured-nation treatment cannot be reached into other treaties; and (iv) Miscellaneous changes (reviewing of the Standard of Treatment, the Fair and Equitable Treatment standard, Denial of Benefits clause, and inclusion of Transparency Rules of the United Nations Commission for International Trade Law (‘UNCITRAL’)).

    • Multilateral Investment Courts

    As a BIT that is signed at an hour when the world is calling reforms in the Investor-State dispute settlement, (for instance, India; Bolivia; Ecuador; Venezuela; Pakistan have refrained from ICSID Convention), the Interpretative Declaration has catalysed Multilateral Investment Court (‘MIC’) and replaced the conventional ISDS system. The proposal of MIC which began with the UNCITRAL Working Group III suggestion (by the European Union and to which Spain is a member state) has come into play with the recent BIT. Such a Court would adjudicate upon claims brought under IIAs, which the member States have decided in assigning the authority. Both of the bodies shall be staffed by decided adjudicators and would be paid on a permanent basis by the member states, with a secretariat to support them.

    Such a negotiation is correlated with the EU’s efforts in calling for a global level reform in the ISDS system. As also evident in the 2019 Final Dutch Model BIT, the EU is taking steps against replacing the conventional system with a permanent investment court arbitration tribunal; for instance, the EU council provided the European Commission for establishing a MIC under the auspices of UNCITRAL.

    The renegotiation has been placed ensuring independent, coherent, impartial, predictable, and transparent arbitration procedures. However, the BIT could have worked on bringing reforms to the conventional ISDS system. For instance, the new BIT could have provided explicit provisions regarding the advisory centre, third-party participation, claims on public money, and third-party funding (as suggested in the UNCITRAL Working Group III session). The BIT could have drawn a fine balance between the conventional ISDS and State’s exposure, by incorporating several exclusions/reservations with respect to the applicability of the system.

    Notwithstanding that, as also discussed in the blog piece by Andreea Nica, the MIC can effectively cater to the concerns regarding duration and cost of the proceedings, appointment of arbitrators, arbitral decisions’ predictability and consistency, and regarding diversity, independence and transparency. Adoption of MIC, thus, acts as a catalyst in providing a better arbitration regime for both the countries (since it mitigates the above mentioned flaws in ISDS system). With that, being a permanent first instance tribunal, MIC would provide for effective enforcement of the decisions in the BIT. Because of the far-reaching implications of the BIT protection standards, MIC would help in an effective process that works transparently and with highly qualified arbitrators. Spain and Colombia being active protectors of the key legal principles of the international investment law, will definitely be able to uphold the principles through the reforms in the BIT, in particular, the ISDS system.

    • Non-Consideration of Holding Companies as Investors

    The BIT concluded for the first time, the non-consideration of holding companies as investors in Articles 1, 2, and 3. This is reflected by the Interpretive Declaration’s view that “the concept of investor explicitly excludes companies that merely hold financial interests”, which is in contrast with the previous IIAs which did not have such a provision for holding companies. Such a view was observed in the Colombia’s Model BIT, 2017, that the investment shall include a closed list of assets, in place of an exemplary list.

    • MFN Treatment

    The most favoured nation treatment has been subject to controversies in investor-state arbitration. However, both Colombia-Spain BIT, 2005 (Article 3) and Colombia Spain 2021 contain the clause of most-favoured-nation (MFN). The Interpretative Declaration clears the exclusion of MFN clause to the extent of the treatments that are derived from the fulfilment of the commitments assumed by the Contracting Parties in commercial projects. This in turn creates a level-playing field for all the foreign investors by prohibiting the host states in discriminating between investors from different countries, and as such, the investors won’t be able to indulge in treaty-shopping. The same was observed in many of the Brazilians BIT’s, for instance, with Chile, Colombia, and Mexico, wherein it stated ‘excluded from the scope of the MFN clause the benefits deriving from regional economic integration’.[i]  

    Comparing it with Colombia’s Model BIT, 2017 in which, the MFN provision was specifically designed to avoid the usage of standards of protection to ‘import’ procedural and substantial provisions from other IIAs.[ii] The model BIT provided for the MFN standard to be invoked only in cases where measures such as administrative acts, or judicial decisions violate the provision of equal treatment of the foreign investors that are a competitor.

    • Miscellaneous changes

    At present, the Interpretative Declaration shall assist us in, little if any understanding, of its stand on the clauses such as the FET clause, Denial of Benefit clause, UNCITRAL rules, and standard of treatment clause.  f the above-mentioned clauses.

    1. The Fair and Equitable Treatment

    The present BIT has thoroughly revised the Fair and Equitable Treatment (‘FET’) standard to minimise the interpretative margins of the Courts. FET clause will thus, act as a catalyser in encouraging investments in the host state by the investors; by not only protecting the investors rights, but also the autonomy of the states. The changes in the BIT vis-à-vis FET standard has followed the recommendations made by the United Nations Conference of Trade and Development (UNCTAD) and the EU investment protection agreement’s approach.

    2. UNCITRAL Rules

    For the first time in history, Spain has agreed to include the Transparency Rules of the United Nations Commission for International Trade Law (UNCITRAL rules) in an attempt to advance its emphasis on independence and impartiality of the members of the Tribunal and the transparency of the procedure. 

    3. Standard of Treatment

    The contents in the BIT, 2021, regarding the standard of treatment has been reviewed in an attempt to circumscribe the tribunal’s margin of interpretation and promote correct interpretation in investor-state disputes. The other mandate is to mitigate the exposure in consideration of the ambiguous wording. It is ideal attempt to clarify the wide spectrum in treaty standards, and simultaneously, it also acts as a catalysers for promoting investment (because of the explicit mention of the provision). With that, it also helps in regulating the autonomy of the States (because of the revision of treatment standard).

    Conclusion

    Although the full text of the BIT is not in the public domain yet, only the Interpretative Declaration, the New BIT definitely includes certain symbolic changes. The new BIT, 2021 is a fresh expression of the speedily shifting landscape in the investment arbitration, and reflects the significant changes since the 2000s. The renegotiated Colombia-Spain BIT addresses a number of conceptual and semantic difficulties that have emanated from the 2005 BIT or that have emerged after the difficulties in the conventional ISDS system. Therefore, the renegotiated Colombia-Spain BIT is anticipated to cater to the interpretative uncertainties that are left to the realms of Courts and mitigate both Spain’s and Colombia’s exposure to non-meritorious claims. When the investor-state dispute settlement system is going through a paradigm shift, the Spain-Colombia BIT, 2021, definitely makes hay while the sun shines, in an attempt to protect investor rights, sovereign prerogatives and public interest.

    [i] Henrique Choer Moraes, Pedro Mendonça Cavalcante, The Brazil-India Investment Co-operation and Facilitation Treaty: Giving Concrete Meaning to the ‘Right to Regulate’ in Investment Treaty Making, ICSID Review – Foreign Investment Law Journal, 2021; siab013, https://doi.org/10.1093/icsidreview/siab013.

    [ii] Kabir AN Duggal, Daniel F García Clavijo, Samuel Trujillo, María C Rincón, Colombia’s 2017 Model IIA: Something Old, Something New, Something Borrowed, ICSID Review – Foreign Investment Law Journal, 34(1), 224–240 (2019), https://doi.org/10.1093/icsidreview/siz004.