The Corporate & Commercial Law Society Blog, HNLU

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

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

    By Neelabh Niket and Nitish Dubey, fourth-year students at HNLU, Raipur

    Introduction

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

    Facts

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

    Analysis

    Before we delve into the nuances of the judgement, it is imperative to make it clear that the discretion conferred upon the Adjudicating Authorities to give a breathing space to the CD cannot be asked as a matter of right but can only be granted by the AA when there exist extraordinary circumstances. The authors however will argue that even this step of the Hon’ble Court is unwarranted and will open up Pandora’s box in an otherwise smooth IBC jurisprudence.  The same has been done under four heads which are as follows-

    • Overlooking Past Jurisprudence

    Prior to the instant case, it was well settled through the verdict in E.S. Krishnamurthy vs M/S Bharath Hi Tech Builder judgement that the AA had only two options when an application under section 7(5)(a) came for adjudication: (i) accept it; (ii) reject it. A judgement on similar lines was also expressed impliedly in the landmark case of  Innoventive Industries Ltd vs ICICI Bank wherein the Hon’ble Court held the following, 

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

    However, the present judgement has in effect provided for a third option for the AA— to keep the insolvency proceedings in abeyance. Such an interpretation is not only against the established jurisprudence but also has little backing from the statute itself as neither the IBC nor the rules therein provide the AAs with the power to defer proceedings on account of an external/unrelated event. 

    • Diluting the Cash Flow Insolvency Test

    The Supreme Court’s decision to read discretion into section 7(5)(a) is not simply a simple shift in AA’s routine power but has the potential to disrupt the entire insolvency regime in India. The regime which was built on the solid foundation of a certain and determinable occurrence of a default has been unsettled and may attract bogus excuses by CDs to escape CIRP, causing prolonged litigation. In doing that, the Court has inadvertently dumped the Cash Flow Insolvency Test and allowed facets of the Balance Sheet Test in the Indian insolvency jurisprudence. Before delving into the tests, it becomes imperative to understand their scope and meaning. 

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

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

    The erstwhile section 433(e) of the Companies Act, 1956 was based on the pretext of Balance Sheet Insolvency as it did not determine insolvency on the basis of defaults but on the entity’s inability to pay dues- a scenario which occurred when the company’s liabilities were greater than its assets.  In simple words, according to this section, an occurrence of default was insufficient in attracting the provisions of insolvency. This was however rejected and replaced by the IBC which ushered significant changes in the Indian Insolvency Regime. Importantly, the Court in Swiss Ribbons Pvt. Ltd. vs Union of India  indirectly approved the Cash Flow Insolvency Test and  noted that in a situation of financial stress, the cause of default is not relevant; and protecting the economic interest of the CD  is more relevant. 

    • Proper Usage of Discretion

    The authors are of the opinion that the usage of ‘may’ in section 7(5)(a) shall be construed to confer discretion to AAs in rejecting a CIRP application only when a mala fide intention is detected and such discretion shall not extend to provide weightage to any extraneous matter which is independent of the loan availed. The discretion in this sense is necessary to curb malicious attempts of financial creditors and CDs in deliberately forcing a Company into insolvency. The same is somewhat prevalent in the IBC jurisprudence and can be traced in few cases. For instance, the NCLAT in the case of Hytone Merchants v. Satabadi Investments Consultants rejected a section 7 application which had fulfilled all pre-requisites on the ground that the debtors and the financial creditors colluded and were acting against the interests of the company. 

    Further, the legislature’s usage of ‘shall’ for operational debt can also be justified on the same premise; the operational creditors are third parties who are not concerned with the entity and hence the chances of such collusion between the CD and operational creditors is very slim and unlikely. The Court has failed to delineate properly the different expressions used in the sections and has wrongly expanded the scope of the word ‘may’ on this premise, which in the authors’ view is wholly unnecessary. 

    • Abridging the Powers of the CoC

    If there is a possibility that the CD may get a favorable order or award, then there is always an option of settlement available with the debtor and the Committee of Creditors(CoC) to settle their claims and withdraw the resolution processunder section 12A of IBC. In any case, it is the Committee of Creditors who after assessing the financial condition of the company, shall decide the best course of action for the Company’s revival. The IBC has not conferred any powers to the NCLT to prima facie decide, at the stage of admitting a petition under section 7, whether a Company is solvent or not. It is counterintuitive to say that  an order or award will operate to save the debtor and confer the NCLT the power to stall the very commencement of the CIRP. 

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

    Conclusion

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

  • PCA Framework as an Effort to Contain the Contagion Effect

    PCA Framework as an Effort to Contain the Contagion Effect

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

    Introduction

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

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

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

    Working of the PCA Framework

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

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

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

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

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

    Impact

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

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

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

    Conclusion 

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

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

  • Claim Period and Enforcement Period in Bank Guarantees

    Claim Period and Enforcement Period in Bank Guarantees

    Manasvini Vyas, an NLU-O graduate currently practicing in Mumbai

    On 28 July 2021, the Delhi High Court in the case of Larsen & Toubro Limited vs. Punjab National Bank passed a landmark ruling clarifying the scope of exception 3 of section 28 of the Indian Contract Act 1872 (ICA). The order passed by a Single Judge Bench has set aside the circulars issued by the Indian Banking Association (IBA) that recommended an unalterable claim period of 12 months for bank guarantees. 

    Before delving further into the judgment, it is imperative to analyse the background against which the judgment holds significance.

    Background 

    Bank Guarantees (BG) are independent contracts that confer upon the beneficiary the right to claim performance from the bank in case of default by the principal borrower. On default, the beneficiary can invoke the guarantee by making a claim within the lifetime of the BG i.e. the “validity period”. This period is mutually determined by the creditor and the principal debtor and it expires on a decided date. Often, a BG provides for an additional grace period over and above the validity period for making a claim before the bank, which is known as the “claim period”. Stipulating a claim period is not a mandatory requirement and inclusion of the same depends solely on the discretion of the contracting parties.  If the bank defaults in honouring its obligations, the beneficiary is entitled to approach the court of law and the period within which the beneficiary is permitted to enforce their rights from the date of default is called the “enforcement period”.   

    The enforcement period is prescribed under the Limitation Act 1963 (Limitation Act) and any agreement that limits the time within which a party may enforce its rights is hit by section 28 of the ICA. According to the provision, an agreement is void 

    1. if it absolutely restricts a party from enforcing their rights under a contract or if it limits the time within which a party can enforce their contractual rights, or 
    2. if it extinguishes the contractual rights of a party or it discharges a party from any contractual liability on the expiry of a prescribed period such that the rights cannot be enforced beyond it.

    exception 3 appended to the provision states that if a contract for bank guarantee stipulates a term for extinguishment of rights or discharge of liability on the expiry of a given period, such a clause would not be void provided the said period is not less than one year from the date of the specified event.  

    History behind Exception 3

    Prior to 1997, the courts created a distinction between ‘remedy’ and ‘right’ and an agreement which barred a remedy to sue beyond the prescribed time period was void under section 28 but an agreement which relinquished rights under the contract was held to be valid[1]. The Law Commission, in its 97th Report dated 31 March 1984, observed that such a distinction was not practical and it gave a dominant party the power to limit the period of remedy by limiting the period of relinquishment of rights because if rights didn’t exist, the remedy would also be extinguished. Consequently, clause (b) was added to section 28. 

    As a result of this amendment, banks were concerned that they could no longer limit their obligations under the BGs and would be required to maintain their BGs for 30 years in case of government contracts and 3 years for private contracts pursuant to the Limitation Act. It was feared that the high cost of maintaining BGs would severely affect the banks’ ability to issue fresh guarantees. In order to assuage the concerns of the banking sector, exception 3 was added to section 28 by way of the Banking Law (Amendment) Act, 2012 (The 2013 Amendment) on the recommendations of Sh. T.R. Andhyarujina Committee. 

    The aftermath of the 2013 Amendment

    Post the 2013 amendment, there was confusion whether the exception dealt with the claim period or the enforcement period. The IBA was of the view that the exception concerned the claim period and therefore it issued circulars recommending banks to stipulate a minimum claim period of 12 months in BGs. It was further believed that if the banks stipulate a claim period of less than 12 months, they will lose the benefit under exception 3 and the period specified under the Limitation Act would be applicable.  

    The confusion was further compounded after the Supreme Court’s observations in the case of Union of India & Anr. vs. M/s Indusind Bank Ltd. & Anr. (2016). Here, the Apex Court was concerned with an issue concerning section 28 as it stood before the 1997 amendment. In this case, the BG stipulated an invocation period of three months beyond the validity period, however, the BG was invoked after the expiry of three months. The Court held that since the clause did not provide for a time limit for lodging a claim before the court, the same will not be hit by section 28. Further, in its obiter, the Court noted that:

     “… Stipulations like the present would pass muster after 2013 if the specified period is not less than one year from the date of occurring or non-occurring of a specified event for extinguishment or discharge of a party from liability.” 

    In this case, the Court was dealing with the time period for filing a claim with the bank and not the period for enforcing the guarantee before the courts. Therefore, when it mentioned “stipulations like the present would pass muster after 2013”, it seemed that the Court had interpreted exception 3 to mean that it provided for a mandatory claim period of minimum one year, thereby, worsening the already unsettled position with respect to exception 3.  

    Notably, a BG is a costly affair for the borrower as it has to maintain margin money/collateral security in support of the guarantee and has to pay commission charges at regular intervals. In such a scenario, a mandatory claim period of 12 months poses a financial burden on the borrower. Not only is the borrower forced into paying commissions for an additional period of one year, but funds locked in as margin money results in increasing the working capital requirements. A 12 month claim period would be even more commercially unviable in cases of short-term guarantees. For example, a BG with an original validity period of six months would be required to be kept open for a period of 18 months! In view of this, critics of exception 3 sought another amendment to section 28 to rectify the anomaly. 

    The decision in  Larsen & Toubro Limited vs. Punjab National BankIn this case, L&T had filed a writ petition against PNB, IBA and the RBI before the Delhi High Court challenging their interpretation of exception 3. As noted above, IBA, in its circulars dated 10 February 2017 and 5 December 2018, had recommended a minimum claim period of 12 months for BGs. It was also stated that, in the absence of such a clause, limitation period as per the Limitation Act would be applicable.

    L&T challenged this clause on the grounds that the extended claim period grossly affected its ability to sign new contracts and affected its fundamental right under Article 19(1)(g) of the Constitution of India to carry on business. It was also contended that a claim period is contractually agreed term between the borrower and the creditor and it may or may not be present in BGs. After scrutinising the tumultuous amendment history of section 28, the Court concluded that exception 3 provides for enforcement period and not a claim period. In coming to this conclusion, the Court observed that exception 3 curtails the limitation period within which the beneficiary can approach the appropriate forum for enforcing its rights. [SS3] The said provision, in no way, limits the period for filing a claim with the bank and the same is to be contractually agreed between the creditor and the debtor. Therefore, IBA’s interpretation that exception 3 dealt with a claim period does not hold ground. The Court also distinguished the obiter in the case of IndusInd with the present case and stated that “the judgement cannot be relied upon since the clauses in question dealt with the enforcement period i.e. curtailment of the limitation period and not the claim period of a bank guarantee”. 

    Concluding remarks

    The 2013 amendment, though well intended, had thrown open a can of worms. BGs, which should ensure smooth flow of cash in business, were rendered ineffective by the weight of exception 3. The confusion surrounding the provision often stood in the way of claims under guarantees and severely affected the ease of doing business in India. In view of this, the judgment of Delhi High Court is a welcome move as the parties can now choose to incorporate a claim period that suits their needs, thereby, significantly bringing down the cost of maintaining the guarantee. 

    [1]Shakoor Gany v. Hinde &Co (AIR 1932 Bom. 330); Kerala Electrical & Allied Engineering Co.Ltd. v. Canara Bank & Others (AIR 1980 Ker 151)

  • Funding of Food Aggregators & Competition law: A Post Covid Analysis

    Funding of Food Aggregators & Competition law: A Post Covid Analysis

    By Rohan Mandal and Jeezan Riyaz, fourth and third year students at USLLS, GGSIPU, Delhi and NLIU, Bhopal respectively.

    In an exclusive arrangement as part of its strategic push, the food delivery giants, Zomato and Swiggy are all set to raise more than $1 billion, which will help them to leverage a position of dominance in the food delivery business. Duopolistic designs, coupled with pricing below the belt, and the viability of recuperating losses have led to a strategic dominance for these entities in the food delivery market, thereby harming the consumers in the long run.  Accordingly, the food aggregators have been under the constant radar of the Competition Commission of India (“CCI”) for manipulating pricing, deep discounting and offering of rebates with an intention to distort competition.

    At the heart of the Competition Act, 2002 (“The Act”), lies the principles of fair competition and therefore any activity or strategy that abuses the ongoing competition in the marketplace, is said to fall within the ambit of the anti-competitive activities.  The Act in the explanation under section 4(2) defines “dominant position”, as a position of strength or dominance, enjoyed by any enterprise which enables it to: (a) individually dominate or function without the competing opponents in a marketplace; or (b) manipulate the consumers in a sense, that is grossly disadvantageous to the other forces of the market. This gains more traction particularly in light of the increased use of these apps and reluctance to dine out in light of Covid.

    • Abuse of Competition & Appetite for market dominance

    Section 4(2)(a)(ii), of the Act disallows an enterprise from engaging in predatory pricing, which is understood as selling goods below cost to drive out competition. While, 4(2)(c) prohibits those activities that deny access to the market and lead to foreclosure of competition. Economies of scale may lead to dominance, and if deep discounting and new rounds of funding received by the food aggregators is viewed holistically, a conclusion to that effect can be drawn.

    With Zomato having acquired Uber Eats and other small start-ups alongside its strategy to rechristen Zomato gold to Zomato pro (a premium subscription model), it gets a strategic edge to dominate the marketplace. Swiggy, on the other hand has launched their initiative called Swiggy Super, which has forced small start–ups to wind up their operations by diverting the consumer base to their platform. This comes at a time when people do not have the luxury of going out to a restaurant due to the ongoing pandemic and are reliant on food delivery apps. Section 19(4) lays down relevant factors to be considered to ascertain abuse of dominance, which include the economic power of the entity vis-à-vis their competitors and market share of the enterprise. The Food aggregators have control over the listing of restaurants and have access to consumer data, which is being leveraged for their benefit and to promote their in-house kitchens. Therefore, an argument can be made thatabuse of dominance is prevalent in the marketplace.

    Further, CCI in its report on e-commerce states that the food aggregators have benefitted immensely by establishing cloud kitchens (cooking spaces without a dine-in-option). These aggregator-run-establishments have an edge over normal restaurants on the app in terms of the user data available to them, preferential listing provided and by forcing other restaurants to purchase items from them. This has led to an unequitable profit earning structure, thereby exhibiting anti-competitiveness from the legal standpoint. Therefore, with data in the hands of these in-house-kitchens in the present digital economic paradigm, they are in a better position to maximize sales and entice consumers.

    In Matrimony.com Ltd. v. Google LLC, Google was accused of violating anti-trust provisions by manipulating their search algorithms and giving preferential listing to its own products and features. This caused the complainant to be listed lower, and thereby affected their business. It was held by the CCI that Google was directly manipulating the consumers by diverting their attention from rival services to their own. Google abused its dominant position to exert pressure on other players to exit the market, which was accordingly dealt with under section 4(2)(e). The CCI has laid down in MCX v. NSE, that  activities which are covered under section 4 such as predatory pricing and denying access endanger competition in the market. In a similar vein, it can be argued that the food aggregators are abusing their position of dominance through their in-house kitchens.

    • Assessment of dominance and abusive conduct: CCI analysis

    Fueled by the stiff domestic competition among restaurants, lack of alternative dine-in-options and buoyed by the ever-expanded funding inthe food delivery business, it has paved a way for a duopoly in the Indian paradigm. This makes it imperative on the part of the CCI to conducta thorough investigation from a competition law standpoint.

    In the new normal of the restrictions worldwide, the food delivery aggregators are engaging in anti-competitive practices such as predatory pricing, violation of platform neutrality, exclusivity, barriers to entry and obliging the already existing rivals to exit. Thus, impacting footfalls and diverting the entire consumer rush to their own benefit. The National Restauranters Association of India’s (“NRAI”), a body which represents over 5,00,000 restaurants, in their complaint to the CCI also echoes this sentiment, wherein they allege abuse of dominance by the aggregators. In their complaint they allege that aggregators charge restaurants exorbitant fees, give preferential listing to restaurants on payment of fees, and engage in deep discounting (non-adherence to deep discount schemes means lower visibility for the restaurants).

    The COMPAT in  Schott Glass appeal case, had observed that abuse of dominance and predatory pricing involves the satisfaction of two important requirements: (i) unequal treatment of similar transactions; and (ii) harm meted out to the competition in the marketplace. This places all the sellers on an unequal footing and is disadvantageous to the interests of the buyers. In another important case, the XYZ v. REC Power Distribution Company related to abuse of dominance, the CCI held that “establishing a denial of access”, indicates exclusivity and sizeable degree of market power being controlled by those in position of dominance.

    The NRAI complaint to the CCI has also alleged that the practices of the deep funded aggregators have forced several restaurants to shut down. Consequently, there is a need to reach a middle ground to ensure that there is stability and transparency in the process and that capitalism doesn’t hamper the very essence of competition as abuse of strength can impact both the competition and the consumers in the long run.

    • The Impact of IPO and the new rounds of funding

    The Zomato IPO will raise Rs. 9,375 crores against the backdrop of Zomato posting losses of Rs. 886 crores in the last financial year. On the other hand, Swiggy is set to raise Rs. 9,297 crores  in their newfunding round against losses of Rs. 3,768 crores in the 2019-2020 accounting year. This inflow of cash against the continued loss-making nature of these food aggregators, makes the market interesting from a section 4 standpoint as the entities will have the financial capability to strengthen their grip on the market, while posting losses, therefore, adversely affecting competition. In Uber v. CCI, the Supreme Court dealt with a case involving taxi aggregators offering rides at lower rates while making losses. The Hon’ble Court held that continued losses incurred by aggregators is prima facie indicative of abuse of dominance because predatory pricing helps them to drive out competition and control the marketplace at the same time. The CCI was ordered to investigate the activities of the aggregators. Although, the Commission would later give the taxi aggregators a clean chit, but the principle that continued losses merit an investigation by the CCI still stands, and should be applied in the present case.

    Zomato and Swiggy have stated that they will continue to make losses in the near future in order to develop business. This would be done by starting operations in new cities, and also diversifying to the item delivery market. At the same time, they also continue to give deep discounts and preferential treatment to certain enterprises. These activities should be investigated under section 4 and the possible appreciable adverse effect on trade under section 3 needs to be looked at. This becomes necessary, particularly in light of the fact that the CCI has also investigated such models in the case of taxi aggregators and e-commerce giants,  Amazon in Lifestyle v. Amazon. In this case the CCI held Amazon guilty under the Act  for not granting visibility to the products of the complainant. The decision of the CCI in Ashish Ahuja v. Snapdeal is also relevant for this purpose, where Snapdeal was accused of granting exorbitant discounts on their platform, which affected the business of their competitors. The CCI held that discounts coupled with harm to the market amounts to abuse of dominance. In the current paradigm, it is evident that the food aggregator market is dominated by two players, whose activities such as continuous deep discounts and preferential listing is prima facie indicative of abuse of dominance, and this merits an investigation by the CCI.

    All these factors have been put forward in the NRAI complaint. Further, the new cash inflow means that the aggregators will have the capacity to continue with the above-mentioned activities, which if left unchecked could have serious effect on the market.

    • Conclusion

    To sum up the above discussions, the authors submit that two important factors need to be considered, namely, the new funding and the previous activities of the food aggregators. When these two factors are looked at in tandem, it becomes imperative that a thorough investigation is conducted by the CCI, to gauge the market situation and address the apprehensions of the NRAI. Zomato and Swiggy have maintained that they will continue to make losses in the near future in order to develop business, which further makes it important for the CCI to probe the allegations against the aggregators. Covid has resulted in the popularity of food delivery giants soaring to greater heights. Therefore, there is a need to critically analyze the legal impediments of anti-competitive strategies that form the basis of the competition laws in India.

  • Recent Trends: Measures taken by SEBI to Regulate the Indian Capital Market

    Recent Trends: Measures taken by SEBI to Regulate the Indian Capital Market

    By Nivedita Rawat, fourth-year student at AMity law school, noida

    Securities Exchange Board of India [“SEBI”] acts as a watchdog for the Indian Capital Market. The Board enacted by The Securities and Exchange Board of India Act, 1992 (“the Act”) has been accorded with comprehensive powers under the Act. The preamble of the Board describes its functions as to “protect the interests of investors in securities and to promote the development of, and to regulate, the securities market and for matters connected therewith or incidental thereto”. In addition to the intent behind the establishment of the Board, Section 11 of the Act lays down the functions of the Board that clearly illustrate “it shall be the duty of the board to protect the interests of investors in securities and to promote the development of, and to regulate the securities market, by such measures as it thinks fit”. This provision exemplify that SEBI has been authorized to take any such measures that in its opinion would protect the interest of the investors and would aid to regulate the market. It’s the reason SEBI keeps on revising and updating by formulating new measures or directions that make securities market conducive, safe and friendly for all kinds of investors that include retail or institutional investors. In the past few months, during and after COVID-19 lockdown times, there have been some key instrumental measures that have been taken by SEBI, such as:

    1. Introduction of UPI and Application through online interface for Public Issue of Debt Securities

    SEBI, in its circular dated November 23, 2020 announced the introduction of Unified Payments Interface [“UPI”] Mechanism and application through online interface for public issue of debt securities. This system has already been in existence for issue of public shares since January, 2019 but is now made available for public debt securities through this circular issued by SEBI under Section 11 of the Act. The said mechanism is in addition to an already existing specified mode under Application Supported by Blocked Amount [“ASBA”]. It would be available for securities opening up for issuance from January 1, 2021 for applications up to a limit of 2 lacs. The concerned entities include National Payments Corporation of India [“NPCI”], UPI and the Sponsor Bank. 

    Analysis: The measure taken up by SEBI is extremely upright as it will make the process of subscribing to debt securities simple for the retail investors, will increase the investor base as the investors will have an option to use UPI interface to block their funds for debt securities during an issue through their brokers/intermediaries. Investing into debt instruments would be as similar as subscribing to equity initial public offerings [“IPO”] as it is now less time consuming and more digitalized. Although the initiative is bound to enlarge the responsibilities of the stock exchange, intermediaries and the sponsor bank, but the prevailing times call for such action as a physical process of issue of debt securities is not only a traditional approach but also make the process cumbersome altogether. Moreover, with the availability of UPI mechanism for subscription of debt securities, enhanced participation by the retail investors is anticipated. It is mainly because until now, the debt instruments had usually been subscribed by the high net investors and institutions, but such a measure by SEBI might change up the things and intends to encourage household investors to be a part of debt market as well.

    • Increased Efficiency of E-Voting mechanisms for Meetings 

    The Companies Act, 2013 mandates a company to provide e-voting facility to the shareholders. Section 108 of The Companies Act, 2013 along with Rule 20 of the Companies (Management & Administration) Rules, 2014 provide for such a facility. Additionally, regulation 44 of the SEBI (Listing and Obligatory Disclosure Requirement) Regulations, 2015 also contains provision to this regard.

    On Dec 09, 2020, SEBI released a circular directing the listed entities to provide e-voting facility to its shareholders. The mechanism called for a system wherein the shareholders will have an option to forecast their votes directly through their Dematerialized [“DEMAT”] accounts with the depositories which’ll forward their votes to the E-voting service providers [“ESP”]. The process would take place in two phases. First phase, wherein the shareholders can cast their vote either through the depository’s website or their DEMAT account. After which, the depositories will give the confirmation of the votes to the shareholders once received from ESP’s. In the second phase, the depository will set up an OTP system for login. For this new and much efficient mechanism, SEBI has also asked the Depositories and the ESP’s to provide helpline services to shareholders, whereas ESP’s have been directed to provide links for disclosures by the companies and the report of proxy advisors for investor’s awareness. 

    Analysis: The entire proposed mechanism aims to ease out the task of casting a vote for the shareholders. Elimination of registration with ESP’s and authentication from the point of depository will ensure security and legitimacy of the votes of shareholders. This is unlike the earlier mechanism in which the shareholders had to visit the ESP’s website to cast their votes with distinct usernames and passwords that created the voting procedure tedious and not very simple. The mandatory updating of key details of shareholders regularly by the stock exchange will also help the entities to be in contact with their users for one stop communication. Additionally, the initiative of providing the link for the disclosure by the entities and links to proxy advisor’s website etc.’ would guide the votes of the investors based on sound rationale, and would also enhance the participation in the e-voting process by the non-institutional shareholders or retail shareholders. 

    • Reclassification rules of promoters as public shareholders and disclosure of their shareholding pattern

    Rules for reclassification of promoters have been mentioned in Regulation 31A of SEBI (Listing Obligations and Disclosure Requirements) Regulation, 2015. On 23rd of November, 2020, SEBI released a consultative paper on the same that proposed a few amendments to the existing rules pertaining to promoter reclassification. It composed of the following proposed amendments:

    1. Promoters with shareholding up to 15%, seeking to reclassify should be allowed with shareholding’s status quo maintained.
    2. One-month duration for meeting between board & shareholders and for reclassification request to be put up before exchange.
    3. Promoters seeking reclassification pursuant to an order/direction of government or regulator should be exempted like reclassification pursuant to resolution approved under Insolvency and Bankruptcy Code, 2016. 
    4. Promoters seeking reclassification pursuant to an offer should be exempted from the reclassification procedure where intent for reclassification is mentioned in the offer letter which needs to be in accordance with SEBI Substantial Acquisition of Shares and Takeover [“SAST”] Regulations and Regulation 31A(3)(b) and 31A(3)(c) of SEBI(LODR) Regulations, 2015. 
    5. Pursuant to an offer, where the former promoters aren’t traceable by the listed entity or not cooperative towards it, exemption from reclassification procedures should be given if erstwhile promoters aren’t in control of the company and diligent efforts have been made by the listed company to reach out to them.
    6. Mandatory disclosure of promoters.


    Analysis: SEBI after having acknowledged the shortcomings of the existing process of promoter reclassification, has proposed amendments which seeks to bring orderliness in the procedure of promoter or promoter entity reclassification. There have been instances where a person is tagged as a promoter of a company in spite of having zero shareholding, this not only influences the choices of the investors but also makes the functioning of a company strenuous. The application of one-month deadlines between shareholder and board meetings and for putting up reclassification request by entity in front of exchange has been done with the intent to Fastrack the whole process and not to have any undue delay. The exemptions made for promoters pursuant to an offer have been proposed keeping in mind the procedural formalities which can be set aside in case where the stance of a promoter has already been clear or when it had been impossible to reach out to them. The disclosure of shareholding pattern by a promoter even in case of zero shareholding is a proposed amendment that aims to curb the companies from misusing the law due to existing loopholes. 

    Conclusion

    Additionally, SEBI has been looking forward to revamp the grievance redressal system for the stock exchange, for which the regulator issued directions to the Bombay Stock Exchange regarding the clients of the defaulting trading members. All inclusive, SEBI keeps on making endeavors to structure the capital market in the interest of the investors, listed entities or any stakeholders that form a part of the capital market. The recent measures have been taken keeping into account, the shortcomings of the laid down procedures or regulations of investing in share market. The Indian capital market should essentially avail the benefit of the rise in fintech like any other sectors of the economy. Depository participants such as Zerodha, Angel broking, Motilal Oswal Financial Services etc. have reported massive increase in the newly opened DEMAT accounts. It thus becomes imperative to have stringent securities law in place at the moment, especially when the number of retail investors have leapt up to record high numbers throughout the period of lockdowns in the country.

  • Anti-Arbitration Injunction Suits in India: A Nightmarish Scenario

    Anti-Arbitration Injunction Suits in India: A Nightmarish Scenario

    By Kabir Chaturvedi and Ridhima Bhardwaj, third-year students at RGNUL, Patiala

    On 12 August 2020, the Calcutta High Court – in the case of Balasore Alloys Limited v. Medima LLC (‘Balasore’) – ruled that “courts in India do have the power to grant anti-arbitration injunctions”, even against foreign seated arbitrations. This decision came just months after the Delhi High Court – in the case of Bina Modi and ors. v. Lalit Modi and Ors. (‘Bina Modi’) – stated that an anti-arbitral injunction suit is not maintainable. The law on anti-arbitration injunctions is already far from consistent but the handling of recent suits by the Indian Judiciary has been nightmarish. Analysing the two judgements, this article critiques the Balasore approach and advocates for the one adopted in Bina Modi. 

    Setting the Scene

    Justice Rajiv Sahai Endlaw in Bina Modi relied on Kvaerner Cementation India Limited v. Bajranglal Agarwal and Anr. in 2001 (‘Kvaerner’) given its precedential value and concluded that a civil court could not grant an anti-arbitration injunction. However, when Bina Modi – and subsequently Kvaerner – were raised before the Court in Balasore, Justice Shekhar B. Saraf placed an “overwhelming reliance” on the majority dictum in SBP & Co. v. Patel Engineering Limited in 2005 (‘SBP’) to rule that Indian Civil Courts could injunct arbitral proceedings. Through this reliance, he inferred that SBP had implicitly overruled Kvaerner and stated that Bina Modi is per incuriam because it ignored the decision in SBP. However, scrutiny of the facts and ratio decidendi of SBP indicate otherwise. 

    Addressing the Dichotomy between SBP and Kvaerner

    The matter before the Apex Court in Kvaerner was whether the court could act outside the purview of The Arbitration and Conciliation Act, 1996 (‘Act’) and grant a stay on arbitration proceedings. The court relied on a bare reading of section 16 of the act to conclude that a civil court does not have the jurisdiction to injunct an arbitral proceeding. Section 16(1) empowers the arbitral tribunal to rule on its own jurisdiction, including ruling on any objections with respect to the existence or validity of the arbitration agreement. 

    On the other hand, the seven-judge bench in SBP was summoned to decide the nature and scope of the exercise of power by the Chief Justice (or his designate) to refer parties to arbitration and appoint the arbitral tribunal, vested in them by sections 8 and 11 of the Act respectively. Subsequently, the bench also had to decide whether this power under sections 8 and 11 could be overridden by a tribunal’s power to decide its own jurisdiction under section 16. The potential overlap between the two was resolved when the bench established that such exercise of power was a judicial function and not an administrative function. The court held that “where the jurisdictional issues are decided under these Sections (8 or 11), Section 16 cannot be held to empower the arbitral tribunal to ignore the decision given by the judicial authority or the Chief Justice before the reference to it was made.”

    This limitation on the tribunal’s power exemplifies a hierarchy which is ensconced within the ecosystem of the Act – wherein the courts are placed on a higher rung. The judicial authorities’ power to review a decision of the tribunal regarding its jurisdiction under section 34 (recourse available to parties to apply for setting aside arbitral award) or section 37 (appealable orders) of the Act are further instances of the existence of this hierarchy within the Act, and were accentuated in SBP. These powers, however, fall under the purview of the Act. 

    An anti-arbitration injunction looks to essentially proscribe arbitration proceedings, and a civil court considering an objection to an anti-arbitration injunction suit which does not represent a substantive action on the basis of merits cannot be said to be exercising powers under sections 8 or 45 in the true sense. Therefore, when civil courts grant an anti-arbitration injunction, they exercise powers ordinarily conferred upon the tribunal under section 16, and operate outside the purview of the Act. The bench in SBP went on to unequivocally condemn any such court interference in arbitration proceedings outside the purview of the Act unless permitted by the Act itself, as it “is a complete code in itself”. 

    In a nutshell, the ratio in SBP was centred around the possible overlap and sharing of authority within the purview of the Act, while the Kvaerner judgment addressed the civil court’s jurisdiction to issue an anti-arbitral injunction outside the purview of the act. These two verdicts thus lay down rules in vastly different contexts and Kvaerner is evidently more relevant to the grant of anti-arbitral injunctions than SBP. Thus, it would be incorrect to assume that SBP implicitly overruled Kvaerner and civil courts can injunct arbitration proceedings. Therefore, the decision in Bina Modi cannot be invalidated by relying solely on SBP and should’ve been given precedential value in Balasore. 

    The Impracticality of Anti-Arbitral Injunctions 

    Apart from being legislatively flawed, the Balasore approach is also impractical. By mulling over an anti-arbitration injunction suit – and eventually not injuncting the arbitral proceedings – Justice Shekhar utilised judicial resources to deal with an issue an arbitral tribunal is competent to deal with under section 16 of the Act. Parties prefer arbitration to litigation because of its quick and efficient nature. When courts mull over anti-arbitration injunctions, it gives rise to prolonged judicial proceedings and interference at the initial stage itself. This creates uncertainty and adds to the costs to be borne by the parties to the dispute, making the whole process of arbitration tiresome, inefficient and expensive. Consequently, parties are discouraged to opt for India as a seat for arbitration. Further, there already exists a huge pendency of cases in India and instead of handling anti-arbitration injunction suits, it must adopt the practice of efficient utilisation of limited judicial resources to swiftly clear the backlog of the pending civil and criminal cases.

    Additionally, Justice Endlaw in Bina Modi cited section 41(h) of the Specific Relief Act, 1963 – which provides that an injunction cannot be granted when an equally efficacious relief can certainly be obtained by any other usual mode of proceeding – to conclude that anti-arbitration injunctions cannot be granted since the tribunal is empowered to offer efficacious relief under Section 16. Therefore, anti-arbitration injunctions amount to unnecessary judicial interference and are, as Gary B. Born puts it, “in most cases, deliberately obstructionist tactics, typically pursued in sympathetic local courts, aimed at disrupting the parties’ agreed arbitral mechanism.”[i] Judicial interference by Indian Courts is also one of the primary reasons why India is considered “non-friendly jurisdiction” for arbitration. India has adopted an aggressive pro-arbitration approach with the objective of making itself a hub of international arbitration, and the 2015 and 2019 Amendments to the Act are testament to the same. Therefore, granting anti-arbitral injunctions would conflict with our overarching objective of fueling the growth of international arbitrations in India.

    Conclusion

    Anti-Arbitration injunction suits in India have been a source of controversy since the decision in Kvaerner and many advocates for such injunctions can be found. However, injuncting an arbitral proceeding violates the basic tenets of arbitration. Misguided by malafide intentions of the parties, courts in India have fallen prey to unnecessarily interfering with – and perusal of – arbitration agreements, a task the tribunal is competent to carry out. Parties’ decision to arbitrate instead of litigate becomes redundant when Civil Courts take the matter into their own hands. Therefore, it is evident that Justice Shekhar’s approach in Balasore is not only legislatively flawed, but also impractical, and that the Bina Modi approach is the way forward.

    [i] Gary B. Born, International Commercial Arbitration (Kluwer Law Intl 2009).