The Corporate & Commercial Law Society Blog, HNLU

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  • Outsourcing Equity: The Multi-Faceted Implications of Overseas Listing

    Outsourcing Equity: The Multi-Faceted Implications of Overseas Listing

    BY VARUN PANDEY, FIFTH-YEAR STUDENT AT UPES DEHRADUN

    The Indian FDI regime has been vying for an enhanced investment environment over the last few decades. Recent measures such as codification of Insolvency and Bankruptcy Laws, taxation incentives for foreign investors and alleviating construction permits  in the infrastructure space, among other reforms had elicited a significant rise within the global ease of doing business rankings. Unfortunately, this surge was short-lived and in a bid to revive the Covid 19-ridden distressed economy, the Ministry of Finance via the 5th stimulus package permitted direct overseas listing of Indian companies. This article analyzes the impact of overseas listing on Indian companies and dwells on the various regulatory roadblocks required to be overcome in order to facilitate such measure, and finally examines the consequent pay-off for Indian Investors.

    I. What is Overseas Listing?

    Direct Overseas Listing would allow companies registered in India to list their equity shares in foreign jurisdictions and gain liquidity. Currently, Indian companies have limited access to foreign capital markets in the form of American Depository Receipts (ADR’s) and Global Depository Receipts (GDR’s). Indian companies can avail Foreign Currency Exchangeable Bonds (FCCB’s) only for issuing debt securities, whereas foreign companies can access the Indian Capital Markets by the Indian Depository Receipts (DR’s) Scheme, 2014. 

    Interestingly, the Central Government had been mulling the said listing reforms way back since 2018. A SEBI Committee Report was published which evaluated various economic, legal and taxation aspects pertinent to foreign listing. One of the primary objectives for enabling direct listing is to expand the investment opportunities for Indian companies by attracting foreign capital and encourage them to compete on a global footing, facilitating their growth will also lead to an improved environment for ease-of-doing business in India. The recent Companies (Amendment) Bill, 2020 further incorporated the provision approving overseas listing of Indian Companies.

    II. Regulatory Overhauls

    The current laws and regulations dealing with listing of companies would require significant changes to facilitate overseas market access for Indian companies.

    • Companies Act, 2013

    Section 23 of the Act deals with public offer and private placement of shares, whereas Chapter III of the Act deals with the prerequisites for allotment of securities altogether. However, neither provisions explicitly permit overseas listing and are limited to listing of companies within the Indian securities markets only, accordingly, an exception will have to be carved out for the companies listing in approved foreign securities markets by way of an amendment within Section 23 or via a MOF circular/ notification .  Furthermore, Section 88(3) of the Act mandates a company to maintain a registry of security holders in correspondence with Section 11 of Depositories Act. Thus, in the event of overseas listing of equities, a common ground is required to be attained between the inter-linked provisions with reference to Section 88(4) that permits a company to maintain the details of shareholders residing outside India.

    • Foreign Exchange Management Act, 1999 and Regulations

    Following the repeal of FEMA 20R Regulations and subsequent enactment of FEMA (Non-Debt Instruments) Regulations, 2019, changes will have to be incorporated within the provisions of Schedule II as it regulates FPI investments. These adjustments will have to be made by taking into account the various sectoral caps which persisted during the FEMA 20R era, where FDI was permitted via automatic route and government approval route. Additionally, retention of profits and other receipts of transactions will have to be regulated in a mechanism that mirrors the ADR/GDR framework currently in place.

    • SEBI Regulations

    SEBI is the sole regulatory authority that overlooks the Indian Capital Markets and the companies listed on domestic exchanges. In order to streamline the process of equity listings on foreign exchanges, it will have to construct a mechanism that is on par with the various  pre-listing obligations of the recognized foreign stock exchange, for instance, provisions in tune with the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 to secure the interests of foreign investors. This obligation extends to the listing company as well who will be mandated to issue their equities in compliance with the mutual laws and regulations.

    Until now, the only Indian debt instrument which are listed on a foreign exchange are Masala Bonds. They are supervised via the SEBI (International Financial Services Centers) Guidelines, 2015 but there exists a lack of regulatory oversight with regards to equities listed by and Indian Corporation. Therefore, the definition of Permissible Securities under Section 7 of the guidelines can be amended to include such class of equities by virtue of the powers conferred to SEBI under Section 11 of the SEBI Act, 1992.

    III. Indian Entities and Investors

    There are glaring queries in the face of benefits accruing to Indian investors by this move, since neither the Companies (Amendment) Bill, 2020 nor the SEBI Report explicitly discuss the consequences in their preliminary disclosures permitting overseas listings. At first glance, it is apparent that Indian entities that will opt for direct listing on overseas platforms will get first-hand exposure to multiple sources of capital from Alternate Investment Funds (AIF’s) and foreign industry-exclusive investor classes that were initially prevented from diversifying their investments to Indian entities due to their respective investment laws and regulations. However, uncertainty regarding authorization of Indian investors subscribing to such entities listed on overseas stock exchanges is sustained, as there are neither any sectoral caps identified on class of shares, nor any clarification about whether the Indian investors will be able to subscribe to equity under the automatic route or the government approval route.

    IV. Relevant Concerns

    In order to facilitate direct overseas listing, there are multiple areas that could prove to be a challenge for the entities as well as the regulators and will need to be rectified.

    Firstly, the SEBI Report identified 12 permissible jurisdictions for overseas listing of Indian companies including the NASDAQ, London Stock Exchange, Euronext Paris etc. To ensure swift listing of equities, Indian entities will be required to coordinate with the local listing regulations under the permissible jurisdictions along with the SEBI framework that shall govern overseas listings, which could hand a double-blow for the Indian corporations due to multiplicity of norms. For instance, an Indian corporation directly listing on the LSE, in order to prohibit insider trading, will have to figure out a mutual ground between SEBI (Prohibition of Insider Trading) Regulations, 2015 and the Financial Services and Markets Act 2000 (Market Abuse) Regulations 2016  of the UK to prevent any potential conflicts which may arise in between their provisions. Similar issues extend to corporate governance norms that may not be unequivocal with the permissible jurisdiction’s regulations.

    Secondly, if a conflict does arise between the regulators, there is a need for a swift dispute resolution mechanism that is relatively quicker than traditional arbitration. Furthermore, since the primary accountability will rest with SEBI, it is imperative that its extra-territorial powers are expanded to encompass any such disputes relating to the Indian equities listed on overseas stock exchanges, also to ascertain that SEBI shall exercise exclusive authority in dealing with corporate offences that may arise on the permissible jurisdiction. Although, the current KYC norms for Indian investors form a reliable frame of reference to curb such occurrences, pairing up with countries which are members of the Financial Action Task Force (FATF) would significantly prevent any large-scale economic offences such as money laundering through these channels.

    Finally, even prior to the legislative amendments, there is an immediate need to strengthen the infrastructural capacity of the Indian Depositories framework and the concerned registrars of Indian securities. A lack of stable gridwork could potentially affect the inter-links between Indian registrars and their foreign counterparts, consequently hampering the efficient trading of equities on the foreign permissible jurisdiction.

    V. Conclusion

    It is admitted that a plethora of concerns related to overseas listing will be clarified once SEBI releases an elaborated framework, yet there are still issues that would require detailed elucidations. For instance, whether overseas listing would grant an exemption to the corporations involved within the prohibited sectors under FDI regime; or what would be the process of subscription to such equities, and which sectors would fall under the government approval route and whether there will be sectoral caps? etc. These are just a few queries that would have to be resolved prior to any Indian entity’s first IPO on foreign soil.

    It is also to be noted that just like much of the reforms announced under the stimulus, overseas listing was already in consideration and might have mitigated the strain on Indian companies had it been already enforced and was functioning. Nevertheless, the move to allow direct listing to overseas exchanges should be welcomed by cash-strapped Indian entities which would now be able to tackle the liquidity-crunch arising from Covid-19 by accessing foreign investors and capital. Furthermore, this leaves the door open for foreign entities to directly list on Indian markets as well, that may allow Indian investors to diversify their stock portfolio as well.  

  • Consumer Protection Rules, 2020: A Conceptual Framework Towards Transparency In Digital Market

    Consumer Protection Rules, 2020: A Conceptual Framework Towards Transparency In Digital Market

    BY ANURAG MOHAN BHATNAGAR AND AMIYA UPADHYAY, THIRD-YEAR STUDENTS AT NLU, ODISHA

    Introduction

    With a vision to impede unjust trade practices in the e-commerce industry, immediate selling, and to safeguard the interest and the rights of the consumers, the Central Government has come up with Consumer Protection (E-commerce) Rules, 2020 (‘the Rules’). The Central Government has the authority to take certain actions to avert unfair trade practices in the e-commerce industry as under section 94 of the Consumer Protection Act 2019 (‘the Act’). The rules concerned, have been worked out as under the powers provided in section 101 (1) (zg) of the Act. One of the basic definitions that have come up under the new rules, include “e-commerce entity” that is, “any person who owns, operates or manages digital or electronic facility or platform for electronic commerce, but does not include a seller offering his goods or services for sale on a marketplace e-commerce entity”.

    Furthermore, the Central Government has also replaced a three-decade-old (1986) act with a new Consumer Protection Act 2019 which came into effect in July 2020. The present piece seeks to present a detailed analysis of the Rules including certain loopholes within the same, and the similarities or differences between competition laws (antitrust laws) and consumer protection laws. Further, the authors have also formulated a cross-jurisdictional analysis with USA and the European Union (EU).

    Critical Analysis

    The replaced Act lacked the vision to provide justice to the consumers and was time-consuming. As per the new Rules, the seller has to mandatorily show details such as price, information about refund/exchange, delivery, and shipment, grievance redressal, etc. The Rules also mention that the sellers cannot make unjustified profits by manipulating the price of the goods (rule 4(11) (a)).In the case of M/S Cargo Tarpaulin Industries vs Sri Mallikarjun B.Kori, the National Consumer Disputes Redressal Commission held that it is an offence to sell any good at a price higher than the current retail price of that good.

    While, the report given by the Competition Commission of India (‘market study’) covered most of the difficulties faced by the consumers, it only comprised of objective facts with the end goal of research and did not establish an authoritative or a binding legal obligation. On the other hand, these rules not only legally bind the e-commerce platforms but also deal with major issues present in the market study such as platform neutrality and search rankings (rule 5 (3)(f)). Regulatory authorities have been strict about search rankings ever since they found Google liable in Matrimony.com Ltd v. Google LLC and Ors.

    Platform neutrality means that e-commerce platforms cannot discriminate in favour of their services. For instance, Flipkart could not favour its products in the search rankings on its marketplace while demoting the other retailers on the platform. Thus, a platform cannot act as both a marketplace and a competitor on that marketplace. In Re: All India Online Vendors Association, Flipkart was alleged for leveraging its position as a marketplace to extend preferential treatment to WS Retail on its platform. Preferential treatment is accorded by numerous e-commerce players in India by marketing and selling products of their own subsidiaries, related parties or others. By doing so, the undertaking imposes dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at competitive disadvantage. Under rule 5(3), marketplace e-commerce entities are required to disclose any differentiated treatment which it is / maybe extending to goods, services or sellers of the same category. As such, the e-commerce platforms will need to disclose descriptions of practices like premium/preferred listing, skewed search results, sponsored deals etc. in the terms and conditions governing the relationship with the sellers on the platform. This will help in curbing such discriminatory profit-making practices.

    Further, the Act aims to establish a Central Consumer Protection Authority (‘CAPA’), Disputes Redressal Commission, Central Consumer Protection Council. These bodies shall carry out investigations in certain matters about misleading advertisements, product liability, and unfair trade practices.

    The Rules have also mapped out a grievance redressal system for complaints. Under the Rules, grievance is classified as any complaint with respect to violations of the Act or the Rules, made to any e-commerce entity. The Rules have made it essential for every e-commerce entity to appoint a nodal grievance officer, whose designation and contact information has to be displayed on its website. Further, it is essential for every e-commerce entity to certify that the appointed officer acknowledges the receipt of the complaint in 48 hours and furnish rectification of the same within 1 month from the receipt date. From the perspective of a consumer, the clause of “acknowledging the receipt” of the complaint will act as improving the transparency in the redressal system and obviously, a time-bound dispute redressal system will qualify as a righteous move.

    Inter alia, other relevant duties of the e-commerce platforms include non-imposition of cancellation charges, explicit consent of consumers and effective refunding. According to the clauses under rule 7, e-commerce entities will not impose cancellation charges on consumers who cancel after confirming the purchase, unless the e-commerce entity is also bearing similar charges. Furthermore, the consent acquired from the customer while purchasing must be express and voluntary. In this way, the e-commerce entities will not under any conditions include pre-ticked boxes in consent forms. In addition, products and services will be taken back and refunds shall be given if there is an occurrence of defective, inadequate or bogus and counterfeit, or not at standard with or not of the characteristics advertised or when delivered late from the schedule, except if brought about by force majeure.

    Relationship between Antitrust and Consumer Protection: Under One Umbrella

    Prima facie, the objectives of both the legislations are quite similar as both deal contortions in the market place, which is driven by supply and demand. While the Competition Law ensures access to goods and services at competitive prices for consumers and averts illicit activities which could hamper an environment of healthy competition, Consumer Protection on the other hand, aims to safeguard the basic right of the consumers to be guaranteed access to diverse goods and services at competitive prices.

    The relation between both the laws can be expressly witnessed in the Competition Act itself, as under section 4, “where an enterprise or a group shall be termed as abusing its dominant position if it limits technical development relating to goods or services to the prejudice of consumers”. A similar reference can also be seen in section 18 of the Competition Act whereby the “interest of consumers must be protected”. Thus, it can be reasonably argued that both the legislations ultimately support one another as two parts of an overarching unity, and that overarching unity is consumer sovereignty.

    Loopholes and Criticism of the Rules

    Rule 2 states that the Rules does not apply to a natural person where the activities are being carried out in personal capacity. The Rules should have included all the stakeholders within its purview to be qualified as an extensive piece of legislation. Secondly, the Rules could have mapped out a detailed rate list of the delivery charges, which the sellers charge on the e-market, which are often unnecessarily higher than what a common man would be willing to fork out. Thirdly, the malpractice of drip pricing has not been addressed. Drip pricing is an act where the seller consistently increases the price of the goods at different stages of online shopping till the final stage of payment. Lastly, the rules have surprisingly not included any legal structure other than a company, such as a limited liability partnership (‘LLP‘). This preclusion would definitely hamper many e-commerce entities which are functioning under different legal structure.

    Furthermore, there are certain terms in the Rules which might create confusion or conflict such as “unjustified prices”, “arbitrary classification” and “unreasonable profits”. Arguably, clauses like “restricting access to sale/discounts on products/services” can be termed as arbitrary categorization since they affect the rights of consumers directly.

    Cross-Jurisdictional Analysis

    Before the Indian Ministry of Consumer Affairs, market research and examinations on the impact of digital marketplaces have similarly been carried out by consumer protection and competition law watchdogs of many other jurisdictions. Some of the noteworthy regulations introduced in other jurisdictions are as follows:

    USA: The two agencies involved in online consumer protection in the US are the Federal Trades Commission (‘FTC’) and the Federal Communications Commission (‘FCC’). While the FCC reviews consumer complaints, the FTC investigates and takes actions against those involved in illicit trade practices. Previously, the FTC had released a dotcom disclosure guidance document in which it mentions that how intently it manages the structure and substance of information distributed in the online marketplace to prevent unreasonable or deceptive activities and protect the consumers from such practices. In any case, while the sectoral division of regulators may provide cures for that specific sector, it isn’t without its disadvantages, lack of co-operation between the regulators and overlapping decisions of authorities, just to name a few.

    EU: The EU introduced new rules for consumer protection in January 2020. This initiative adopted by the commission urges more transparency on e-commerce marketplaces, same consumer rights for “free digital services”, better search rankings, transparency in customer reviews, customized pricing.  It also focuses on forbidding purchasing of tickets online through bots and encouraging honest discount claims. The directive also mentions levying penalties on those e-commerce platforms which violate these consumer rules, which is up to 4 percent of the platform’s overall turnover.

    Conclusion

    In an industry that is going through a phase of expansion and technological advancement, robust legislation such as the Act was the need of the hour. Certainly, the Rules can be considered as a step in the right direction. Even though some of the provisions of the Rules might be in contravention to the sellers but overall, these rules were needed because until now, there was no particular legislation that dealt with unconventional issues resulting from the e-commerce industry. Lastly, these Rules cover all the contemporary issues and act as much-awaited legislation governing the new e-commerce industry and shall aim to let out some uniformity in the market.

  • The Future of Financial Institution Resolution Mechanisms: FRDI to Make a Comeback?

    The Future of Financial Institution Resolution Mechanisms: FRDI to Make a Comeback?

    By Anirudh Rao Saxena and Anupriya Nair, Fourth-year students at NALSAR, Hyderabad

    An air of uncertainty and impermanence surrounds the future of the Indian financial system as a result of COVID-19. On 11th July 2020, speaking at the State Bank of India (SBI) economic conclave, RBI Governor Shaktikanta Das voiced his concerns pertaining to a likely increase in cases of capital erosion and non-performing assets (“NPA”) in the banking sector, as a result of the pandemic. As a contingency response to these vulnerabilities, he proposed the setting up of a resolution corporation (“RC”) with requisite legislative support to aid in the insolvency management of financial firms.

    Chronology of Events

    The necessity to establish an RC for insolvency and liquidation proceedings of Financial Service Providers (“FSPs”) was originally observed in the controversial Financial Resolution and Deposit Insurance Bill, 2017 (“FRDI”). The late Finance Minister (“FM”), Arun Jaitley, in August 2017, launched the FRDI in the Lok Sabha. Subsequently, in August 2018, interim FM Piyush Goyal withdrew the FRDI owing to public anxieties surrounding a ‘bail-in’ clause which was put in place to combat issues of inadequate deposit insurance.

    In February 2020, FM Nirmala Sitharaman announced that although the revival of the FRDI is in the works, the Ministry of Finance cannot commit to a timeline for it to be tabled in Parliament. Currently, media reports suggest speculation around a forthcoming revised Financial Sector Development and Regulation (Resolution) Bill, 2019 (“FSDR”) in accordance with a briefing note prepared by economic affairs secretary, Atanu Chakraborty.

    A Primer on FRDI

    The prime reason for the introduction of FRDI was due to the increasing interaction between the public and the financial sector. It was owing to this very reason that the government felt a need to protect the interests of the depositors. Furthering this intention, the government introduced the contentious FRDI Bill, 2017 in the Lok Sabha.

    Presently, India lacks an all-inclusive and integrated legal framework for the resolution and liquidation of financial firms. The responsibilities and powers for resolution are dispersed amongst regulators, Courts and the Government under multiple laws. These powers are quite limited, therefore banks are typically restricted to two methods of resolution i.e. winding up of the bank or mergers. Further, the impact of failure in case of a traditional insolvency procedure is limited to the creditors of the insolvent firm, however the failures of financial providers have a much wider ramification on the economy of a country (Cypriot Financial crisis). Thus, just as the Insolvency and Bankruptcy Code, 2016 (“IBC”) has provided a comprehensive resolution mechanism for non-financial firms, the FRDI Bill aims to do the same  for financial institutions.

    What Triggered the Withdrawal of FRDI?

    The foremost trigger behind the withdrawal of the FRDI was the questionable ‘bail-in’ clause found in Section 52 of the Bill. This section allowed for, if the RC saw fit, the internal restructuring of liabilities (deposits). Moreover, further sub-sections of the clause provided for the cancellation and modification (into long-term bonds and equity) of deposits. It is notable that the extent of the powers of the RC in this regard would be applicable on deposits only beyond the insurance cover amount of INR 1 lakh. Inevitably, this clause led to apprehension among depositors owing to the possibility of being left with a mere 1 lakh in case of bank failure.

    In response to public concerns surrounding the ‘bail-in’ clause, not only the Ministry of Finance, but the late FM Arun Jaitley himself, presented the clause as a transparent means of granting additional protection to deposits. Au contraire, The Associated Chambers of Commerce & Industry of India (“ASSOCHAM”) argued against the clause, bringing focus to the dangers of diminishing trust in the banking system and of the consequent routing of public investment into unsuccessful avenues leading to the eventual erosion of the banking system. The competing objectives of the Bill, and that of the depositors, led to debate resulting in the withdrawal of the Bill.

    The Revival of FRDI in 2020: Understanding its functioning

    FRDI aims to provide establishment of a RC and a regime which would enable a timely resolution of failing financial firms. The RC will consist of representatives from all financial sector regulators (the Reserve Bank of India, the Securities and Exchange Board of India, the Insurance Regulatory and Development Authority of India and the Pension Fund Regulatory and Development Authority), the ministry of finance as well as independent members. It aims to achieve timely intervention by classifying firms into 5 categories – low, moderate, material, imminent, or critical. Determining the health of a financial entity, ensures that a timely decision can be taken before it’s classified as a weak entity and there is no other option left but to liquidate the firm.

    The liquidation waterfall mechanism sets up a priority in terms of dispersal of payments  on the occurrence of liquidation. According to the hierarchy, first priority is given to secured creditors, followed by unsecured creditors, and finally by operational creditors. Under the current regime regulated by Deposit Insurance and Credit Guarantee Corporation (“DICGC”), the deposits are insured up to INR 1 lakh  over which the deposit is treated on par with unsecured creditors. However, as per the provisions of the FRDI Bill, these uninsured deposits will be placed above unsecured creditors and Government dues. FM Nirmala Sitaraman, in her 2020 budget speech, announced that the limit for insured deposits would be increased to INR 5 lakhs. This move would ensure improved protection of the rights of the depositors since a larger sum of deposits are protected. For this transition to occur in a seamless way, the FRDI Bill would have to transfer the deposit insurance functions from the DICGC to the RC which would then result in an integrated approach to the depositor’s protection and resolution process.

    Decoding the Status Quo

    The status quo of FRDI may be ascertained from the assertions made by RBI Governor Shaktikanta Das as part of his recent speech at the aforementioned SBI economic conclave. On account of similarities between his proposal and the FRDI with respect to the suggestion to set up an RC, the re-emergence of a revised FRDI may be easily perceived.

    First, Das drew attention towards the increased relevance of resolution as opposed to liquidation of banks. He cited resolution (wherein the bank remains a going concern) as being more effective in providing depositors with a higher value of return.

    Second, the traditional merger approach often utilized to save failing banks by merging (The merger of Corporation Bank and Andhra Bank with Union Bank ) with larger banks, doesn’t provide the same return as the resolution process.

    Third, Das stressed upon the necessity to have the RC acting beyond simple implementation of corrective measures. The primary focus of the RC, as he stated, is not to correct, but to monitor, foresee and assess emerging risks as and when they surface.

    Interim Mechanism

    On 15th November 2019, the Ministry of Corporate Affairs (“MCA”) notified the Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019 (“Rules”) with the objective to provide a framework for insolvency and liquidation proceedings of FSPs other than banks.

    The Rules shall be applicable to FSPs (to be notified by the Central Government) as per Section 227 of the IBC including discussions with appropriate regulators, for the purpose of conducting insolvency and liquidation proceedings within a specified time frame. It is imperative to comprehend the provisional nature of the framework provided under Section 227 as it has been set up as an interim mechanism until either a revised legislation is enacted, or the IBC is amended.

    The Way Forward

    It is important to analyze and address the position FSDR will take in its proposed reforms. The bail-in clause was problematic in the FRDI owing to the lack of coherent legal framework within which it operated. This ultimately resulted in disproportionately disadvantaging individuals while leaving the corporate and financial sectors unharmed. In order to preserve financial stability, it is essential that the new Bill is strategically designed to establish a balance between the rights of private stakeholders and public policy interests.

    The FSDR should consider including the “no creditor worse off test” in order to safeguard stakeholder interests. This move will convince investors that the bail-in provision is merely a way in which the bank buys time to restore its strength and long-term viability. This framework has been tried and tested during the 2011 Denmark financial crisis, and was advocated by the International Monetary Fund. It is of utmost importance that the bail-in framework is carefully structured to ensure effective implementation in the FSDR.

    Additionally, owing to the constant changes in the dynamics of the banking sector with various mega sector banks undergoing mergers, it would be ideal to wait until there is better clarity on the future of the banking sector before introducing a new Bill. In order to better incorporate the legislative framework of other acts with the functioning of a new Bill, multidisciplinary research should be conducted before its enactment.

  • Corporate’s Social Commitment: Corporate Social Responsibility And The Covid-19 Aftermath

    Corporate’s Social Commitment: Corporate Social Responsibility And The Covid-19 Aftermath

    BY ROOPAM DADHICH and PRANSHU GUPTA, Fourth-YEAR Students AT NALSAR University of Law, Hyderabad

    The Ministry of Corporate affairs (‘MCA’) has allowed the inclusion of corporate expenditure utilised for the purposes of fighting COVID-19 pandemic under Corporate Social Responsibility (‘CSR’) spending requirements. Expenditure incurred on activities such as sanitation, pandemic management, preventive healthcare, etc, would now be covered under the same.  A greater part of the CSR spending of the top 300 companies of India has been distributed to Covid-19 alleviation measures, a majority of which was donated to the PM CARES Fund. This post briefly discusses the evolution of CSR regime in India and how it may take a revolutionary turn in times of COVID-19.

    Evolution of the CSR Framework

    Prior to passing of the Companies Act, 2013 (‘the Act’), the Central Government passed guidelines for the companies to allocate funds for creating a voluntary CSR policy. The intention behind this was to gradually make the corporate sector embrace the CSR guidelines voluntarily. Later, a stronger body of rules was presented by SEBI in its circular in 2012 in which it became mandatory for the top 100 listed companies in BSE and NSE to report the business responsibility.

    According to the Companies Bill, 2011, corporate bodies to which the CSR arrangements applied were required to establish a CSR council to detail a CSR approach. The council would have the function of utilising the funds for CSR activities which were to be affirmed by the board. At the point when it came to CSR spending, proviso 135(5) of the 2011 Bill stated that companies under this section will make every attempt to spend at least 2 per cent of its average profits of the past three years on CSR exercises.

    At the underlying phases of this discourse by the Standing Committee, it seemed that the CSR spending would be made a mandatory affair under which the companies violating this rule would be made liable under penal provisions. However, such a recommendation got a lot of criticism from the corporate world which was fervently against any such kind of legislation. The opposition from the corporate sector prompted a semi compulsory methodology whereby companies are pegged to the 2 percent rule without being under any commitment to exercise it.  Disclosing the reasons behind non-spending was instead made mandatory.

    There has been an amendment in 2019 in the 2013 Act which bought several changes to the CSR provisions by penalising non-compliance of the CSR policy. Spending funds accumulated for CSR exercises in a financial year became necessary. All the unspent funds are to be transferred to a special account which is to be absorbed for the completion of its CSR goals within three years. If the company fails to utilise the sums, it has to transfer the same to the government for social welfare schemes. Punitive measures by imposing fines and imprisonment are also added if the company is in default or is unable to make a CSR policy.

    Since the change in 2019, the companies have fervently opposed the alterations made to the CSR provisions because of the addition of stringent punitive measures. Considering the opposition, the Government has appropriately concluded that it would not notify the alteration to section 135 of the Act, and that it will rather review the scenario in the time being.

    Analysing the Impact of the CSR Regime

    Observing the quantitative parts of CSR expenditures, surveys show that before the authorisation of the Companies Act, 2013, the sums included for CSR were very insignificant. In light of the moderate, yet relentless, development of CSR exercises in India, both as far as CSR policies and disclosure are concerned, the presentation of an administrative order towards CSR move can be said to invigorate further development and thus subsequently has been endorsed by analysts.

    However, a major critique of CSR prerequisites is that there are no reasonable criteria to examine the sufficiency and propriety of CSR spending. More importantly, there was no proper system for the study of the disclosures in the Act, until the 2019 amendment where CSR spending was made mandatory. While corporate have surely not done their fair share with regards to indulging themselves in social ventures under CSR, having being compelled to make a contribution to central funds for non-compliance is very much same as a corporate assessment. It only acts in a creation of one more formality for the corporate. The corporate sector takes it as a mandatory expenditure which does not really lead to any profitability, and thus it is a 2% tax spent by the companies themselves and not given to the government.

    From the viewpoint of compliance, some companies precisely allocate 2 percent of their average profits, whereas some companies who used to spend more than 2 percent of their average profits before the law, have now started to bring it down close to the 2 percent mark. While from one perspective this might be characteristic of consistence, it may then again likewise be reminiscent of mechanical adherence equal to a “check the box” frame of mind.

    Thus, providing tax deductions for CSR activities may change the outlook of the corporate sector for social commitment. Moreover, imprisoning company officials for default appears to be somewhat over the top for what is supposed to be a civil liability. Further, it is crucial to take note of the point that a mere fund allocation does not really fulfill a social obligation.

    The Government should explore different suggestions apart from tax deductions for CSR spending, for example, carrying forward the unspent sums up to three budgetary years and making a CSR exchange portal. The base of CSR exercises should further be expanded to incorporate activities such as sports advancement, senior residents’ and specially-abled persons’ welfare, etc.

    CSR in COVID-19

    The MCA through its notifications and a circular has clarified that any expenditures made towards COVID-19 would come under the ambit of CSR activity under schedule VII of the Act pertaining to disaster management, healthcare, and sanitation. Further to encourage such activities the MCA also exempted all donations made towards PM CARES Fund under the Income Tax Act, 1961. The result of which is that a lot of companies have donated a heavy sum in the PM CARES Fund as part of their CSR obligation including Tata trusts, Reliance Industries, Wipro, JSW Group, etc.

    The pandemic also brings opportunities for those with an acumen and mindful approach towards CSR. For instance, manufacturing companies in the UK have undergone a transformation in their factories as they are now also producing protective equipments, ventilators, sanitizers, etc, and mostly making a donation of these items instead of selling them. Vodafone provided free unlimited data to most of its customers in the UK. Supermarkets have allotted specific opening time only for health workers and old people, and are continuously distributing food items to NGOs. Companies have also waived off their commercial airtime to contribute more for the cause. Even some banks have waived off interests on loans for a period of time.

    The drastic consequences of the pandemic on the Indian economy will be unprecedented. Thus, it marks a crucial event which has the potential of significantly changing the nature of CSR. Even though the pandemic has driven many companies on the verge of a breakdown, it have also presented a completely new set of opportunities which could be further harnessed for the interests of corporate as well as the society.

    An authentic and genuine CSR from a company will lead to a stronger relationship with the general public since people will develop great expectations from these companies and their brands with respect to the special efforts made by them to fight the pandemic. Customers can take pride in the fact that the brands they trust are contributing in these difficult times by donating health equipments or helping financially. The relationship nurtured between a stakeholder and a company during this pandemic would indeed be more meaningful as compared to that of ‘normal’ times.

    Post-COVID, there will be an acceleration in CSR in the long run since the corporate world will eventually understand that their survival in the long run depends on accomplishing a balance between revenue and cordiality among different stakeholders. The important question is not about investing in CSR or not, but more regarding the manner in which to invest to derive benefits mutually from the interdependent society.  The common learning we all can take from the pandemic is that everyone is embroiled in this man-made disaster together. This will definitely raise the expectations of the stakeholders from the corporate being more responsible. Thus, we can imagine the post-COVID era to be an era where those firms are thriving who has a stronger commitment with society and effective CSR agendas.

    Conclusion

    The 2019 amendment brings in a greater risk of rigidity which eventually alters the real purpose of CSR. However, the effects of this amendment would be interesting to observe in the current COVID-19 environment where corporate responsibility has become an indispensable affair in tackling the drastic repercussions of the pandemic.

  • Introducing the Rule of Locus Standi in Competition Jurisprudence: Clipping the CCI’s Wings

    Introducing the Rule of Locus Standi in Competition Jurisprudence: Clipping the CCI’s Wings

    By VANSHAJ DHIMAN, A STUDENT OF THIRD-YEAR AT RMLNLU, LUCKNOW

    On 29th May, 2020, the National Company Law Appellate Tribunal (‘NCLAT’ or ‘Tribunal’) rendered a judgement – in Samir Aggarwal v. CCI & Ors. – wherein it was held that unless a person’s legal rights “as a consumer or as a beneficiary of healthy competitive practices” have been infringed, he/she cannot file an information before the Competition Commission of India (‘CCI’) levelling allegations for the contravention of Sections 3 and 4 of the Competition Act, 2002 (‘Act’).

    This myopic and unnecessary view of the NCLAT, in essence, reserved the position of an informant for the competitors, consumers and their associations only and thereby failed to uphold the true legislative intent behind the said provision. In this blog, the author shall present a two-pronged argument to highlight the errors in the findings of the Tribunal – firstly, the fetters of locus standi will more likely frustrate the very object and scheme of the Act; secondly, it will cause great damage to consumer welfare and effective competition in the market.

    Factual Matrix

    In the present matter, Mr. Samir Aggarwal (‘Appellant’) challenged the CCI’s order, wherein the CCI found no prima facie case since no agreement, understanding or arrangement existed either between Ola and Uber and their respective drivers or between the drivers inter-se qua price-fixing. Therefore, the allegations against the Ola and Uber contravening Section 3 of the Act by forming hub and spoke cartel were dismissed by the CCI under Section 26(2) of the Act. While ruling on this matter, the NCLAT also questioned the locus standi of the Appellant, albeit rejected the appeal on the basis of merits as well.

    • Tracing the object and scheme of the Act

    The CCI was primarily constituted to enforce the competition policy of India and to prevent market failures. The preamble of the Act confers the duty on the CCI to eliminate practices having adverse effect on competition, to promote and sustain competition and to protect the interests of consumers. This wide amplitude of mandate reverberates with Section 18 of the Act as well.

    Interestingly, no qualifications or requirements have been prescribed by the legislature which a person has to fulfil before filing an information with the CCI under Section 19(1) of the Act. As per Section 19(1) of the Act, the CCI may carry out an inquiry suo motu; or upon receipt of information from any person, consumer or their association or trade association; or upon a reference made to it by the Central Government or a State Government or a Statutory Authority.

    Section 2(l) of the Act defines the expression ‘person’ and includes, inter alia, an individual, Hindu undivided family, company, corporation, association and every artificial juridical person. Indubitably, the expression ‘person’ has been given a broad and inclusive meaning. Thus, the legislative intent seems to be very clear regarding entrusting the duty on every citizen for highlighting any potential antitrust violation before the CCI to uphold the sanctity of the economic legislation.

    An Informant cannot be and should not be considered as a party to the dispute merely because of its status of being an informant because he/she merely works as one of the sources of information for the CCI. What matters is the substance of an information and therefore should be given primacy over the standing or antecedents of the informant. As rightly pointed out by the CCI that “antecedents of the informant cannot be made a ground for the Commission to not take cognizance of abusive conduct of any entity”.

    In the matter of Saurabh Tripathy v. Great Eastern Energy Corporation Ltd., the CCI observed that in order to highlight any anti-competitive practices before the CCI, the informant need not be a personally aggrieved person from such practice as the proceedings before the CCI are not ‘in personam’ but are rather ‘in rem’ affecting an entire market. Interestingly, even the Director-General (‘DG’) can furnish an information, a complaint or a memo before the CCI under Section 19(1)(a) of the Act, albeit, the DG cannot initiate a suo motu investigation.

    In Surendra Prasad v. CCI, the Competition Appellate Tribunal (‘COMPAT’) highlighted the judicious scheme of the Act and held that “there is nothing in the plain language of Sections 18 and 19 read with Section 26(1) from which it can be inferred that the Commission has the power to reject the prayer for an investigation into the allegations involving the violation of Sections 3 and 4 only on the ground that the informant does not have a personal interest in the matter or he appears to be acting at the behest of someone else.”

    • Free Market more important than the standing of an informant

    In Central Circuit Cine Association v. Reliance Big Entertainment Pvt. Ltd., by assailing the order of the CCI, the appellant i.e. CCCA, questioned the locus standi of the informant (respondent) contending that the CCCA is an association of the distributor or exhibitors and only members of the association are governed by the rules of the association, therefore, non-members should not be allowed to file an information with CCI levelling allegations for contravention of Sections 3 and 4 of the Act. Negating the contention of the CCCA, the COMPAT held that since the CCI can take suo-motu cognizance of any anti-competitive matter, rules of association cannot be made a ground to question the locus of a non-member who attracts CCI’s attention towards an anti-competitive practice flourishing in the market.

    Had the information could only be filed by an aggrieved party, the foregoing anti-competitive practices of the association might not be challenged and ultimately, damaged the freedom of trade in the market. Therefore, the role of an informant as information provider is indispensable and should not be weighed on the anvils of antecedents of the informant. The informant only initiates the proceeding before the CCI to obtain a prima-facie order under Section 26(1) of the Act. Accordingly, the DG would then conduct an investigation into the matter and submit its report to the CCI. Indubitably, the locus of the informant’s information is subservient to the evidence brought on record by the DG and further assessed by the CCI. Hence, the case against the opposite parties is made on the basis of findings of the DG and not on basis of any information so being received.

    Countering frivolity of information

    It is a well-settled principle that a person approaching a court must come with clean hands. Now, even though there was no locus standi requirement under competition jurisprudence, the COMPAT had, in L.H. Hiranandani Hospital v. CCI, cautioned the CCI to critically examine the identity of the informant before acting on the information and regard its submission with suspicion where the informant is a third party espousing someone else’s cause with an ulterior motive.

    Indeed, the liberal interpretation of the terms ‘information’ and ‘person’ have resulted in some vexatious and frivolous cases before the CCI but in response to that shackling the CCI with the rule of locus standi cannot be a plausible justification. Alternatively, the CCI may avert unscrupulous people by adopting a mechanism to scrutinize the information and if found agitated with oblique and mala-fide motives, a penalty should be imposed to punish such opportunistic people.

    International Positions

    The European Commission has the power to initiate ex-officio investigation into the suspected cartels or infringements of Article 101 of Treaty on the Functioning of the European Union after receiving a complaint or information from various sources such as, inter alia, informant, consumer, whistle-blower or any third party, other departments or competition authorities.

    The United Kingdom’s Competition and Markets Authority and Canada’s Competition Bureau may also start an investigation after receiving a complaint or information from consumers, businesses, informants or whistle-blowers leveling allegations for violating their respective competition acts. Evidently, information provided by third parties or whistle-blowers helps countries in making effective Intelligence system vis-à-vis completion policy.

    Some antitrust watchdogs including Hungarian Competition Authority and Korea Fair Trade Commission are even authorised to give rewards to the informants or whistle-blowers for providing indispensable information to the competition authorities, which will eventually help them in detecting and unveiling the hard-core cartels.

    Concluding Remarks

    The concept of an aggrieved party was diluted when the expression “receipt of a complaint” was replaced with a wider expression “receipt of any information” by the Competition (Amendment) Act, 2007. Unfortunately, the NCLAT has now saddled the CCI with the rule of locus standi by overlooking the plain and natural meaning of the statutory provision.

    This inhibitive decision of the NCLAT would, ergo, preclude the third parties and whistle-blowers from approaching the CCI regarding any unfair or anti-competitive trade practices carried out in the market. Hence, keeping in mind the foregoing arguments and international practices, the author hopes that either the Supreme Court or the NCLAT itself will soon correct this position in a suitable case, otherwise, its consequences will be far-reaching in the competition domain of India.

  • Lifting the Suspension On Section 10 Of IBC- Need Of The Hour?

    Lifting the Suspension On Section 10 Of IBC- Need Of The Hour?

    By Chirali Jain and Chahak Agarwal, fifth-year students at NLU, Jodhpur

    In a recent development, a PIL has been filed by Mr. Rajeev Suri in the Delhi High Court, challenging the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020 (‘the Ordinance’) by way of which applicability of section 10 has been suspended for a period of 6 months owing to the current pandemic. The petition challenges the Ordinance as it suspends the operation of sections 7, 9 and 10 of the Insolvency and Bankruptcy Code, 2016 (‘the Code’), depriving the corporate applicant of the ability to initiate the Corporate Insolvency Resolution Process (‘CIRP’). Following submissions have been made through the petition to challenge the suspension of the aforementioned provisions:

    a. Such suspension in these extraordinary times is “irrational, arbitrary, unjust and mala fide” as it stops a corporate applicant from exercising its statutory rights.

    b. It will push the companies towards liquidation, discourage entrepreneurship and defeat the objectives of the Code.

    c. Suspension is ultra vires Articles 14 and19(1)(g) of the Constitution of India.

    d. It would result in further deterioration of the affairs of the corporate debtor and result in making the restructuring/ revival of the corporate debtor unviable.

    The Delhi High Court has issued a notice to the Union Ministry of Law and Justice and Insolvency and Bankruptcy Board of India on July 28, 2020 and sought a reply till August 31 in the matter. 

    Background

    The current pandemic has impacted small and large businesses in various sectors across the economy. The Government, in an attempt to provide some relief to the distress caused by the pandemic, introduced a slew of changes to the insolvency framework of the country. 

    On June 5, 2020, the President promulgated the Ordinance with immediate effect. The Ordinance introduced section 10A to the Code, thereby effectively suspending the operation of sections 7, 9 & 10 and consequently section 14 of the Code with respect to defaults arising on or after March 25, 2020 for a period of six months, extendable up to a maximum period of one year from such date as may be notified. The proviso to section 10A also bars any insolvency application from ever being filed, for any default occurring during the Suspension Period. 

    Sections 7 and 9 of the Code, allow filing of an insolvency application against the corporate debtor, by a financial creditor and an operational creditor, respectively, when a default occurs above the threshold limit. Section 10, on the other hand, allows corporate entities to voluntarily file an insolvency application against themselves, where a default has occurred. By giving the corporate debtor the right to approach the adjudicating authority for initiation of CIRP, this provision affords the defaulting entity a chance to revive themselves through the resolution of debt. However, by suspending the applicability of this section, the Ordinance, despite having the aim of protecting corporate entities from creditors, does considerable harm to the corporate debtor.  It takes away the much needed resort, available to the corporate debtor, to subject itself to an insolvency proceeding for resolution of debt or revival of the entity. Moreover, the inability of creditors to file insolvency applications against intentional defaults or for debts that are not linked to Covid – 19, may further impede the flow of financial resources to the commercial sector in India. That said, the Ordinance does not render the corporate debtors and creditors remediless as there are other remedies available to them which are discussed later in the post. By way of insertion of section 66(3), the Ordinance also seems to exempt liability of directors or partners of corporate debtors in case of potential losses to creditors during the exemption period, due to lack of due diligence. However, this may provision may be misused and lead to further deterioration of realisable value for creditors.

    It may be observed that the Ordinance protects companies and promoters from liability arising due to no fault of their own. However, the position regarding the liability of promoters is still not clear, owing to the fact that proceedings can still be initiated against personal guarantors.  

    Implications Of Suspension Of Section 10

    The rationale behind suspending the applicability of section 10 is not clear. Suspending the applicability of section 7 and Section 9 may be seen as a necessary or a justifiable move in order to revive economic activity and provide temporary relief to companies under severe distress caused on account of the Covid-19 pandemic and the national lockdown. However, suspending section 10 has sparked massive debate as move may cause more harm than the intended benefit. This provision has been used as a tool for companies to opt out of the market in times of extraordinary financial distress. This refusal of freedom to companies during this uncertain period acts as an impediment to the fulfilment of the spirit of the Code.

    Suspension of section 10 is further detrimental to companies under huge financial distress, whose value of assets is deteriorating rapidly and their only viable option is to file for insolvency. Instead of enabling quick sale of assets so as to realise some value, suspension of this provision will only lead to more problems. A huge influx of insolvency applications could further impede the capital flow of the economy and can bring unexpected economic disruptions during COVID-19 when  ideally the target should be to get the capital flow moving. This move can also affect India’s position in the context of Ease of Doing Business which has been the guiding light for a lot of changes introduced by the government recently.

    The suspension also deprives the corporate debtor from exercising the fundamental rights guaranteed under the Constitution. Article 19(1)(g) of the Indian Constitution guarantees every citizen the right to practise any profession, or to carry on any occupation, trade or business. Rights to carry on a business also include rights to start a business, right to continue a business and right to close a business.

    In Excel Wear V. Union of India, the Supreme Court held that the right to carry on any business also provides an inherent right to close the business as no person can be compelled to carry on the business in case of losses or other circumstances. The act of the government to close the exit route for the corporate debtor by striking off section 10 of the Code is infringing the fundamental right provided to the corporate debtor under Article 19(1)(g) of the Constitution of India. Moreover, this would only result in keeping the industry alive forcibly to suffer the pain until it collapses.

    However, the right to close the business comes along with reasonable restrictions as per Article 19(6) of the Constitution. The Court while considering this right has to take into account the background of the facts and circumstances under which the order was made, the nature of the evil that was sought to be remedied by such law, the ratio of the harm caused to individual citizens by the proposed remedy and to the beneficial effect reasonably expected to result to the general public. It will also be necessary to consider in that connection whether the restraint caused by the law is none than was necessary in the interests of the general public. Here, it is important to note that keeping Section 10 operational would not harm the creditors or any other stakeholders in any manner, thereby not violating public interest.

    The Way Forward

    The Ordinance has taken the corporate debtor to the pre-IBC era and uses alternative remedies which would defeat the whole purpose of the enactment of the Code. Some of these remedies are application under Section 230 of the Companies Act, 2013, application for recovery of money under Civil Procedure Code, applications under SARFAESI before DRT, bank negotiated restructuring, etc. 

    However, even after resorting to these alternative remedies, they would still be less efficacious as the insolvency proceedings under the IBC because (i) the corporate debtor would still be liable to pay through the restructuring of debt despite being in a dubious position; (ii) the benefits of moratorium on legal proceedings would not be available; and (iii) it would have a low binding effect.

    An alternative option could be the introduction of pre-packaged insolvency schemes, which are already prevalent in the UK and the US, as an aid to the current insolvency framework. An exception may also be created under the Code with respect to section 29A of the Code, in order to allow promoters to participate in pre – packaged schemes who have defaulted due to economic reasons stemming from the pandemic.  

    It will also be beneficial to take a look at the approaches being followed in various countries such as the UK, Australia and Singapore. These countries have managed to keep the doors open for voluntary insolvencies while suspending any action by creditors against the companies in case of default. In UK, wrongful trading provisions of the Insolvency Act have been suspended,  effective from 1 March until 1 June 2020. This change seeks to remove the threat of directors incurring personal liability for ‘trading while insolvent’ during the pandemic. In Australia, due to the provision of voluntary insolvency proceedings, Air Mauritius, second largest airline of the country filed for insolvency. In Spain, companies can file voluntary bankruptcy applications, and in case of pending declarations on voluntary bankruptcy applications, judges might declare insolvency if waiting for too long might cause irreparable damage. Further, Singapore has provided relief by introduction of moratorium against commencement of insolvency of only an affected debtor.

    Therefore, it is the opinion of the authors that while suspending section 7 and section 9 is justified, suspending section 10 is an extreme step and is not in accordance with the inherent spirit of the Code. 

  • India Mauritius Double Taxation Avoidance Treaty: Assessing AAR Decision Implications

    India Mauritius Double Taxation Avoidance Treaty: Assessing AAR Decision Implications

    By Anupriya Nair, A fourth-year student at NALSAR, Hyderabad

    On 26 March 2020, The Authority for Advance Ruling, New Delhi (‘AAR‘) in the case of  Re Tiger Global International II Holdings, Mauritius  denied the capital gains tax exemption pertaining to the indirect transfer of shares of Indian companies under the India Mauritius Double Tax Avoidance Agreement (‘DTAA‘). The ruling was a result of a favourably designed DTAA  which allowed Mauritius-based companies selling Indian shares to benefit from the exemption, and to promote tax avoidance practices involving the repositioning of investments into India via Mauritius-based shell entities.

    This article examines the economic implications of the AAR decision in light of the uncertainty brought about by COVID-19. The ruling in the instant case brings forth a substantial shift in practice with regard to the interpretation of the DTAA and will have a lasting effect on international investment relationships with India.

    Brief Facts of the Case

    The applicants in Re Tiger Global International II Holdings, Mauritius, comprising of Tiger Global International II, III, and IV Holdings (‘TGM’), were part of a tripartite structure of private companies which engaged in long term investment activities undertaken for the purpose of gaining capital returns. These three companies are residents of Mauritius for taxation purposes pertaining to the DTAA.

    The applicants invested in Flipkart (Singapore) between 2011-2015 which attributed a significant value of its shares to India as a result of its investment in various India-based companies. The three Mauritian taxpayers subsequently transferred a portion of their Flipkart (Singapore) shares to Fit Holdings S.A.R.L.(Luxembourg) . This sale was a consequence of a larger transaction involving Walmart’s acquisition of a majority stake in Flipkart (Singapore).

    Initially, the applicants approached the Revenue Tax authorities (‘Revenue’) in August of 2018 under Section 197 of the Income Tax Act 1961 (‘IT Act’) seeking a ‘nil’ withholding certificate in relation to the aforementioned transfer. The request was denied on grounds of ineligibility arising out of lack of independence and control and the Mauritian applicants held in the transaction in question.

    Subsequently, the applicants approached the AAR under Section 245Q (1) of the IT Act in order to determine whether the transaction would be taxable under the existing DTAA.

    Breaking Down the AAR Ruling

    The AAR’s ruling, after consideration of the factual matrix of the case, upheld the ruling of the Revenue. It was held that the share transfer transaction in question was an investment strategically designed for tax avoidance purposes. The AAR made the following key observations:

    • Since the financial statements of the applicant revealed that Flipkart (Singapore) was their only recorded investment, it was concluded that the transaction was an exploitation of the DTAA that Mauritius specifically shared with India.
    • The operating structure within which the transaction was to function, although not held to be a definite indication of tax avoidance, reflected an intention to exploit the benefits of the DTAA. This was termed as an ‘inescapable conclusion’ by the Court.
    • The role of Charles Coleman (a US-resident) over the entirety of the TGM group structure, as a director, beneficial owner, and applicant appointed signatory of bank cheques, gave the AAR reason to believe that the real control and management of the business was not situated in Mauritius but in the USA. Determining the ‘head and brain of the Companies’ as opposed to the daily affairs of business activity was a deciding factor in this aspect.
    • The AAR concurred with the Revenue to conclude that the holding-subsidiary structure in combination with the USA-based control and management of the business was indicative of the intention of applicants to exploit the DTAA as ‘see through’ entities.
    • Since the transaction involved the share transfer of Flipkart (Singapore) which only procured a substantial value of its company from India, and not an Indian company, the DTAA was held to be inapplicable and the applicants ineligible to claim benefit under the premise of the investment.

    Exploring the Implications of the decision

    Economic Implications

    There is an air of uncertainty and impermanence that surrounds the present state of economic affairs owing to the pandemic. The AAR ruling in the instant case will deter investors from engaging with the Indian market. Mauritian investors were operating under the premise that all existing investments up to March 31, 2017 have been grand-fathered (protected) and exits/shares transfers beyond this date will not be subject to capital gains tax on exit. However, exit plans for Mauritian entities were constricted by virtue of amendments in the convention between India and Mauritius for the avoidance of double taxation and fiscal evasion with respect to taxes on income and capital gains. The denial of treaty benefits, despite the existence of the grandfathering rule, is likely to attract ramifications on future exits by start-up investors who have routed money from tax havens.

    The added rigidity in the parameters for the exemption of tax under DTAA will encourage international investors to move their investments to alternate routes and investment destinations. This can cause severe implications on an economy already on the brink of recession owing to the pandemic.

    Context-Specific Approach

    The context-centric approach adopted by the AAR may mark a shift in the analysis of claim for benefits with respect to tax treaties in the future. A key take-away from the ruling is the increased relevance placed in the examination of substance matter of the parties involved in the DTAA. Further, the holistic perception of the transaction was deemed indispensable, wherein the roles of not only the sale of the shares, but rather the purchaser/buyer involved were also analysed. The intention behind the transaction was also determined by careful perusal of the structure, credibility, conduct, ownership and control of the business.

    This level of specificity in the analysis of the transaction leads to the question of the possible arbitrariness in future AAR rulings due to the broadening of scope of analysis made available to them. In the instant case, the AAR found one of the purposes of the transaction arrangement to be for obtaining tax benefit, failing the Principal Purpose Test. However, despite the AAR having utilised the aforementioned test, it was not explicitly mentioned in the ruling, leaving scope for wider analysis/interpretation of operational structure and consequently, easier deconstruction of DTAA in the future.

    An Uncertain Future

    The CBDT Circular No. 789/2000 clarifies that the tax residency certificate (TRC) issued by the Mauritian Tax Authorities would constitute sufficient evidence of residency as well as beneficial ownership of the Mauritian entity for application of the tax treaty. Further, the landmark ruling of the Hon’ble Supreme Court in the case of Vodafone International Holdings B.V. wherein the apex court unequivocally found that the language of the IT Act was inadequate to tax offshore indirect transfers, upholds the eligibility to claim benefits under the treaty (grandfathering rule).

    It is therefore essential to understand that the ruling in the instant case was rooted in the scrutiny of the specificities of the factual matrix presented before the AAR and is not to be held as the conclusive and settled jurisprudence on the DTAA between the two countries. Although it is an important AAR ruling, it is important to consider its position in jurisprudence in light of the above-mentioned circulars and judicial pronouncements. The primary relevance of this judgement lies in its dissonance from this previously deep-rooted position of law.

    This discord in the position of law created by this ruling will create an uncertainty in the mind of investor. Further, the way in which the standard treatment of indirect transfer of shares with respect to capital gains exemption will be affected by the current AAR ruling with Tiger Global is unpredictable. We can only wait and observe the way in which issues surrounding the economic impact, grandfathering clause and principle purpose test will be addressed when Tiger Global moves to Delhi High Court to challenge AAR’s decision.

  • NPA Crisis: Pressing Need For Bad Bank

    NPA Crisis: Pressing Need For Bad Bank

    BY ADITI SINGH, GRADUATE FROM SYMBIOSIS LAW SCHOOL, PUNE

    Indian banks especially the public sector banks are heavily burdened with bad loans and an ongoing pandemic is further making the crisis worse. For banks to effectively operate, it’s imperative that they continue lending loans and advances which are categorised as a standard asset or a non-performing asset (‘NPA‘). In an event when the borrower defaults in payment of interest or principal amount of loans and advances made by the bank for more than 90 days, the asset which was earlier categorized as a standard asset is then converted to an NPA.

    According to the Financial Stability Report the Gross NPA ratio of Scheduled Commercial Banks may rise from 8.5% in March 2020 to 12.5% by March 2021 under the baseline scenario however the same may be escalated to 14.7% under a very severely stressed scenario. Banks suffer enormous losses in provisioning for already existing NPAs, due to the Covid-19 pandemic, the world has been facing economic slowdown which has forced the Reserve Bank of India (‘RBI’) to allow a moratorium period and the government to suspend resolution procedure under Insolvency and Bankruptcy Code which will further burden the already burdened banks with NPAs.

    Asset Reconstruction Companies away from Efficient Resolution of NPAs

    There are Asset Reconstruction Companies (‘ARC’) registered with the RBI and regulated under the SARFAESI Act, 2002 that purchase NPAs from the banks at a discounted price and then focus on realising such financial assistance. In order to secure finances, ARCs under section 7 of SARFAESI Act, 2002 are authorised to issue security receipts to qualified buyers evidencing the purchase or acquisition by the holder thereof, of an undivided right, title or interest in the financial asset involved in securitisation. However, ARCs have not been able to provide relief to the stressed banking sector. ARCs have been poorly capitalised to purchase NPAs from the banks and to make 15% of upfront payment as required. Even if ARCs have capital to purchase NPAs the price offered by them after haircut is far too less for banks to agree upon which is why the banks delay and avoid to put NPAs for auction. Delay by the banks in selling NPAs to ARCs leaves restrictive space for ARCs to realise the stressed assets, ultimately defeating the entire purpose behind ARCs existence. Looking at the near future, Indian Banks’ Association has proposed to set up a ‘Bad Bank’ for the recovery of banking sector from the financial distress.

    How will Bad Bank resolve NPAs? How will it work differently from already existing ARCs? Who will fund the Bad Bank in India? These are some of the questions that come hand in hand with the discussion of establishing Bad Bank.

    The Bad Bank Approach

    A Bad Bank essentially is an ARC which aims at reducing NPAs from the books of banks thereby reducing the load of stressed assets upon the banks. The banks will first segregate their assets and then transfer their stressed assets to the Bad Bank. The Bad Bank will then focus on realizing those stressed assets.

    Experiences of United States of America, Ireland, Germany, Sweden, Malaysia suggests various significant features behind success of Bad Bank. Mellon Bank of USA was the first bank to use the Bad Bank approach to resolve stressed assets. Further, The United States established, the Resolution Trust Corporation in the year 1989 funded by government and a few private investors. Thereafter, in the year 1992 Sweden incorporated Securum, a state sponsored company to resolves stressed assets, which successfully resolved ailing assets and was closed in the year 1997. Some of the major factors behind its success were state intervention, well framed laws and policies, transparency and political unity.

    Another significant model is Danaharta, established by the Malaysian government in the year 1998, a government funded asset management company with finite life to resolve stressed assets and recapitalisation. Malaysian government focused on strengthening its laws to support the effective operation of Danaharta. Malaysian government also stressed upon involving experts around the world which contributed immensely towards its success. However, there is no correct model for Bad Bank but intervention of state in ownership of Bad Bank needs to be carefully determined before establishing Bad Bank in India.

    The structure of the Bad Bank will be the main area which will distinguish it from the already existing ARCs in India. Indian Banks Association has proposed three stages of Bad Bank which includes an Asset Reconstruction Company (‘ARC‘) which will house the NPAs, an Asset Management Company (‘AMC’), and an Alternate Investment Fund (‘AIF’). The ARC will be owned by the Government of India, the AMC will be a professional body with participation from public and private sector, and the AIF is where a secondary market can be created for security receipts. The association recommended that the capital of Rs. 10,000 for Bad Bank to start operating shall be funded by the government.

    The idea of Bad Bank has been avoided for a long time in India. However, looking at the enormous number of distressed assets it becomes significant to find a way to resolve them. The role of ARCs and IBC has been significant yet not sufficient to resolve enormous number of NPAs. Bad Bank which is essentially an ARC has the potential to get financial sector ready to release funds. Some of the significant factors that will help the Bad Bank to effectively operate and resolve the enormous amount of bad loans in India are as follows:

    Structure of the Bad Bank

    The structure is the significant feature that will distinguish it from ARCs. Amid Covid-19, it is unreasonable to expect state owned Bad Bank, even otherwise Bad Bank requires minimum state intervention. However, Experiences around the world are a testimony that the state cannot be entirely excluded from the ownership structure of Bad Bank.

    The suitable structure for Bad Bank would be a Public-Private Partnership (‘PPP‘) to maximise recovery. Size of NPAs in public sector banks is such that the Government cannot be entirely excluded from the ownership but can stand as a minority stake holder so that the bank has the commercial freedom and transparency to avoid red-tapism while resolving the stress of bad loans.

    Adequate guidelines and Framework: For Bad Bank to resolve NPAs effectively there must be adequate guidelines and frameworks from the very beginning, firstly, to determine the value at which assets shall be transferred and secondly, to determine how these NPAs shall be resolved. The major issue ARCs have been facing is to reach an agreement on the value at which banks can sell off the NPAs. Moreover, in the case of ARCs, the RBI launched guidelines on sale of stressed asset by banks in 2016 much after the enactment of SARFAESI Act.

    Banks have been selling NPAs to ARCs either by an auction or bilateral negotiations. However, auction cannot be a suitable way for Bad Banks to acquire NPAs as it will further complex the entire time bound procedure the Bad Bank needs to follow.

    One of the key aspects of having PPP structure is the profit sharing link between the owners of the Bad Bank. Framework may include links of profit sharing between the owners of the Bad Bank so that once the bad asset has been resolved by the Bad Bank the profit will accrue to the owners of Bad Banks i.e. the banks, the original institution itself. If the banks have a profit sharing link then they would not shy away from transferring assets to Bad Bank without any unnecessary delay.

    Timeline: Timeline in which the assets need to be resolved by the Bad Bank is crucial to the entire resolution process and must be strict. Bad Bank should be able to resolve the acquired NPAs within 5 years which can be extended up to 7 years in special circumstances. The extension must not give any leverage otherwise it can start a vicious cycle of bad loans all over again.

    No Barriers to foreign skills and capital: The valuation mismatch between ARCs and bank is because ARCs have been under capitalised due to stringent policies for foreign investors to invest in ARCs which were relaxed only in 2016. This has been the major cause for ARCs limited role in resolving NPAs. The same shall not be done with the Bad Bank, foreign investors must allowed to invest in the Bad Bank from the very beginning so that the Bad Bank does not remain under capitalised.

    Along with the investors, Bad Bank shall also include experts from all around the globe to deal with complex NPAs. Also, in an event when it takes time to resolve NPAs, it’s the experts who can use their expertise to deal with the assets meanwhile a suitable buyer can be found.

    Having a Bad Bank will let the banks continue the lending however, it will bring its own challenges but this seems be to be the best suited time for its incorporation for the recovery of the banking sector. It’s also significant to not completely rely on a successful model of a foreign nation as India will need its Bad Bank to meet its own challenges. Since, the resolution procedure stands suspended in such circumstances banks specially the Public sector banks need to have confidence to keep up the lending. In such circumstances it’s important to segregate distressed assets and let them be realised by the experts.

  • IBC Ordinance: A Double-Edged Sword for MSMEs

    IBC Ordinance: A Double-Edged Sword for MSMEs

    BY JUBIN MALAWAT AND BHAVYA KALA, SECOND-YEAR STUDENTS AT RGNUL, PUNJAB

    Introduction

    CoVID-19 has created worst ever recessional conditions in the markets worldwide leaving everyone in distress. In light of the prevalent market conditions and the anticipated future contraction in the market, the government of India has introduced a few stabilizing and corrective measures keeping in mind the vulnerability of the Micro, Small and Medium Enterprises (‘MSMEs’) in these challenging times. One of the best examples of the measures adopted by the Union Government is the vision of making India self-reliant, ‘Atmanirbhar Bharat’. The government has also introduced a few changes in the Insolvency and Bankruptcy Code, 2016 (‘IBC’) with an intent to safeguard the MSME sector from the leash of CoVID-19 and improve the ease of doing business.

    Although the intent of the government behind the promulgation of ordinance dated 5th June 2020 was to amend the IBC to provide some breathing space to the MSME sector, the measures have had some unintended effects on the sector. This piece analyses the impact of the recent ordinance to amend the IBC on the MSME sector and highlights the gaps which are to be bridged. Bridging of these gaps would not only make MSMEs sustainable in the times of economic downturn but also help India become ‘Atmanirbhar’. 

    Highlights of the ordinance introducing sec. 10A to the IBC:

    1. Suspension of S. 7, 9 and 10 of the IBC for default arising on or after 25.03.2020 till 25.09.2020 and extendable up to 25.03.2021.
    2. No new application shall be allowed to initiate fresh CIRP from 25.03.2020 for a minimum period of 6 months extendable up to 12 months as and when notified.
    3. No application shall ever be filed for the initiation of CIRP of a corporate debtor concerning any default arising during disruption period starting from 25.03.2020.
    4. An application seeking initiation of fresh CIRP shall be allowed only if the following two conditions are fulfilled:
      • The default arose before 25.03.2020.
      • The said default amount is greater than Rs.1 Crore. 

    Impact on MSME Sector

    Micro, Small and Medium Enterprises, as defined in S. 7 of MSMED Act 2006, contribute significantly to the economy of the nation. It employs around 111 million people and accounts for approximately 48% and 28% of the nation’s export and GDP respectively. Hence, it is clear the MSME sector remains the backbone of the nation’s economy and deserves to be protected in these unprecedented times. The legislators with a similar intent promulgated an ordinance amending the IBC but the letter didn’t seem to match to the authority’s intent.

    Recent changes in the IBC, including the rise in the default threshold under S. 4, suspension of S. 7, 9, and 10, and insertion of the proviso in S. 10A providing blanket protection to the debtors defaulting during the disruption period starting from 25th March have raised debates as to whether the ordinance helps MSMEs or harms them. Owing to the recent ordinances, MSMEs have been impacted in two ways, i.e. being a creditor and being a debtor.

    MSMEs being the Operational Creditors

    As per the study by the Brickwork Ratings, MSMEs have approximately Rs.303 lakh crore of their funds stuck with large corporates in the form of receivables. Hence, it can be asserted that MSMEs play a vital role in the economy being operational creditors to the large corporate houses. In the times of CoVID-19 when the whole economy is struggling to escape from the rippling effect over the economy, it becomes all the more important to ensure that the smaller firms contributing to the nation’s economy on such a large scale are duly paid back.

    • Suspension of S. 9 adding to the plight of MSMEs

    The un-amended IBC framework facilitated negotiating leverage to the smaller firms against the mighty corporates as the MSMEs could enforce S. 9 of the IBC to recover their dues in a time-bound manner. But the recently introduced ordinance, although passed to provide breathing space to the distressed firms, has made the MSME firms helpless by disabling them to invoke insolvency proceedings for the recovery of their dues. In numerous cases, it has been that the corporate houses, fearing wide-ranging ramifications, settled their debts against the smaller firms after the application for insolvency proceeding was filled but before the same was taken up by the tribunals.

    According to the data provided by the Insolvency and Bankruptcy Board of India, up to March 2020, 157 applications for corporate insolvency resolution process were withdrawn under S. 12A of the IBC, of which 64 cases involved amounts less than Rs.1 crore. The reasons for early withdrawal of cases were full settlement with the applicant and other settlement with creditors.

    Now under the garb of amended IBC framework, the corporates who earlier feared harsh consequences of the insolvency proceedings would now fearlessly strong-arm the smaller firms by defaulting the repayment of their dues. Furthermore, the redressal forums other than NCLT fail to provide timely redressal adding to the plight of the creditors.

    • Proviso incentivizing corporate debtors to default

    Apart from the above-stated problems, the proviso in the newly introduced S.10A has placed the MSMEs in a vulnerable position by allowing complete amnesty to the corporate debtors who default during the disruption period. The expression “no application shall ever be filed” has opened the flood gates of varied interpretation.

    Recently, the Hon’ble National Company Law Tribunal, Chennai Bench in Siemens Gamesa Renewable Power Private Limited v. Ramesh Kymal interpreted the proviso to S. 10A and held that there shall be no insolvency proceedings ever against the defaults which arise after 25.03.2020. This interpretation allows an exemption to the defaulting debtors whether or not such default has arisen due to the economic downturn in the times of the pandemic.

    If such an interpretation is taken up, it would incentivise the non-payment of dues by the corporates and would lead to the MSMEs turning up into non-performing assets. In these trying times when the economy is struggling to move out of the rippling effect, fall of MSME sector would adversely impact the nation’s economy. Among other things, a decline in MSME sector would cause a steep rise in the unemployment rate and set off India’s ambition of becoming self-reliant. 

    MSMEs being the Corporate Debtors

    Objectives of IBC include maximization of the value of assets, to promote entrepreneurship, availability of credit and balance the interests of the stakeholders. In consonance with the objectives, S.10 facilitates an exit route to a corporate debtor wherein the loss-making business is transferred to a prospective resolution applicant based on a resolution plan to revive the sick enterprise. The resolution plan is sanctioned by the adjudicating authority keeping in mind the interests of all the stakeholders.

    Blanket suspension of S.10 defeats the core objective of the IBC to revive and not to liquidate the enterprise. Suspension of the section would lead to a slow death of the business enterprises which could be revived with a prospective plan. The ordinance would not only deprive the corporate debtor of rehabilitating the business but also force him to continue the distressed business. This would not only deplete the value of assets rather than maximizing them but also lead to the winding-up of a potentially viable business.

    Conclusion

    In the testing times of this pandemic, although the government has tried to modify the provisions of the IBC with a bonafide intention to provide safeguard to the MSMEs, it has ended up worsening the situation for them. The recent ordinance adding S. 10A in the IBC and the notification has created loopholes which would act against the interest of the MSMEs. These would make the smaller businesses vulnerable in the hands of larger corporates.

    Furthermore, these additions and modifications to the IBC would act as a barrier for MSMEs to pull off under the government’s “Atmanirbhar Bharat” initiative. The liquidity crunch faced by the MSMEs owing to the suspension of S. 7 and 9 of IBC would compel the MSMEs to avoid further payments of their debtors and undergo unnecessary litigation which would certainly raise the burden of the MSMEs in the near future. Moreover, blanket suspension of S. 10 of IBC will destroy every hope of reforming viable MSMEs.

    Keeping in mind the flickering market conditions and the upcoming competition in domestic as well as international market, more focused actions are called for on the part of the authorities. As pointed out by the Hon’ble Finance Minister in her press note, a special insolvency framework needs to be introduced under S. 240A of IBC accompanied with other focused initiatives. This would not only provide leverage to the MSMEs against the powerful corporates but also help India holdup its ambition of self-reliance.

  • Material Influence Test – A Convoluted Approach For Determining Control

    Material Influence Test – A Convoluted Approach For Determining Control

    By Priyashi Chhajer, fourth-year student at NLU, Jodhpur

    The concept of control has been laid down in various statutes and defined differently as per their requirements. Competition Act, 2002 (‘Act’), Companies Act, 2013, SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, Foreign Direct Investment policy are a few examples. ‘Control’ is defined in explanation of section 5 of Act, which reads as “Controlling the affairs or management by one or more ‘enterprises’ or ‘groups’, either jointly or singly, over another enterprise or group.” Acquiring control of enterprise may lead to appreciable adverse effect on competition and is therefore required to be notified to the Competition Commission of India (‘CCI’).

    An uncertain and wide definition was adopted in the Act as the legislature intended to determine acquisition of control on factual basis. However, because of an absence of clear and specific guidelines the scheme of control continues to be ambiguous. The uncertain boundaries of control have also led to inconsistency in interpretation resulting in improper imposition of penalties.

    Recently Ministry of Corporate Affairs introduced Draft Competition (Amendment) Bill, 2020 in February wherein; material influence over the affairs of business and management has been proposed as a standard to determine control. This test on one hand will put large number of transactions under scrutiny and help in monitoring competition in market; but at the same time it will give excessive power to CCI thereby hampering the ease of doing business.

    Ambit of Control – Asymmetrical Interpretation Leading to Confusion

    As a matter of practise, CCI  has attempted to assess control by the yardstick of “decisive influence” over the affairs of another enterprise or group by way majority shareholding, veto rights or contractual agreements. However, these boundaries have diluted over the period of time.

    In Multi Screen Media Private Limited Case,  veto rights over strategic commercial decisions were exercised. CCI in this order extended the ambit of control to  not only proactive rights but also negative and affirmative rights. In subsequent RB Mediasoft/ IMT order, mere right to convert zero coupon optionally convertible debentures into equity share,  was  considered as control. Threshold was further lowered in case of Jet- Eithad, where  Eithad acquired 24% stake without any veto or quorum rights, along with the right to appoint 2 out of 12 directors.  CCI took into account  Eithad’s ability to control the managerial affairs of business and considered the transaction as acquisition of control.

    Later on, CCI started shifting the threshold towards material influence for determining ability to exercise control. In Argium Inc. and Potash Corporation of Saskatchewan, Inc., it was observed that although Potash Corp. held 14% interest, it still had the capacity to control the affairs as it was leading in production in global market and thus might exercise influence.

    In the recent  Ultratech/Jaiprakash Order , CCI defined material influence as “the lowest level of control, implies presence of factors which give an enterprise ability to influence affairs and management of the other enterprise including factors such as shareholding, special rights, status and expertise of an enterprise or person, Board representation, structural/financial arrangements etc.” CCI expanded the ambit of control to include material influence and not just de facto and de jure control (acquiring more than 50% of voting rights by way of shareholding).

    Later in 2018,  this expansive threshold was reiterated in Meru Travel Solutions vs. ANI Technologies and Ors, where CCI ruled that Softbank has ability to exercise  material influence even though it is a minority shareholder in Ola and Uber. Therefore, even the acquisition of  minority shareholding, for investment purposes may attract section 5 and section 6 under competition Act.

    The scope of  policies is left wide and inclusive, so as for the CCI to interpret it in a manner favouring competition law objectives. The strict definition may impede promotion of social and economic cause. However, inconsistent factual determination of control by regulatory body has clearly lead to dysfunctionality, as it has breed vagueness for business entities and lack of clear legislative guidance has vested excessive discretionary power with CCI.  

    Complexities  that are Propagated by “Material Influence” Test

    Firstly, unavailability of codified guidelines and the open-ended interpretation of ‘control’ adopted by CCI will empower them with unrestricted power to take up suo-moto cognizance of any transaction. For instance, in Jet – Eithad Case where there was acquisition of mere 24% stake without any significant rights; CCI still took the matter into its hands and reviewed the deal. Not only this, disparity amongst different regulators makes compliance unmanageable  for the businesses . As was seen in abovementioned case where affected by the CCI’s orders, SEBI reopened the case and ordered to investigate the matter again.

    Secondly, even when there is likeliness of appreciable adverse effect on competition, the transaction needs to be notified in accordance with section 6(2) of Act. Sporadic definition and lack of precedential clarity will result in ambiguity pertaining to determination of transactions that needs to be notified. There have been instances wherein the CCI took 60-90 days to conclude prima facie inquiry, which in turn should be completed in 30 days. Open ended test of control will bring more transactions under review which will lead to delay in execution of  transactions and deterrence in ease of doing business.

    Thirdly, expansion of definition of control has also led to expansion of the meaning of ‘group’ under explanation (b) of section 5. In this explanation group is considered to be formed when “two or more enterprises are directly or indirectly in position to control the management or affairs of another business”. The new threshold will affect the applicability of  numerous exemptions available to intra group dealings. Also, it will be difficult to determine horizontal and vertical overlaps during merger filings.

    Fourthly, many financial investments and private equity transactions will now come under the review of competition commission as because of the expansive definition the pure minority protection rights can also now be seen as negative control triggering mandatory notifying obligation under section 6 of the Act.

    Position of Law in other Jurisdictions

    Indian regime is similar to that of the EU. However unlike in India, EU provides detailed guidelines for interpretation of control. Article 3(2) of ‘Council Regulation (EC) No 139/2004 on the control of concentrations between undertakings’ defines control as the ‘possibility of exercising decisive influence on an undertaking’. It implies that one may or may not actually exercise decisive influence but even a slightest possibility of exercising effective decisive influence is ample enough to bring it under the ambit of control. There are no particular thresholds specified to assess when there is change of control. However, European Commission issued a Consolidated Jurisdictional Notice, which acts as a guide and tool for interpretation. It anticipates and provides for all possible instances when merger regulations can be triggered. Possibility of exercising decisive influence can be on the basis of right, assets or contracts, or any other means, either separately or jointly.

    In the US, the concept of control is defined in Hart-Scott-Rodino Regulation (‘HSR’). Section 7 of Clyton Act  provides for three tests – the commerce test, the size of transaction test and the size of person test. For the transaction to fall under HSR filing obligation, above tests must be fulfilled. Generally, acquisition of voting rights and assets is looked into to determine change in control.

    CCI has failed to remedy the indefiniteness surrounding the concept of control. International organisations such as  OECD endorse global uniformity for the definition of control. Unfortunately, the domestic inconsistency has resulted into cross-border disparities for the understanding of control.

    Conclusion

    A transaction can be reviewed under section 5 of Act only if there is change in control. Earlier it was decided by way of decisive influence over management or affairs of business by way of majority shareholdings, veto rights and contractual agreements.  By virtue of this threshold those transactions comprising acquisition of non-controlling powers, however having appreciable adverse effect on competition were left unchecked. To alter the situation Competition Law Review Committee, 2019 proposed to lower the threshold of control so as to include those minority shareholdings that can affect competition.

    Material Influence test is the lowest threshold of control. As a consequence of this, majority of combination transactions will come under review process. It will increase the load of the CCI with insignificant notifications and will also be onerous for the parties involved in transactions. Moreover, lack of guidance and inconsistency in precedential trail adds to the existing confusion on kinds of transactions that are eligible for notification.

    Therefore, there is pressing need to make the market investor friendly for economic growth. Sizable problems posed by the proposed amendment weighs down the benefits that it purports. Cues must be taken from other jurisdictions so as to promote certainty in domestic regime. CCI must tread with caution so that ease of doing business is not affected and market entities do not get caught in clutches of cumbersome notifying process, unforeseen penalties and vagueness.