The Corporate & Commercial Law Society Blog, HNLU

Category: Company Law

  • The Digital Dilemma: Reimagining Independent Directors’ Liability under Companies Act, 2013

    The Digital Dilemma: Reimagining Independent Directors’ Liability under Companies Act, 2013

    BY SVASTIKA KHANDELWAL, THIRD- YEAR STUDENT AT NLSIU, BANGALORE

    INTRODUCTION

    The 2025 breach compromising the personal data of 8.4 million users of Zoomcar underscores the growing prevalence of digital risks within corporate governance. Such incidents raise pressing concerns regarding the oversight obligations of boards, particularly independent directors (‘IDs‘), and call for a critical examination of S.149(12), Companies Act, 2013 (‘the Act’), which limits ID liability to instances where acts of omission or commission by a company occurs with their knowledge, attributable through board processes and with their consent or connivance, or where they have not acted diligently.

    This piece argues that S.149(12) has not kept pace with the digital transformation of corporate operations and requires legislative reform to account for the dual challenges of digitalisation: the increasing integration of digital communication in corporate operations, and its growing impact on digital corporate governance failures like data breaches and cybersecurity lapses.

    Firstly, the piece traces the evolution of the IDs’ liability regime. Further, it examines the knowledge and consent test under the first part of S.149(12), arguing it fails to address accountability challenges in the digital-era. Subsequently, it analyses the diligence test as a more appropriate standard for ensuring meaningful oversight.  Finally, the article explores how S.149(12) can be expanded to effectively tackle the liability of IDs for digital governance failures.

    UNDERSTANDING S.149(12) OF THE ACT: SCOPE AND DEVELOPMENT

    In India, the emergence of ID has evolved in response to its ‘insider model’ of corporate shareholding, where promoter-driven concentrated ownership resulted in tensions between the majority and minority shareholders. This necessitated safeguards for minority shareholders and independent oversight of management. Before the 2013 Act, the duties of directors were shaped by general fiduciary principles rooted in common law. This lacked the specificity to address the majority-minority shareholder conflict effectively. A regulatory milestone came when SEBI introduced Clause 49, Listing Agreement 2000, requiring listed companies to appoint IDs. However, it offered limited guidance on the functions and stakeholder interests these directors were expected to protect. A more detailed approach was followed in the 2013 Act, which explicitly defined the role of IDs in S.149(6), S.149(12), and Schedule IV. This marked a transition from treating IDs as general fiduciaries to assigning them a more distinct role. IDs facilitate information symmetry and unbiased decision-making. Furthermore, they are essential for raising concerns about unethical behaviour or breaches of the company’s code of conduct. Significantly, they must safeguard the interests of all stakeholders, especially minority shareholders. By staying independent and objective, they help the board make informed decisions.

    This article focuses on S.149(12) of the Act, which contains two grounds for holding IDs liable. First, if the company’s actions occurred with the ID’s knowledge and consent or connivance, provided such knowledge must be linked to board processes. Secondly, liability arises due to the lack of diligence. Since the provision uses “or,” both grounds function independently; failing either can attract liability. While knowledge must relate to board proceedings, the duty of diligence extends beyond this. It is an autonomous and proactive duty, not confined to board discussions.

    REASSESSING THE KNOWLEDGE AND CONSENT TEST

    The piece argues that S.149(12)’s knowledge and consent standard is inadequate in the context of digital governance, where risks emerge rapidly and information is frequently acquired through digital channels.

    Firstly, courts have tended to apply S.149(12) narrowly, often solely focusing on the knowledge and consent test. They fail to go a step further to assess the duty of diligence. This incomplete approach weakens accountability and overlooks a key aspect of the provision. This narrow interpretation was evident in  Global Infratech, where the IDs were cleared of liability due to insufficient evidence indicating their participation in board proceedings. Interestingly, while SEBI held executive directors to a standard of diligence and caution, it imposed no such obligation on IDs. The decision emphasised that an ID can escape liability solely on the ground of not having knowledge acquired through board processes, without demonstrating that he exercised diligence by actively seeking relevant information. A similar restricted interpretation was evident in the Karvy decision, where SEBI absolved IDs of liability as they had not been informed of ongoing violations in board meetings, without addressing their duty to proactively seek such information through due diligence.

    Further concern arises from the judiciary’s conflation of the knowledge test with involvement in day-to-day functioning. In MPS Infotecnics and Swam Software, IDs were not held liable because they were not involved in the day-to-day affairs of the company. This finding was grounded in the belief that the ID lacked knowledge of the wrongdoing. Such a reasoning exposes a critical flaw in the knowledge test, which lies in treating an ID’s absence from daily affairs as proof that they were unaware of any misconduct, thereby diluting the ID’s duty to exercise informed oversight over core strategic decisions and high‑risk domains, including cybersecurity.

    This interpretation is especially problematic in view of digital governance failures. Various grave catastrophic corporate risks like data breaches and ransomware attacks arise from routine technological processes. Storing user data, updating software, and managing cybersecurity are daily activities that are central to a company’s operations and survival. The “day-to-day functioning” standard creates a perilous loophole. It allows an ID to escape liability by remaining willfully ignorant of the company’s most critical area of risk. An ID can simply claim they lacked “knowledge” of a cybersecurity flaw because it was part of “day-to-day” IT work. Thus, this piece argues that the judiciary’s narrow reading of S.149(12), which applies only the knowledge test, is inadequate in the digital domain. IDs need not be technology experts. Still, they must ask the right questions, identify red flags and ensure appropriate governance mechanisms are in place, including cybersecurity, thus reinforcing the need to apply the diligence test more robustly.

    Another shortcoming of this test is its over-reliance on attributing ID’s knowledge only to matters in formal board processes. In the digital era, this approach overlooks the reality that board decision-making and oversight increasingly occur outside the confines of scheduled meetings. The integration of real-time digital communication channels such as Gmail and WhatsApp highlights crucial gaps. It creates an evidentiary vacuum, since highly probative indications of negligence, like the dismissal of a whistleblower’s alert or a decision to ignore a cybersecurity risk, may be discussed within informal digital communications. Limiting knowledge to board meetings enables plausible deniability. IDs may engage in and even influence critical decisions through private digital channels, omit these discussions from the official record, and later easily escape liability under the knowledge standard, despite having complete awareness of the wrongdoing. Cyber crises unfold without warning, long before the next board meeting is convened. Their rapidity and opacity require IDs to act through digital channels. The exclusion of these communications from the liability framework offers an easy shield from responsibility.

    Compounding this issue, the requirement of “consent or connivance” fails to capture digital corporate environment nuances. Consent is no longer limited to clear, documented paper trails, but is often expressed by various digital cues in businesses. A “thumbs up” emoji in a WhatsApp group could signal agreement, acknowledgement, or simply receipt, therefore giving IDs room to deny intent and escape liability. This problem is exacerbated by end-to-end encryption and disappearing messages features on some instant-messaging applications. It allows erasing potential evidence. Moreover, connivance or covert cooperation can now take subtler digital forms, like an ID editing a cloud-sharing Google Document, replacing “imminent risk” with “need routine system check” in an audit report, intentionally downplaying a serious breach warning. The current wording of the provision is silent on whether this would make an ID accountable.

    Therefore, it is evident that the knowledge and consent test is insufficient in the face of pervasive digitalisation and warrants a wider interpretation in light of the foregoing developments in corporate operations.

    THE DILIGENCE TEST: A STRONGER STANDARD

    While ID liability has often been confined to the narrow ‘knowledge test,’ SEBI’s order in Manpasand Beverages Ltd. reasserts the importance of diligence. On 30 April 2024, SEBI held the company’s IDs responsible, noting that although they claimed a lack of access to vital documents, they made no effort to obtain them. This ruling signals a renewed commitment to holding directors accountable beyond mere knowledge.

    This is beneficial in the context of digital governance failures, as the diligence test provides a stronger framework for ensuring accountability; it imposes an obligation on IDs, as highlighted in Edserv Soft systems, where it was observed that due diligence requires questioning irregular transactions and following up persistently with uncooperative management. The Bombay Dyeing case held that IDs in audit committees are expected to question the presented information and actively uncover irregularities, even if deliberately hidden. It emphasised that IDs must question accuracy and demand clarity without relying solely on surface-level disclosures. The same heightened duty must apply to digital governance, where concealed cyber risks like breaches or ransomware pose equally serious threats and require equally proactive investigation.

    Therefore, the diligence test is more effective for tackling digital corporate governance failures as it replaces passive awareness with active oversight. Since these digital threats often remain hidden until too late, waiting for information is insufficient. It is not a tool for operational meddling but for high-level strategic scrutiny, like questioning a cybersecurity budget marked below industry benchmarks for a data-intensive organisation.

    CONCLUSION: CHARTING THE WAY FORWARD

    As shown, S.149(12) of the Act, in its current form, appears ill-equipped to tackle the realities of digital corporate governance failures. This concern may be addressed through an evolved interpretation of the existing framework, potentially supplemented by a clarificatory Explanation to S.149(12), specifically tailored to digital threats.

     A logical starting point for this evolution is a broader reading of “knowledge.” It can be expanded to include not only information attributable to formal board meetings but also any material information communicated to, or reasonably accessible by, the ID through any mode, including digital means. Additionally, a rebuttable presumption of “consent or connivance” can be inserted where IDs, after gaining such knowledge, fail to record objection or dissent within a reasonable time, especially when the matter involves a material risk to the company or a breach of law. This approach does not set a high threshold; it merely shifts the onus and strengthens timely oversight, encouraging IDs to speak up. Given the potential severity of cyberattacks, such an approach aligns with the need for heightened vigilance in digital governance.

    Further, the timeless duty of due diligence may be interpreted to include a baseline level of digital literacy. While they need not be technology professionals, they must understand enough to ask relevant questions and assess whether management has adequately addressed digital risks. Without this foundational competence, IDs cannot meaningfully engage with cybersecurity, data governance, etc, leaving oversight dangerously superficial.  Embedding this requirement under S.149(12) makes it a statutory duty, ensuring that failure to acquire or apply such skills can directly trigger liability. In the modern corporate landscape, technology is not optional; rather, essential and enduring. Therefore, IDs must be equipped to fulfil their duties in this environment.  

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

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

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

    INTRODUCTION

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

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

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

      NCLT’S ORDER VIS-À-VIS PRECEDENTS

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

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

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

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

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

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

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

          JUDICIAL DISCRETION IN CAPITAL REDUCTION TRANSACTIONS: AN ANALYSIS

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

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

          EXPLORING THE ALTERNATIVES TO THE TRADITIONAL WAY OF CAPITAL REDUCTION

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

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

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

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

          CONCLUDING REMARKS

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

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

          [ii] [1988] BCLC 685.

        1. Inside the SEBI Intervention: Anatomy of Jane Street’s Derivatives Manipulation

          Inside the SEBI Intervention: Anatomy of Jane Street’s Derivatives Manipulation

          BY HIMANSHU YADAV, THIRD-YEAR STUDENT AT MNLU, CS.

          INTRODUCTION

          India is the world’s largest derivatives market, accounting for nearly 60% of the 7.3 billion equity derivatives traded globally in April, according to the Futures Industry Association. Amid growing concerns over market integrity and transparency, the Securities Exchange Board of India (‘SEBI’) took decisive action to protect the interests of investors. On July 3, 2025, the SEBI banned Jane Street from Indian markets for manipulating indices. The US-based global proprietary trading firm, Jane Street Group, operating in 45 countries with over 2,600 employees, is banned from trading until further notice. The order marks a significant regulatory action against market manipulation. Jane Street reportedly earned ₹36,502 crore through aggressive trading strategies, facing ₹4,843 crore in impounded unlawful gains.

          In April 2024, based on prima facie evidence, SEBI initiated an investigation against entities of Jane Street for alleged market abuse. The firm’s activities were found to have violated SEBI’s Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market Regulations, 2003 (‘PFUTP’). The further investigation by SEBI led to findings that on the weekly index options expiry dates, the firm was holding extremely large positions in cash equivalents in the Future and Options (‘F&O’) market. Based on prima facie evidence, the SEBI issued a caution letter to Jane Street and its related entities.

          The activity of Jane Street, mostly done on expiry dates, allowed the firm to influence the settlement outcomes. On expiry day, the closing price of an index (like Nifty or Bank Nifty) determines the final settlement value of all outstanding options and futures contracts. Even a small change in the index’s closing value can lead to huge profits or losses, especially when large positions are involved. Due to the large position held by Jane Street, it allowed the firm to easily conceive the motive.

          SEBI held Jane Street accountable for the two-phase strategy on January 17, 2024 intensive morning buying of Bank Nifty stocks/futures and simultaneous bearish options positioning, followed by aggressive afternoon sell-off to push the index lower at close. These trades directly influenced Bank Nifty’s settlement value, disproportionately benefiting Jane Street’s option positions at the expense of others.

          HOW JANE STREET’S JANUARY 17, 2024 TRADES MANIPULATED THE BANK NIFTY INDEX ON EXPIRY DAY

          The SEBI analysed the top 30 profitable trades of Jane Street, out of which 17 days were shortlisted for detailed analysis concerning derivative expiry day trades. The critical analysis of these days resulted in 15 days with the same deployed strategy for manipulation of indexes, which can also be termed as “Intraday Index Manipulation Strategy”.

          The manipulation strategy was deployed in such a manner that JS Group held a large position. In Patch-I, the net purchases of JS group were INR 4,370.03 crore in cash and future markets. As the purchases in the Index stocks in the morning were executed, it raised the prices of Bank Nifty constituents and the index. The purchases were so high, it made the index move upward. Now that the index moved upward, the put option would become cheaper and the call option would become expensive. This sudden surge gives a misleading signal of bullish interest in Bank Nifty. Based on this delusion of a bullish trend, the JS group purchased the put positions at a cheaper rate quietly. In Patch-II, the JS group sells all the futures positions that were purchased in Patch-I, as the volume bought and sold was so large that it resulted in pushing the index downward. Now, the premium of put prices rises, and there is a drop in the value of call options. This sole movement by JS group entities misled the retail investors, resulting in a loss booked by the retailers, as they were the single largest net buyer across Bank Nifty during this patch. This price upward movement reflects that the Jane Street group was creating an upward pressure during Patch-I.

          EXTENDED MARKING THE CLOSE STRATEGY ADOPTED BY JANE STREET

          On July 10, 2024, the entity was again held liable for “Extended Marking the Close” manipulation. The tactic used under this strategy is to aggressively give a sell or purchase order in the last trading session, upon which the final closing price of a security or index is reflected.  On the last day of trading (called expiry day), the final value of an index like Bank Nifty is very important because all option contracts are settled based on that final number, known as the closing price. Jane Street had placed bets that the market would fall (these are called short options positions, like buying puts or selling calls). If the market closed lower, they would make more money. So, in the last hour of trading on July 10, 2024, Jane Street sold a lot of stocks and index futures very quickly. This sudden selling pushed the Bank Nifty index down, even if only slightly. Even a small drop in the index at the end of the day can increase the value of their bets and bring in huge profits. This tactic is called “marking the close” It means influencing the final price at which the market closes to benefit your trades.

          THE LEGAL PERSPECTIVE ON THE STRATEGIES ADOPTED BY JS GROUP

          In trading, manipulating the market effectively creates and uses monopolistic power.  Order-Based Manipulation (‘OBM’) by high-frequency  traders have several negative effects, such as heightened price volatility in both frequency and size, unfair and monopolistic profit from manipulated investors’ losses and instability potential.

          The JS group and its entities are allegedly held liable for the Intra-day Index Manipulation strategy and Extended Marking the Close strategy. Regulations 3 and 4 of the SEBI PFUTP Regulations, 2003, prohibit any act that manipulates the price of securities or misleads investors. The JS Group was held liable under section 12A(a), (b) and(c) of the SEBI Act, 1992; regulations 3(a), (b), (c), (d), 4(1) and 4(2)(a) and (e) of the PFUTP Regulations, 2003.

          The SEBI, which acts as a market watchdog, is well within its jurisdiction to initiate criminal proceedings as well as impose penalties against entities of the JS group under Section 24 of the SEBI Act, 1992. Section 11 of the SEBI Act 1992 empowers SEBI “to protect the interests of investors in securities and to promote the development of, and to regulate, the securities market.” Section 11B – Directions by SEBI gives SEBI quasi-judicial powers to issue directions “in the interest of investors or the securities market,” even in the absence of specific wrongdoing. It allows the regulator to: Restrain trading activities, modify operational practices, and Direct intermediaries and related entities to cease and desist from certain actions.

          Further, the defence of arbitrage cannot be validly exercised by Jane Street. The activity incurred by Jane Street cannot be termed as a traditional arbitrage practice, as arbitrage means taking advantage of existing price gaps naturally. Jane Street was not only finding pricing gaps and making fair profits rather Jane Street was also manipulating the pricing of some index options and futures to change the market in a way that isn’t normal arbitrage.

          Jane Street artificial price moves through high-frequency, manipulative trading to mislead the market.

          WAY FORWARD

          The Jane Street ‘Soft Close’ Strategy and SEBI’s delayed discovery of such transactions highlight the extent to which a system can lag in evaluating manipulative actions by traders at machine speed. It was actually in 2023, the U.S. Millennium, a prominent global hedge fund, filed a lawsuit against Jane Street after poaching its employees. These employees disclosed a previously covert Indian market strategy centred around artificially influencing expiry-day closing prices to benefit Jane Street’s derivatives positions, a tactic akin to a “soft close.” Only upon the filing of such a suit, the SEBI launched a full-fledged investigation, and the regulator analyzed the 3-year expiry trades of the JS Group. The SEBI’s long-term sustained efforts over the years to safeguard the retail investors from losing their money, at this juncture, a much more advanced regulatory scrutiny is required. Jane Street, being a high-frequency trader, the tactics deployed by such an entity shock the market and have a grave impact on the retail investors. High-frequency Trading (‘HFT’),  has the potential to bring the most worrisome instability to the market. The Flash Crash 2010, which was triggered by automated selling orders worsened by HFT, is one of the most severe events that disrupted market stability. Going forward, SEBI must adopt a more agile and tech-driven oversight model, capable of detecting unusual volumes, timing-based trade clusters, and order book imbalances in real time. It should also consider making a special HFT Surveillance Unit that works with AI-powered systems. This isn’t to replace human judgment, but to help with pattern recognition and rapidly identify anything that doesn’t seem right.

          CONCLUSION

          The regulator recently released statistics showing that the number of retail investors in the derivatives market is close to 10 million. They lost 1.05 trillion rupees ($11.6 billion, £8.6 billion) in FY25, compared to 750 billion rupees in FY24. Last year, the average loss for a retail investor was 110,069 rupees ($1,283; £958). Due to such manipulative trading activities, it is the retail derivative traders who face a tight corner situation and end up losing their money.  SEBI, in its report published on July 7, 2025, highlights that 91% of retail investors lose their money in the Equity Derivative Segment (‘EDS’) The regulatory check and stricter analysis on the trading session are the need of the hour. But on the contrary, cracking down on the practice of such a global level player is what SEBI should be praised for. More dedicated and faster technology should be adopted by SEBI to carry out such an investigation in a swifter manner. 

        2. From Approval To Autonomy: SEBI’s New Framework For Stock Brokers In GIFT-IFSC

          From Approval To Autonomy: SEBI’s New Framework For Stock Brokers In GIFT-IFSC

          BY Vishvajeet Rastogi, SECOND-YEAR STUDENT AT CNLU, PATNA
          INTRODUCTION

          The Gujarat International Finance Tec-City – International Financial Services Centre (‘GIFT-IFSC’) is India’s ambitious bid to develop a globally competitive financial centre catering to international markets and investors. A major regulator of securities markets in India, the Securities and Exchange Board of India (‘SEBI’) has inducted significant regulatory reform to ease the operational environment for stock brokers who seek to operate in GIFT-IFSC.

          On May 2, 2025, SEBI released a circular titled “Measure for Ease of Doing Business – Facilitation to SEBI registered Stock Brokers to undertake securities market related activities in Gujarat International Finance Tech-city – International Financial Services Centre (GIFT-IFSC) under a Separate Business Unit” (‘SEBI Circular’) abolishing pre-approval for stock brokers for conducting securities market activities in GIFT-IFSC and enabling them to conduct such activities through a Separate Business Unit (‘SBU’) of their existing structure. This transition from a strict approval regime approach to an autonomous regime is likely to promote ease of doing business and support the internationalization of India’s financial services.

          This article assesses the salient provisions of the SEBI Circular, discusses its regulatory and legal implications, and reviews the opportunities and issues it throws for stock brokers’ foray into the GIFT-IFSC.

          KEY CHANGES

          The SEBI Circular brings in major reforms in order to ease the functioning of stock brokers in the GIFT-IFSC. It does away with the mandatory condition under which stock brokers have to take SEBI’s advance approval for starting securities market activities in GIFT-IFSC. The reform eases the entrance process and enables brokers to get started sooner with less procedural complexity.

          `In place of the previous approval mechanism, stockbrokers can now conduct activities through an SBU within their existing organizational structure. An SBU can be created in the form of an exclusive branch or division, providing more flexibility in organizing the business of brokers. Although the SEBI Circular encourages the utilization of SBUs, it also leaves the choice for stockbrokers to carry on through subsidiaries or through joint ventures if desired. Similarly, brokers who have already established subsidiaries or joint ventures in the GIFT-IFSC can choose to wind them down and bring their activities under an SBU if it aligns with their business strategy.

          The SEBI Circular also defines regulatory contours by bringing the operations of the SBU under the ambit of the International Financial Services Centres Authority (‘IFSCA’). That is to say that policy issues, risk management, grievance redressal, and enforcement in relation to the SBU will be regulated by IFSCA rules, not SEBI. SEBI’s jurisdiction will continue to extend only to Indian securities market activities. For the purposes of clear demarcation between the two activities, the SEBI Circular requires activities of the SBU to be segregated from the stockbrokers’ domestic activities at arm’s length. This requires maintaining separate accounts and operational autonomy to prevent regulatory overlap.

          Financial segregation has also come with the condition that the net worth of the SBU must be held separate from the stock broking entity dealing in the Indian market. The net worth of the stockbroker for Indian operations will be computed excluding the finances of the SBU, and the SBU itself will have to fulfil capital adequacy norms as per IFSCA’s regulatory guidelines.

          Finally, the SEBI Circular makes it clear that the investors dealing with the SBU will not be subject to SEBI’s grievance redressal platforms like the SEBI’s Complaints Redress System (‘SCORES’) or the Investor Protection Fund operated by the stock exchanges. Their protections and redressal of grievances will instead come under the framework of the regulation of IFSCA, strengthening the operational autonomy of the unit in the GIFT-IFSC.

          Together, these amendments constitute a policy shift towards regulatory clarity and increased operational autonomy with well-codified governance norms to allow stock brokers to successfully increase their presence in international financial services.

          Regulatory Rationale and Objective

            This SEBI Circular outlines the new strategy to promote operational efficiency and regulatory clarity for the stock brokers in the GIFT-IFSC. Removal of the requirement of prior approval from SEBI enhances the regulatory ease of doing business by reducing barriers to entry for brokers to conduct cross-border securities activities. This reform aligns with the larger vision of transforming the GIFT-IFSC into an internationally competitive financial centre at the global stage with international capital and global-level market players.

            The setting up of SBUs in existing stock-broking establishments brings about an objective definitional and regulatory distinction between transactions in domestic business and activities under the jurisdiction of GIFT-IFSC. Segregation does away with regulatory overlap, demarcates the areas of oversight between SEBI and the IFSCA, and protects against conflict of interest.

            Segregation requirements for finances as well as separate net worth requirements and accounting methods further specify that risk and obligation are properly segmented. These requirements increase transparency and the integrity of domestic and foreign market segments.

            In addition to this, the SEBI Circular specifically defines the extent of investor protection and vests grievance redressal and resolution of disputes in the jurisdiction of IFSCA and thereby strengthens jurisdictional certainty.

            Legal and Compliance Implication

            This SEBI Circular represents an important jurisdiction shift for stock brokers who are present in the GIFT-IFSC from SEBI to the IFSCA for business transacted through SBUs. This requires strict adherence to the dual regime of regulation where domestic business continues to be under SEBI’s jurisdiction while SBUs in the GIFT-IFSC operate in terms of IFSCA’s separate regulatory regime.

            The keystone of such a structure is the rigorous ring-fencing requirement with financial, operational, and legal separation between domestic and GIFT-IFSC activities of the stock broker. Financial ring-fencing implies separate accounts maintained by the SBU and separate net worth standards as governed by IFSCA to have clear delineation of assets and liabilities. Operationally, the SEBI Circular stipulates separation of SBUs through arm’s-length management to avoid inappropriately influencing control and mixing of resources. Legally too, separation enforces jurisdiction-related divisions, reduces regulatory arbitrage, and limits system risk.

            This regulatory framework replicates international best practices in influential global financial hubs like the Dubai International Financial Centre (‘DIFC’) and Singapore Monetary Authority-regulated centres. These jurisdictions all prioritize unambiguous jurisdictional demarcation, independence in operations of international financial institutions as well as strong investor protection systems, which support integrity in the marketplace and investor confidence.

            Emulating such principles, SEBI’s SEBI Circular establishes GIFT-IFSC as a compliant and competitive global hub, weighing deregulation against essential safeguards to preserve financial stability and regulatory oversight.

            Opportunities and Challenges for Stock Brokers

            These new guidelines offer stock brokers some strategic options. Most significant among them is greater operational independence, enabling brokers to carry out international securities activities in the GIFT-IFSC with the help of SBUs without obtaining SEBI approval in advance. This independence allows for quicker entry into the market, where brokers can leverage new opportunities in the international markets more easily. Also, carrying out business in the GIFT-IFSC exposes brokers to more international customers and varied financial products, largely opening them up to an extended marketplace and new revenue streams.

            But these advantages carry built-in difficulties. Dual regulatory compliances present a nuanced challenge in that stock brokers have to manage the regulatory conditions of SEBI for their Indian operations as well as IFSCA for their activities in the GIFT-IFSC. This duplicity requires evolved compliance structures and internal controls for maintaining conformity with separate law regimes. In addition, the investor dealing with SBUs will not be able to enjoy SEBI’s prescribed grievance redressals like SCORES, which can potentially create investor protection and redress concerns.

            Internally, stock brokers also need to have strict ring-fencing of resources and finances to have clean separation of both domestic and international operations. Proper management of the segregation is important in order not to have operational overlaps, to protect financial integrity, and to guard against commingling of assets and liabilities. While the SEBI Circular paves the way for internationalization and growth, it also necessitates enhancing the risk management capacities and the regulatory infrastructure of the stock brokers.

            Conclusion and Way Forward

            The SEBI Circular is a forward-looking step towards increasing the regulatory independence of stock brokers in GIFT-IFSC by doing away with previous approval systems and permitting activities in terms of SBUs. The reform not just makes it easier to enter the market but also strengthens India’s vision of promoting GIFT-IFSC as an international financial centre powered by well-defined regulatory lines between SEBI and IFSCA.

            While it introduces new opportunities, it also poses issues like managing the dual regulatory compliances and lack of SEBI’s grievance redressals for investors transacting with SBUs. The author suggests that the stock brokers need to pre-emptively enhance their systems of compliance and risk management in order to be able to manage such complexity. In addition, having closer collaboration between SEBI and IFSCA on regulatory harmonization, particularly investor protection, would increase the confidence of the markets. Proper communication to the investor about the grievance mechanism applicable under IFSCA is also needed to inculcate trust and transparency in the new ecosystem. Using these steps, stock brokers can reap the maximum advantage of this regulatory change and promote sustained development and international integration of India’s financial markets.

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

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

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

            Introduction

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

            Understanding the Regulation and its Evolution

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

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

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

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

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

            Bridging the Gaps: A Vision for the Future

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

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

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

            Conclusion

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

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

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

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

            Introduction

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

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

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

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

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

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

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

            The NCLT Chennai Bench rightly noted:

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

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

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

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

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

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

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

            Revival of CIRP in case of Failure of Settlement Agreement

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

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

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

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

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

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

            Comparison with Section 230 of the Companies Act, 2013

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

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

            Conclusion and Recommendations

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

          3. SEBI’s Norms For Sharing Real-Time Price Data: Laudable Yet Restrictive

            SEBI’s Norms For Sharing Real-Time Price Data: Laudable Yet Restrictive

            BY SACHIN DUBEY AND SUKRITI GUPTA, THIRD-YEAR STUDENTS AT NLU, ODISHA

            Introduction

            Securities and Exchange Board of India (‘SEBI’), vide circular dated 24th May 2024, introduced ‘Norms for sharing of real-time price data to third parties.’ The circular has been brought to tackle the concerns arising from the unauthorized sharing of real-time price data (‘Price data’) with online gaming platforms and other third parties and to protect the securities market. Price data refers to the current data of information which is made accessible as soon as it is generated. It is used in time-centric applications like stock trading and navigation to have real-time price analytics.

            This restriction was made in the purview of an upsurge in online gaming platforms, virtual trading apps, fantasy stock trading apps, and various other websites. Since the past couple of years, there has been an incremental increase in trading through these virtual platforms which therein invited attention to regulate the functioning of these platforms. It works in a way that provides its users with an illusionary image ofhow stock trading is done by featuring the exact parallel stocks listed on Stock Exchanges and also by citing similar price values and fluctuations. Since they do not fall under the domain of SEBI, they,therefore, become an unregulated fragment. Sharing real-time price data poses a high risk of leakage of sensitive information related to securities in the market. These virtual trading platforms appropriately use the data for their apps and websites to build a real trading atmosphere for their users which in turn fabricates their mind to construe this trading to be an actual stock market trading. This may also create parallel, unregulated platforms which would continue to hamper the trust of its users thus, promoting unfair trading. The sharing of real-time price data also acts as a disruptor in the securities market, because of which the regulator is consistently trying to prioritize the interests of investors above all else.

            The circular also mentions that market infrastructure institutions (‘MIIs’) and market intermediaries such as brokerages are forbidden to share price datawith third parties. However, it comes with an exception that price data can be shared if such information is essential for the systematic functioning of the securities market and regulatory compliances. Further, a written agreement needs to be entered and due diligence is required before transferring price data with third parties so that it will not be put to any illegal use.

            This post delves into the impact of SEBI’s recent circular on investors and virtual stock trading apps, highlighting its broader implications. Additionally, it sheds light on the potential drawbacks of the circular and suggests measures to cure the same.

            REGULATORY GREY ZONES AROUND VIRTUAL STOCK TRADING PLATFORMS

            Hitherto, Virtual stock trading apps operate in an ambiguous regulatory environment. Regulatory officials describe it as a form of Dabba Trading, an unlawful practice which involves placing bets on the movement of the price of underlying assets such as stocks or commodities. In India, Dabba trading activities flout various provisions of the Securities Contracts (Regulation) Act, 1956 (‘SCRA’) and are subject to punishment under section 23 of the SCRA. 

            SEBI already made its intention clear in 2016 when it issued a warning to investors against various entities offering leagues/schemes/competitions etc. based on the securities data. SEBI stated that these schemes are neither authorized nor endorsed by SEBI or any SEBI-recognized exchanges. It further sought public input on proposed amendments to SEBI Investments Advisers (Regulations), 2013 which included a provision to prohibit anyone from organizing schemes, games, leagues, or competitions related to the securities market. However, it did not forward the proposal and instead prohibited Stock Brokers from participating in games, leagues, schemes, competitions, etc., that involve the distribution of prizes, medals, gifts, etc. SEBI’s recent circular will further force virtual trading stocks to shut down their operations.

            Apart from SEBI, the National Stock Exchange (‘NSE’) vide circular dated 20th April 2023 observed that some market participants are misusing its data for gaming and virtual trading, which undermines fair and transparent trading principles. It reminded trading members that NSE Data should only be used for legitimate trading activities by their clients and not for gaming or virtual trading purposes.

            Therefore, there has never been regularity clarity regarding virtual stock trading apps which made them operate in a regulatory grey area.

            SEBI’s OBJECTIONS AGAINST VIRTUAL STOCK TRADING APPS USING REAL TIME PRICE DATA

            Although SEBI was not concerned with these platforms working as stock market simulators for education or entertainment purposes utilizing price data, the problem arose with the involvement of money. Platforms like India Trading League or Stock Race charge a small entry fee and award monetary rewards tied to the performance of stocks or commodities. This has sparked an addictive interest among users leading to the successful development of their business model.Further, they do not come within the regulatory foothold of SEBI and therefore are not required to provide disclaimers to users regarding the difference between actual trading and virtual trading as well as the risks attached to virtual trading.

            Further SEBI’s concern about restricting price data with these platforms comes from its objective to protect the interest of investors in the securities market. Out of the regulatory foothold of SEBI, these platforms tend to create a virtual, parallel and uncontrolled securities market where there will be no trust among the users.

            Stock Exchanges primarily generate revenue through transaction fees on trades and subscription fees for providing price data. SEBI has explicitly forbidden the creation and operation of games or competitions related to securities and security markets.If a third-party platform acquires price data and uses it to operate subscription-based games, it would undermine the exchanges’ revenue sources and breach SEBI regulations.

             KEY CONCERNS

            The move to regulate the sharing of price data with third parties, including fantasy stock trading games, is commendable for its aim to prevent investors from becoming addicted to these games and getting duped into the fraudulent practices of these platforms.Still, it has certain shortcomings which need to be acknowledged and taken care of.

            To start with, SEBI should not view every such development with suspicion which is beneficial for innovation and the growth of private businesses in the economy. SEBI should promote these business platforms while simultaneously bringing them under its regulatory foothold.

            SEBI should take a proactive approach by establishing a clear framework for these platforms, detailing the rules and regulations related to securities they must adhere to, and specifying the required disclosures for registration. Such measures will not only ensure compliance but also promote transparency and encourage innovation, creating a more dynamic and trustworthy financial ecosystem. It could have also outlined the eligibility criteria for participants, including age limits, net worth, and other intriguing requirements. The Board can take a cue from the Australian Securities and Investments Commission (‘ASIC’) which requires platforms like fantasy stock trading games to obtain a license before starting operation. Licensed platforms which are called binary options providers in Australia ensure protection to investors as they need to make certain disclosures as well as need to fulfil certain obligations imposed by ASIC.

            Further, the circular states that that price data will be provided to investor educational platforms with a delay of one day.If price data is allowed to be shared with educational platforms with lag of one day, then these platforms will be compelled to use delayed data which will not serve the purpose of such learning platforms. Their business model would go in negatives as its whole object of live simulation-based tasks would be affected, offering no monetary incentives. Their contribution in enhancing investment skills and simplifying the investment process for individuals through realistic stock market simulations will be significantly impacted. Therefore, SEBI should consider repealing it from the circular.

            Hence, while SEBI’s plan to issue a circular regulating the sharing of price data with third parties, including virtual trading platforms, is praiseworthy, yet restrictive. This regulation may hinder innovation that aids in the development of investment skills and simplifies the investment process for individuals.

            Conclusion

            Globally, many countries are adapting to digital era due to the rise of various online platforms offering monetary services. With the increase in these platforms, there is a growing concern regarding sharing price data with the third parties. Regulators around the globe are becoming aware of the risks and challenges connected with manipulation of markets, and leakage of sensitive data. So, it has become essential to have rules and regulations to regulate data sharing. Therefore, amidst this, SEBI has brought such norms which restricts sharing price data with third parties to bring credibility and stability in the worldwide stock market. Although it is commendable, SEBI could have implemented regulations to bring these platforms under its regulatory framework while still allowing them to operate. After all, a country’s legislation aim should be to let the private business develop in the country with having certain regulatory control over them.

          4. Post Cox and Kings: Delhi High Court Exempts Directors From Group Of Companies Doctrine- Implications And Analysis

            Post Cox and Kings: Delhi High Court Exempts Directors From Group Of Companies Doctrine- Implications And Analysis

            By Shivang Monga and Varun Pathak, Third-Year Students at MNLU, Mumbai

            I. Introduction 

            The Delhi High Court(‘DHC’)on 24 January 2024, in the case of Vingro Developers Pvt Ltd v Nitya Shree Developers(‘Vingro Developers’), delivered an important ruling on the aspect of impleading directors of a company to the arbitration agreement. The court, in this case, excluded directors from the ambit of the group of companies’ doctrine, which the Supreme Court(‘SC’) upheld in the case of Cox and Kings Limited vSAP India Private Limited(‘Cox and Kings’).

            According to this doctrine, an arbitration agreement entered into by one company binds non-signatory group entities under certain circumstances. This doctrine applies only when the circumstances demonstrate the mutual intention of the parties to include both signatories and non-signatories. Consequently, the non-signatory gets impleaded despite not formally consenting to it.

            The DHC judgement brings certain clarity to the doctrine by excluding directors from being impleaded. The exclusion in this case stems from the application of the principal-agent relationship.

            This article seeks to analyse the high court’s verdict in the context of the Cox and Kings judgement, and sheds light on why ‘group of companies’ doctrine should not apply to such scenarios. Furthermore, we broaden our analysis by examining how different international jurisdictions have addressed issues of binding directors and employees within a company to the arbitration agreement.

            II. Binding Directors to Arbitration: Applicability of Cox and Kings

            The Respondent in the above case signed two Builder Buyer Agreements with the Petitioner concerning the Rajasthani Resident Township Project of the Respondent. The Respondent company’s directors were authorised representatives. Director 1 had signed the BuilderBuyer Agreements on the Respondent’s behalf, while Director 2 was a non-signatory. Pursuant to the non-delivery of the possession of flats, the Petitioner invoked arbitration against the Respondent.

            The Petitioner also sought to enforce the arbitration agreement against the company’s directors by invoking the Cox and Kings judgment. It was argued that in light of the said judgement, non-signatories could be impleaded and that the directors cannot be separated from the company. Petitioner argued that as per the said judgement, a joint reading of section 2(1)(h) and section 7 of the Arbitration and Conciliation Act, 1996 would mean that ‘parties’ included signatories and non-signatories. The contention was that one director (signatory) and other director (non-signatory) were not ‘third parties’, but rather ‘non-signatories.’

            However, the DHC underscored that the application of the ‘group of companies’ doctrine, as per the Cox and Kings judgment, hinges upon the common intention of the parties to bind non-signatories to the arbitration agreement. To accurately ascertain this intention, the court emphasized the need to consider the relationship between the parties and the surrounding circumstances.

            In light of the fact that the arbitration agreement was not signed by Respondent 2 in personal capacity but only in representative capacity and the fact that Respondent 3 was not a signatory to the arbitration agreement, the court held there was no intention to bind the directors to the arbitration agreement.The High Court therefore, did not apply the group of companies’ doctrine and allowed arbitration proceedings only against the company and not its directors.

            III.Authors’ Analysis: Deciphering the Common Intention and Corporate Separateness

            In Dow Chemical v. Isover Saint Gobain, the ICC tribunal emphasized that non-signatories could be made a party to arbitration agreement based on the mutual intent of the signatory and the non-signatories. Similarly, in Cox and Kings, the Supreme Court clarified that the group of companies’ doctrine applies only when there is clear corporate separateness among the entities within the group. 

            Applying these principles to such cases, it becomes evident that the directors cannot be bound by the arbitration agreement for two key reasons. Firstly, due to the absence of corporate separateness between the director and the company. Secondly, the crucial element of common intention necessary for enforcing the arbitration agreement is lacking. 

            To establish corporate separateness, there needs to be the involvement of two separate entities, such as a holding company and its subsidiary, each with its own legal identity. However, in such a case, the director’s role as an agent of the company cannot fall within that definition. Consequently, with only one corporate entity at play and the director acting on its behalf to execute the arbitration agreement, the prerequisite of common intention also remains unfulfilled.

            Due to the absence of corporate separateness between a director and the company, the lines between the intentions of the individual director and those of the company becomes blurred. Directors, as agents of the company, are generally seen as integral parts of the company rather than distinct entities. When a director signs an arbitration agreement, it’s typically assumed as an action on behalf of the company, with the intention assumed to be that of the company. Without clear corporate separateness, it becomes difficult to ascertain the intentions of the director and of the company as a whole. This lack of distinction makes it challenging to establish the necessary common intention required for enforcing arbitration agreements. The enforcement of arbitration agreements involving directors also becomes uncertain, as it remains unclear whether the director’s actions truly represent the collective intention of the company or if they’re acting in their personal capacity.

            Therefore, DHC noted in the absence of corporate separateness and common intention the directors cannot be bound by the arbitration agreement in the present circumstances as they were also not acting in their personal capacity.

            IV. Understanding Directorial Exemption: The Role of Agency Principle 

            In addition to addressing the absence of a common intention to bind directors, the court also relied on the agency principle to discern the relationship between the company and its directors. Notably, it was observed that directors acted on the company’s behalf, as specified under Section 182 of the Contract Act. Similarly, Section 230 of the Contract Act clarifies that an agent does not assume liability for principal’s actions unless the agent personally commits to such responsibility. 

            The court’s perspective for not relying on the group of companies’ doctrine in favour of the agency principle is commendable. By emphasizing the fiduciary duties and roles of directors as company agents, the court elucidates a more nuanced understanding of corporate relationships and individual responsibilities within corporate structures.

            V. International Position 

            In light of the High Court’s oversight in considering international jurisdictions, it becomes imperative to delve into global legal perspectives on this issue. International jurisdictions have a mixed view regarding binding non-signatory directors and employees of companies to arbitration agreement. In the USA, in DK Joint Venture 1 v. Weyand it was held that because of the principles of contract and agency law, non-signatory corporate officers and agents of a corporation cannot be bound by the arbitration agreement entered on behalf of the company. The court in Covington v. Aban Offshore Ltd took the same view. Once, an arbitral tribunal in Geneva also held that the arbitration clause should not extend to the directors who have acted under employment.

            Due to the lack of uniformity on this issue in the international jurisdiction, it has also been held in certain cases that employees could be subject to arbitral jurisdiction as per the arbitration agreement signed by the company. This approach is based on the principle of ‘third party beneficiary’. According to this principle, employees could be subject to arbitral jurisdiction based on arbitration agreements signed by the company when they are intended beneficiary to the contract. However, this position is different and does not hinge on the group of companies’ doctrine, as argued before the Delhi High Court.

            It has been held in the case of In re Vesta Ins. Group Inc by Supreme Court of Texas that arbitration clauses apply only to contractual signatories, and the agents or officers of corporates can only be made a party to the dispute if they are enlisted as a third party beneficiary.

            Thus, even in cases where arbitration agreements bind employees, it is not based on the group of companies’ doctrine. The argument that the arbitration agreement must bind the directors by relying on Cox and Kings judgment does not stand as the group of companies’ doctrine in the present case cannot be applied in light of non-existence of separate companies.

            Therefore, the High Court’s decision aligns with the prevailing international stance, affirming that the impleadment of non-signatories to arbitration agreements, as per the Cox and Kings judgment, is contingent upon the common intention and the existence of separate entities within a group of companies.

            VI. Conclusion and Way Forward

            The judgment in Vingro Developers brings some clarity to the application of the Group of Companies Doctrine. By excluding directors from arbitration agreements, it underscores the defined fiduciary relationship within corporate structures. This decision emphasizes the need to consider agency principles and the absence of distinct entities within a group, to ensure a nuanced understanding and application of this doctrine in India. Moving forward, a comprehensive approach is needed to ensure consistency and fairness in resolving disputes involving directors and other employees of the company to ensure trust and efficiency in corporate arbitration proceedings.

          5. India’s New Digital Personal Data Protection Laws & Its Implications For M&A Compliance

            India’s New Digital Personal Data Protection Laws & Its Implications For M&A Compliance

            BY DEVINA SOMANI, FOURTH-YEAR STUDENT AT JGLS, HARYANA

            Introduction

            India’s recently implemented Digital Personal Data Protection Act, 2023 (DPDP Act)on 11th August, 2023 exclusively pertains to the processing of personal data, regardless of its initial form (digital or analog subsequently converted into digital format). Under the Act, ‘personal data,’ is described as ‘any information relating to a recognizable individual.‘

            The Act introduces ‘significant data fiduciaries’ (“SDFs”) with added duties based on data scale, sensitivity and impact. SDFs appoint a Data Protection Officer (“DPO”) and face transfer restrictions. ‘Data processors’ handle data for fiduciaries, ‘data principals’ being the subjects. The ‘Consent manager,’ registered with the Data Protection Board, centralizes consent management as a Data Fiduciary (holds responsibility for processing personal data), ensuring transparent and accessible handling. 

            The DPDP Act does not apply to handling the personal data of individuals located offshore if processed in India based on a contract between an entity in India and one located outside it. This exclusion aims to support Indian outsourcing firms regularly managing data of individuals outside India. However, it might hinder the chances of the European Union (“EU”) and similar regions considering India as offering sufficient protection for data transferred to such firms. Therefore, under the Act, Cross-border data transfers are generally allowed unless restricted by the government, benefiting IT companies by enabling uninterrupted operations. Moreover, the Act prioritizes existing restrictions on the transfer of personal data abroad including mandates from RBI to store payment data within India.

            The Impact of the New Data Privacy and Protection laws on Mergers and Acquisitions

            When it comes to Mergers & Acquisitions, evaluating the Act’s impact would primarily involve determining whether the chosen M&A structure falls within exempted M&A Scenarios, allowing a focused compliance effort on the applicable provisions.  Section 17(e) of the Act states that the rules concerning the obligations of Data Fiduciaries and the rights and responsibilities of Data Principals in Chapters II and III will not be applicable in situations where data processing is essential for certain corporate actions like mergers, amalgamations, reconstructions, or transfers of undertakings between companies that are authorized and approved by a court, tribunal, or competent authority as per prevailing laws. However, any sharing or processing of personal data for M&A purposes outside the scope of a court-approved scheme must adhere to the Act’s provisions. 

            Should the structure not align, comprehensive compliance measures spanning the entire M&A lifecycle become necessary. This entails identifying personal data footprints through an in-depth discovery process, where records of processing are established, customer consent protocols are navigated for conflicting data, and data privacy policies for the merged entity are implemented. The buyer will have to scrutinize the type of data relevant to the target’s business and its significance in their operations. Similarly, it will need to assess whether the target company’s business model presents additional complexities or unexpected privacy vulnerabilities compared to the buyer’s current model. For instance, if specific privacy regulations apply to a particular sector of the business (such as financial institutions or insurance companies), this will likely alter the approach to how the due diligence is conducted. It becomes crucial to consider these sector-specific regulations and responsibilities when assessing the transaction’s risks and implications under the Act. Moreover, in a transaction involving a party where the primary business of the entity involves data processing (like an advertising agency or a company focused on big data and artificial intelligence), the significance of the data handled in their operations becomes even more pronounced.

            Similarily, different considerations arise regarding data protection in Share sales and Asset sale transactions. For share sales, where only the shares of a company are transferred to the buyer, the company retains control over its personal data, such as employee records and customer contact details. As this control does not shift, there is no obligation to inform data subjects about post-transfer data processing unless the nature or purpose changes. However, it is advisable for the company to notify data subjects about the change in ownership to prevent any potential confusion or distrust. Any alterations to the buyer’s data protection documents post-transfer, like privacy policies, should be communicated to data subjects if they are significant. On the other hand, during  Asset sales, unlike Share sales, personal data often moves from the seller to the buyer, where it becomes necessary to inform the data subjects as the controller’s identity changes. If the buyer obtains personal data, it must furnish privacy policies or other data protection documents to the concerned data subjects. This aligns with transparency principle followed by the General Data Protection Regulation (“GDPR”). The seller might agree to implement new policies before the sale’s completion. The specifics outlined in the privacy policy or other applicable data protection documents, especially regarding employees, are crucial.

            Data Privacy Considerations in the Pre-Acquisition Phase

            M&A deals involve handling extensive Personal Data of the target company, where a buyer’s due diligence will involve inquiry into information about data tied to the acquired target like data on employees, customers, vendors, contractors, suppliers, and business partners (Data Principals). If the seller or target discloses this personal data during the due diligence, compliance with the Act’s consent requirements (Section 6 of the DPDP Act, 2023) is necessary at that stage. Additionally, in a business transfer like a ‘slump sale,‘ where the entire business is transferred, processing personal data of customers and vendors requires consent. The seller, as the Data Fiduciary, must obtain consent before processing such data, issue notices and seek fresh consent if necessary. Since getting approvals during mergers and acquisitions can be challenging at times, alternative options may include Data Sharing Agreements(“DSAs”) which establish the specific terms and conditions governing data sharing, regardless of whether the data is transmitted within India or abroad.

            In order to spot potential privacy risks, the buyer must initially comprehend the kinds of personal data handled by the target company. To assure and safeguard the buyer, the seller can provide assurances through Representations and Warranties. Additionally, the buyer should seek indemnification specifically concerning any repercussions resulting from identified non-compliance with data protection laws uncovered during due diligence. A prerequisite condition mandating the target to secure consent from pertinent data subjects. Can be incorporated into the transaction documents as condition precedents which might necessitate rectification of any non-compliance with relevant laws discovered during due diligence before finalization.

            As an acquiring entity, it is vital to grasp the involvement of third-party processors linked to the target company and ascertain the scale of international data transfers. Significant focus should center on any cloud service providers engaged, the methods and locations of data storage, and the array of contracts and data processing agreements (“DPAs”) the company has in place. 

            In the course of an M&A deal, companies must restrict the handling of employee data to what is essential for the transaction’s objectives. Upholding principles like data minimization and purpose limitation safeguards employee privacy during this process. The Act specifies that processing Personal Data for employment purposes is deemed a ‘legitimate’ utilization. This implies that an employee’s Personal Data could potentially undergo processing without their explicit consent under certain conditions, namely: (1) Utilization of the Data Principal’s information for their employment. (2) Employing the data to shield the employer against potential loss or legal responsibility, (3) Providing any service or benefit requested by an employee who acts as a Data Principal. In a scenario where a seller might argue for the necessity of divulging such information, their rationale could be centered on ensuring that a potential buyer extends comparable offers to employees for recruitment purposes. As this disclosure directly links to the employment status of the Data Principal, it falls within the purview of legitimate use and, therefore, stands exempted from the necessity of seeking consent as outlined in the Data Protection Act. 

            Moreover, the legislation emphasizes the criticality of maintaining the accuracy and consistency of employee data, particularly when these data influence decisions impacting employee. Employers are further required to promptly report any breaches of personal data to the Data Protection Board (“DPB”) and affected individuals. Additionally, they must facilitate the erasure of personal data once its intended purpose is fulfilled, aligning with the overarching principles of the Act. To fulfill the transition to the Act, employers are granted the leeway to continue processing employee data until consent for such data is withdrawn. However, they are mandated to furnish employees with a comprehensive notice detailing the types of personal data being processed, the procedures to exercise their rights under the new regulations, and avenues for lodging complaints as per the guidelines under the Act. 

            Data Privacy Related-Risks Upon Completion of Transaction

            Upon the completion of the transaction, the buyer typically expects to receive all personal data associated with the acquired business. In cases where there is a cross-border transfer of data at closing, there may be risks associated with conflict between such transfer and stricter regulations imposed by existing Indian laws on transferring personal data outside India, such as the Reserve Bank of India’s mandate for payment system data storage within the country. Section 16(2) of the Act explicitly states that it does not override current transfer restrictions set by various sector-specific laws or administrative regulations in India. Depending on the transaction’s nature, such as a spin-off of an independent subsidiary, the transferred personal data might continue to be hosted on the target’s systems sold as part of the deal. 

            In M&A transactions, the involvement of a third-party entity gaining access to personal data constitutes a “transfer” that could potentially breach the consent requirements under Section 6(1) of the DPDP Act. Hence, it becomes crucial to inform data subjects about such transfers. The seller should provide specific information to data subjects about the transfer of their data to a third party at the time of the transfer. After the transaction’s closure, the buyer must consider the necessary steps to utilize the acquired data while ensuring compliance with the DPDP Act, 2023. 

            Henceforth, it becomes crucial for the buyer to safeguard the information as mandated by DPDP Act and refrain from further disclosing the personal data without consent of the data principals as under Section 6 of the DPDP Act. As such, the seller may establish a “Data Protection Agreement” with the buyer concerning these obligations, which can also include adherence to any restrictions in the seller’s contracts with third parties regarding the shared personal data before closing.

            Conclusion

            India’s Digital Personal Data Protection Act, 2023 (“DPDP Act”) has a significant impact on Mergers and Acquisitions (M&A). Replacing earlier regulations, the DPDP Act governs data handling, emphasizing consent, legitimate use, and the role of Data Fiduciaries. In M&A, it prompts necessary consent requirements during a due diligence, affecting both Share and Asset sale transactions. Employment-related data processing under the Act demands adherence to the consent framework under the Act even during transitions. Post-transaction risks emerge concerning cross-border data transfers and compliance with sector-specific Indian laws. Navigating these complexities demands proactive compliance measures to adapt to India’s ever evolving landscape in Data Privacy Laws during such M&A transactions.

          6. Bharati Airtel & Anr v. V.V. Iyer – Unraveling the Set-Off Saga in Insolvency

            Bharati Airtel & Anr v. V.V. Iyer – Unraveling the Set-Off Saga in Insolvency

            by Pratishtha Agarwal and Prabhav Tripathi, students of third-year at the Institute of Law, Nirma University

            Introduction

            While the Insolvency and Bankruptcy Code, 2016 (“IBC”) serves as a complete code, many a time, the exclusive nature of the Act presents a legal lacuna in the procedure and calls for determining the application of other general laws in such absence of relevant provisions. On a similar note, in the recent case of Bharati Airtel Limited and Anr. v Vijaykumar V. Iyer and Anr., the Supreme Court decided upon the question of the right to claim set-off in the Corporate Insolvency Resolution Process (“CIRP”). In set-off, it is a debtor’s right to settle the smaller claim owed to him against the larger claim payable to his creditor. As there is no statutory provision on setting off the balance amount once the CIRP has been initiated, the Bench comprising Justice Sanjiv Khanna and Justice S.V.N. Bhatti observed the appeal.

            It was held that insolvency set-off and statutory set-off do not apply to CIRP. Though the right to claim of set-off is generally granted under Order VIII Rule 6  of the Civil Procedure Code, 1908 (“CPC”), it is not permitted in the CIRP when the Resolution Professional proceeds to take control and custody of Corporate Debtor’s assets under Section 25(2)(a) of IBC.

            This blog aims to understand the rationale behind the judgement and the exceptions it carved, discuss the arguments presented from both sides and analyse the dissenting stances of foreign jurisdictions on claim of set-off in insolvency proceedings.  

            Facts of the Case 

            In April 2016, eight spectrum trading agreements were executed between Bharti Airtel Limited, Bharti Hexacom Limited, Aircel Limited, and Dishnet Wireless Limited to acquire the usage rights of the spectrum allocated to the latter. Since the agreement was contingent on the approval of the Department of Telecommunications, Government of India, (“DoT”) it had demanded that the Aircel entities submit bank guarantees for Rs 457.73 crores owing to certain licenses and spectrum dues.

            After the Aircel entities filed a challenge with the Telecom Disputes Settlement and Appellate Tribunal (“TDSAT”)regarding DoT’s directive, they were ordered by TDSAT to provide bank guarantees for which they approached the Airtelentities. On the Aircel entities replacing the bank guarantees furnished by the Airtel entities and Airtel entities receiving them from the DoT, Rs. 411.22 crores were payable by the Airtel entities to the Aircel entities.

            Pertinently, the bone of contention arose on 10th January 2019 when the Airtel entities made a payment of Rs 341.80 crores due to Aircel entities after setting-off a balance amount of Rs 145.20 crores on the ground that Aircel entities owed that amount to them. This set-off was contested before the Adjudicating Authority (“AA”) in Mumbai by Airtel wherein an order in favour of the Airtel entities held that they had a right to set off Rs. 112.87 crores from the payment. The Resolution Professional contested the Adjudicating Authority’s order before NCLAT which held ‘set-off to be antithetical to the objective of the IBC.’ 

            Provisions And Principles: No Right To Claim Set-Off In The CIRP

            Relying upon the opening part of the enactment, the Supreme Court judgement addresses IBC as a complete code to consolidate the laws relating to insolvency resolution and reorganization. The intentional omission of statutory set-off or insolvency set-off provisions during CIRP reflects a legislative decision to preclude the assertion of such rights in insolvency proceedings. Additionally, Regulation 29 of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 (“Liquidation Regulations”) which addresses setoff and mutual credits, is confined to Chapter III Part II, specifically about the liquidation process. This posits that if there were a conflicting legislative intent, the law would have encompassed Chapter II Part II of the IBC to allow the application of set-off claims during CIRP.

            Section 238 IBC provides an overriding power wherein notwithstanding anything inconsistent present in any other law for the time being in force, the laws laid down are in effect. This legal position also disarms Regulation 29 from subsuming the CIRP under its scope of insolvency set-off. Further, Order VIII Rule 6 of CPC creates a legal or statutory set-off wherein the defendant has a right to claim set-off against the plaintiff’s demand for an ascertained sum of money that is legally recoverable and is not beyond the pecuniary limits of the court’s jurisdiction. However, this set-off too, is overridden by Section 238 and rendered inapplicable from being exercised during insolvency proceedings, thus maintaining the rigidity and exclusivity of the Code.

            It was further argued that the concept of insolvency set-off, in its entirety, goes against the principle of pari passu. Section 53 of the IBC lays down the priority order of creditors for the distribution of sale proceeds of liquidation assets under the “waterfall mechanism”. Here, set-off offers an overriding effect and primacy to the creditor entitled to claim set-off against the demanded credits of the Corporate Debtor. In the process of dealing with these cross demands by set-off, the assets are depleted in favour of that single creditor with set-off entitlement that was initially available to be settled amongst the general body of creditors. As a consequence, with a decrease in the dividend payable, the same class of creditors are not treated equally and the liquidation hierarchy is also compromised. Thus, if such a claim is permitted in the CIRP, it is bound to go against the waterfall mechanism by keeping the entitled creditor on a higher footing and the other creditors at a disadvantageous position.

            Contradictory Viewpoint on the Applicability of Set-Off to CIRP

            The SC judgment attempts to clear the air on the applicability of set-off to CIRP however it raises pertinent questions on whether the Apex Court has taken an erroneous stance. The judgment moots the contention that Regulation 29 of the Liquidation Regulationsmandates the mutual set-off however the instant regulation only corresponds to liquidation.

            Pertinently, as noted earlier, the judgment of the SC in the case of Swiss Ribbons v. Union of India held that set-off can be considered during CIRP subject to the challenge before the AA. Interestingly, the judgment takes note of the mandatory nature of insolvency set-offs in the United Kingdom as highlighted by the judgment in the case of National Westminster Bank Ltd. v. Halesowen Presswork & Assemblies Ltd.. Therefore, it is vital to highlight that set-off is a widely accepted and practised principle of insolvency law internationally. Notably, Section 553  of the U.S. Code provides for the right of a creditor to offset a mutual debt that arose before the commencement of the case i.e. pre-petition debt. However, per the ratio of In re Shopper’s Paradise,  it was highlighted that a creditor can never offset a post-petition debt against a pre-petition debt. This in line with the distinction drawed upon in the instant judgment in relation to set-off pre and post the initiation of the CIRP. 

            Further, in the matter of Pramod Kumar Sharma Uniworld Sugars Pvt. Ltd. v. ED&F Man Sugar Ltd., NCLT Chandigarh had held that set-off was permissible during CIRP in view of ‘the treatment reflected in the book of accounts of the Corporate Debtor while determining the liability of the parties with regard to the purchase and sale of sugar.’ A case has been made out in detail below for allowing set-off in the context of CIRP. 

            Justifications for Permitting Set-off in the Context of CIRP

            1. Litigation Minimization: Permitting setoffs can aid in the reduction of litigation throughout the CIRP. The presence of set-off may potentially mitigate disputes concerning the validity and magnitude of claims, as it incentivizes the involved parties to negotiate settlements rather than engage in protracted legal disputes.

            2. Encourages Credit Flow: An effectively operating set-off mechanism has the potential to encourage credit flow. If creditors are certain that the quantities owed by the debtor can be offset against their exposure, they may be more inclined to grant credit to financially distressed companies. This would subsequently increase the availability of credit in the market.

            3. Promoting Creditor Engagement: Permitting set-off enables creditors to be more motivated to actively participate in the CIRP. To encourage greater participation in negotiations, contribution to the resolution plan, and support for the company’s revival, creditors might be more inclined to offset their claims against the liabilities of the debtor.

            Conclusion

            However, the Apex Court has carved out two exceptional conditions in Paragraphs 30 and 32 of the judgement, wherein the set-offs are permitted in CIRP in two circumstances. Firstly, a contractual set-off is allowed if its entitlement is effective before or on the date of CIRP initiation.  As the same cannot be precluded, the terms of the contract remain binding besides the moratorium period. Secondly, equitable set-off, wherein the claim and counter-claim are linked by transactions that can be treated as one, was also made an exception by the Bench. Herein, the set-off needs to be “quantifiable, genuine, and established on fact and in law.” Through this judgement, the Supreme Court reiterated the sanctity and exclusivity of IBC and settled the position of law on the applicability of the right to claim set off in the CIRP. In the context of insolvency law, the ratio decidendi is a right step in the way to establish a proper demarcation of claims in CIRP and other laws.