The Corporate & Commercial Law Society Blog, HNLU

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  • CONSOLIDATION WITHOUT SAFEGUARDS: ANALYSING THE SEBI FPI MASTER CIRCULAR

    CONSOLIDATION WITHOUT SAFEGUARDS: ANALYSING THE SEBI FPI MASTER CIRCULAR

    BY KHUSHI JAIN AND UJJWAL GUPTA, SECOND – YEAR STUDENT AT DR. RAM MANOHAR LOHIYA NATIONAL LAW UNIVERSITY, LUCKNOW

    INTRODUCTION

    On 5 December 2025, the Securities and Exchange Board of India (‘SEBI’) issued a Consultation Paper on Review of Master Circular for Foreign Portfolio Investors (‘FPIs’) and Designated Depository Participants (‘DDPs’) (‘Consultation Paper’) proposing the consolidation of the existing consultation paper. This paper aims to streamline hitherto fragmented regulations by consolidating multiple circulars and guidelines into a single instrument. Through the Consultation Paper, efforts are made to revise disclosure and compliance for FPIs and DDPs, beneficial ownership norms, compliance obligations and the role of intermediaries.

    This piece first sets out the key changes introduced through the consolidation. Second, the impact of these changes is analysed on various stakeholders including FPIs and DDPs. Third, key concerns arising from the proposed structure are identified. Towards the end, the Indian approach within a comparative cross-jurisdictional regulatory perspective is discussed. The piece is concluded by offering plausible reforms to address the aforementioned concerns so as to preserve efficiency and accountability.

    KEY PROPOSED CHANGES

    The regulations of FPIs are governed by a layered statutory framework under the SEBI Act 1992, SEBI (Foreign Portfolio Investors) Regulations, 2019 (‘2019 Regulations’) and SEBI Master Circulars and Operational Guidelines. The Consultation Paper would reshape the enforceability provisions of FPI regulation.

    Prominently, the Consultation Paper proposes a comprehensive consolidation of multiple circulars, FAQs, and interpretative notes into a single revised Master Circular governing FPIs and DDPs. It operates as de facto subordinate legislation. Building on this, Regulation 4(c) of the 2019 Regulations mandates FPI to disclose beneficial ownership in accordance with the Prevention of Money Laundering Act, 2002 and Financial Action Task Force Recommendations. The Consultation Paper strengthens look-through obligations and identifies natural persons exercising “ownership or control” in a multi-layered investment structure.

    Substantiating on the above provisions, DDPs are provided with registration-related functions and limited ongoing oversight through Regulation 12 of the 2019 Regulations. The Consultation Paper rather shifts their role to frontline regulatory gatekeepers. It inculcates their responsibility for continuous validation of their compliance, enhancing due diligence on FPIs. They are supposed to develop Standard Operating Procedures (‘SOPs’) for validation, real-time monitoring of validation tools such as corporate group repositories, and freeze codes, straining systems under tight timelines like 7-Day Type I change notification.

    This fundamentally extends the disclosure, reporting, and compliance requirements for FPIs by way of more frequent reporting, monitoring and verification of investor information on a continuous basis, and ongoing compliance certification requirements.

    STAKEHOLDER IMPACT ANALYSIS

    There will be asymmetric effects of the proposed changes among the different groups of stakeholders. The changes redistribute regulatory risks and operational burden, having several unintended effects regarding market depth and stability.

    The compliance architecture model can disproportionately affect the passive institutional investors like pension funds and sovereign wealth funds because their investment approach is long-term and non-controlling in essence. Lack of any provision on punitive measures for transitional non-compliance can create considerable legal and commercial uncertainty for market participants. This could result in sudden FPI exits, higher cost of capital for Indian issuers, and higher volatility in the secondary markets, thereby violating Section 11 of the SEBI Act, 1992.

    The Consultation Paper enhances the supervisory authority of SEBI, that could earlier detect concentrated or opaque market positions. However, it also increases institutional dependence on delegated supervision by DDPs, raising coordination and accountability challenges. SEBI may face allegations of inconsistent enforcement or excessive discretion.

    Lastly, the framework may influence volume, composition and stability of foreign capital flows from a market-wide perspective. It relaxes International Financial Services Authority-based FPIs, allowing up to 100% Non-resident Indians/ Overseas Citizens of India/ Resident Indian  participation under strict conditions like pooling, diversification (e.g., no more than 20% in one Indian entity), and independent managers. Foreign institutional investments in the long term may be discouraged due to increased complexities in complying with the debt and equity portions that are expected to be supported by foreign investments. Foreign passive institutional investors may decrease the overall efficiency of the market as a result of less participation in the secondary markets.

    KEY CONCERNS

    Consolidation would result in the conversion of interpretative guidance into mandatory compliance and the expansion of enforceable obligations without any amendment to the 2019 Regulations. It dilutes the effect of delegated legislation principles. Many provisions function as soft law and are not binding rules under Section 30 of the SEBI Act. Thus, the consolidation would make them a binding compliance standard, transforming advisory norms into enforceable duties.

    Moreover, unlike regulations, circulars are not subject to safeguards like legislative scrutiny. Consolidation would thus advance the power of SEBI to alter the compliance structure without any amendment. Consequently, it would also amend the scope of provisions through drafting techniques. Conditional, context-specific, or risk-based obligations are inculcated into general obligations that are to be applicable across the FPI ecosystem. The Consultation Paper could result in omission of caveats and qualifiers. It would broaden the regulatory net without re-examining the substantive framework set out in Regulations 4 and 22 of the 2019 Regulations.

    Furthermore, the Consultation Paper fails to address the doctrine of regulatory equivalence for entities domiciled in jurisdictions that are FATF-compliant. Contradicting the proportionality test, already regulated foreign investors can duplicate and disproportionate disclosure burdens.

    The expansion of the ambit of DDPs leads to regulatory outsourcing. However, it neither ensures any statutory immunity nor delineates liability in erroneous determinations or misclassification of risk. It raises pertinent concerns regarding liability attribution.

    Concerns about constitutional guarantees under Article 19(1)(g) and 19(6) are also raised. Serious concerns about ex post facto interpretation can also exist due to the absence of procedural safeguards of supervisory discretion. It may implicate the principles of audi alteram partem and predictability of the rule of law in financial regulation under the capital regime in India.

    For measures that limit market access, the SEBI Act has laid down a specific procedure to be followed. This includes the requirement that the actions under Section 11B, penal measures under Section 15-I, and suspension or cancellation under Section 12(3) all need a well-reasoned order, prior hearing, adherence to principles of natural justice, and can be challenged in the SAT under Section 15T. As opposed to this, the draft Master Circular for Foreign Portfolio Investors (FPIs) and Designated Depository Participants (DDPs)  (‘Master Circular’) allows trading restrictions via intermediary-led SOPs, without SEBI adjudication, hearing, or an order that can be appealed, and thus sidesteps essential safeguards given in law.

    CROSS-JURISDICTIONAL ANALYSIS

    In the United Kingdom (‘UK’), disclosure or Anti-Money Laundering (‘AML’) failures of foreign investment entities are dealt with by the Financial Conduct Authority through a formal enforcement procedure. Usually, non-compliance leads to supervisory engagement and, if necessary, formal enforcement proceedings initiated by a warning notice. The impacted entities can make representations before an adverse decision is taken against them, and the final decisions are made by the independent Regulatory Decisions Committee. Market access restrictions or licence limitations only arise from a reasoned decision that is subject to appellate review by the upper Tribunal. Unlike as contemplated under the Master Circular, coercive market access restrictions in the UK cannot be imposed by intermediaries and remain exclusively within the Financial Conduct Authority’s (‘FCA’) adjudicatory enforcement process.

    The European Union (‘EU’) framework for portfolio investment compliance operates through MiFID II and anti-money laundering directives. MiFID II does not prescribe automated investor account blocking for Know Your Costumer (‘KYC’) non-compliance; rather, it gives national competent authorities supervisory and investigatory powers, whilst any limitation on market participation must be derived from national law or the trading venue rules. The AML system requires customer due diligence and allows firms to suspend transactions as part of their internal compliance controls. Moreover, when a public authority orders a restriction, the measure is governed by the national procedural law which transposes EU directives and is further guaranteed fundamental procedural safeguards, such as the right to challenge administrative measures before an independent body, and not outsourced to intermediaries.

    In Singapore, the Monetary Authority of Singapore (‘MAS’) supervises AML and disclosure compliance under the Securities and Futures Act through a risk-based supervisory framework. MAS deals with KYC or disclosure breaches by means of supervisory engagement, directions, penalties, or license-related action after the determination of the breach. Automatic trading suspensions or market access suspensions are not usual, and any such coercive restrictions follow well-reasoned decisions to guarantee proportionality and centralised enforcement. Importantly, MAS does not give coercive enforcement powers to market intermediaries, unlike the expanded role that has been considered for DDPs.

    Viewing these jurisdictions collectively, it can be observed that greater transparency and AML compliance can be achieved without having to rely on automated market exclusion mechanisms that bypass prior notice or independent assessment. In this context, the Master Circular delineates a stricter model of regulation than what is necessary, as shown by international practice.

    CONCLUSION AND SUGGESTIONS

    Based on lessons drawn from frameworks discussed above, it is possible that India could prescribe regulatory and procedural safeguards. The following developments can work in tandem for coherent enforcement. 

    Primarily, SEBI should expressly draw a distinction that consolidation of circulars does not transform interpretive guidance or FAQs into binding compliance requirements unless issued under the 2019 Regulations or Section 30 of the SEBI Act. Along with, any provision extending substantive requirements should be brought about only through formal regulatory amendment, following the prescribed legislative safeguards.

    Second, SEBI should desist from retaining conditionality, context-specific qualifiers and risk-based caveats in existing circulars. The Master Circular should operate as an operational guide rather than a source of new general obligations, ensuring that Regulations 4 and 22 of the 2019 Regulations remain the primary substantive framework.

    Third, the consolidated framework must specifically acknowledge the concept of regulatory equivalence applicable to FPIs incorporated in FATF-compliant and well-regulated countries. The requirement of disclosure and KYC must be customized in terms of risks associated with each jurisdiction and type of investor and system significance.

    Fourth, concerning the absence of any measures to shield FPIs from penalties for non-compliance in the transition period, SEBI should provide a definite period for existing FPIs during which non-compliance resulting solely from the newly consolidated obligations shall not be penalised. This will ease both uncertainty and avert sudden market exits.

    Finally, SEBI must clearly define the scope of DDPs’ authority, provide statutory protection for bona fide actions and specify liability allocation in cases of erroneous determinations or misclassification. Coercive or market-access-restrictive decisions should remain exclusively within SEBI’s domain.  Additionally, any restriction on trading, account operations or market access must be preceded by notice, opportunity of hearing, and a reasoned order passed by SEBI under Sections 11B, 12(3), or 15-I of the SEBI Act. Intermediary-led SOPs should not substitute statutory adjudication or appellate remedies under Section 15T.

    The Consultation Paper is veritably an important step towards simplifying the regulation of foreign portfolio investment through consolidation. However, as the authors point out, said consolidation should not weaken statutory protections, proportionality, accountability, or procedural fairness under the SEBI Act and the 2019 Regulations. If there are no adequate safeguards, the draft Master Circular may, in fact, increase the compliance and enforcement burdens and consequences beyond its legal basis. Whether or not this consolidation will ultimately strengthen India’s capital markets depends on the degree of care SEBI exercises in reconciling efficiency and legality in the final framework.

  • Judicial Shift in Treaty Taxation: The Tiger Global Judgment

    Judicial Shift in Treaty Taxation: The Tiger Global Judgment

    BY CHEENAR SHAH, VANSHIKA BANSAL, THIRD- YEAR STUDENT AT GUJARAT NATIONAL LAW UNIVERSITY

    The Supreme Court (‘the Court’) on January 15, 2026, delivered a landmark judgment in the case of The Authority for Advance Rulings (Income Tax) and Others v. Tiger Global International II Holdings (‘Tiger Global case’). The Court determined that the General Anti-Avoidance Rule (‘GAAR’) can supersede treaty benefits and ‘grandfathered’ investments if the exit arrangement lacks any commercial substance. By ruling that a Tax Residency Certificate (‘TRC’) is no longer a conclusive proof of eligibility, the judgement breaks down the classic Mauritius Route and investors must now demonstrate real economic control and management to claim benefits under the India- Mauritius Double Taxation Avoidance Agreement (‘DTAA’).

    BACKGROUND

    Tiger Global invested in Flipkart, Singapore, between October 2011 and April 2015. Flipkart generates a significant part of its revenue through assets in India. In 2018, Tiger Global sold its stake to Walmart Inc. as part of a bigger acquisition of a majority stake in Flipkart.  

    Tiger Global sought to obtain a capital gains tax exemption under Article 13(4) of the DTAA, as it held a valid TRC of Mauritius, and accordingly, filed an application under Section 197 of the Income Tax Act, 1961 (‘IT Act’) to issue a nil withholding tax certificate. However, the Indian tax authorities stated that the exemption cannot be claimed, as Tiger Global lacked independent decision-making control and management.   

    Aggrieved by the decision, the Appellant approached the Authority for Advance Rulings (‘AAR’), which ruled in favour of the Tax Authorities’ decision. However, the decision was overturned by the Delhi High Court on grounds of arbitrariness. The matter was thereafter challenged before the Supreme Court.  

    JUDICIAL PERSPECTIVE

    The Court determined on three major issues: firstly, whether the GAAR could supersede capital gains exemptions under the treaty despite grandfathering of investments made before 2017; secondly, whether the Limitation of Benefits (‘LOB’) provision of the DTAA precluded application of the GAAR; and thirdly, whether the possession of a TRC continued to be appropriate evidence of entitlement to claim relief under the treaty in the post-GAAR regime.  

    The Court deviated from the deferential approach and placed Indian tax adjudication under the post Base Erosion and Profit Shifting (‘BEPS’) international anti-abuse standards that emphasise on the economic substance of a treaty rather than the form. The advantages under the treaties were recharacterized as qualified privileges that depend on commercial presence and control rather than mere residence.

    ANALYSIS

    Why ‘Grandfathering’ is Not a Shield 

    The core of the legal dispute hinges on the interpretation of the GAAR, codified in Chapter XA of the IT Act. Tiger Global argued that their investments were protected by the ‘grandfathering’ provisions of Rule 10U(1)(d), which excludes income from the transfer of investments made before April 1, 2017. They contended that since their shares were acquired between 2011 and 2015, the gains were immune from GAAR scrutiny. Nevertheless, the Court took a more sophisticated mode of analysis and made a distinction between an investment and an arrangement. While the investment occurred prior to the cut-off date, the arrangement of the specific share-sale transaction took place in 2018. The result of Rule 10U (2) is that the provisions of GAAR will apply to an arrangement regardless of the date of its entering into, provided the tax benefit will be obtained on or after April 1, 2017. 

    This points to the fact that grandfathering is not an anti-tax avoidance license. In case the Revenue can show that an arrangement does not have commercial substance or the arrangement was entered into with a major purpose of receiving a tax benefit, then the age of the original investment will not rescue the arrangement as an impermissible avoidance arrangement. Over the years, international investment has been flowing into India, thinking that any old investments were not subject to modern anti-avoidance regimes through grandfathering. The Court, however, found that GAAR could be used in relation to exits that could be regarded as impermissible avoidance arrangements under Section 96 of the IT Act.  

    Such a jurisprudential change will presumably require the re-pricing of Indian assets, with investors now having to add a treaty risk premium to the assets to reflect latent capital gains liabilities. This shift also demonstrates that domestic anti-abuse provisions have become more prevalent than treaty concessions. Additionally, the ruling exposes prevailing offshore investments to the risk of long litigation. The onus of proof has changed, and when the Revenue proves a prima facie case that the investor is engaged in tax avoidance, it is incumbent upon the latter to prove that the motive was genuine. Tax neutrality in this new environment cannot be considered an unchanging part of an investment strategy. 

    The Coexistence of SAAR and GAAR 

    The DTAA 2016 Protocol added a LOB provision that specifically targets so-called shell or conduit companies. This clause provides a quantitative threshold where a company is not considered a shell if its total expenditure on operations in Mauritius is at least 1.5 million Mauritian Rupees. Tiger Global argued that because they satisfied these objective LOB criteria, the Revenue was precluded from invoking GAAR. 

    This either-or analysis was opposed by the Court, and it was held that Specific Anti-Abuse Rules (‘SAAR’), like the LOB clause, and GAAR can and do coexist. LOB clause is a transitional objective filter, but GAAR is a supervening subjective code that is meant to address aggressive tax planning. It may also be disqualified under GAAR, even when an entity meets the spending requirements of the LOB, the primary purpose of the arrangement being to claim a tax benefit. 

    This change has far-reaching consequences for international tax planning. Through its focus on the main purpose of the test, the Court has indicated that even transactions which technically meet all the requirements of SAAR may be disqualified in case their purpose is mainly tax-oriented. This causes a shift of emphasis from box-ticking compliance to the creation and documentation of an effective, authentic business point behind each tier of an investment structure. 

    Substance over Form and Piercing of the Corporate Veil 

    Further, the Court emphasised on the reality of the corporate structure under the tax system in India rather than the formal adherence to the treaty. The legislative effect of the Central Board of Direct Taxes (‘CBDT’) Circular No. 789 of 2000, which considered a TRC as adequate evidence of residence to claim benefits, was further emphasized in Union of India v. Azadi Bachao Andolan. However, the present case recalibrates on that jurisprudence in the light of the contemporary legislative framework and limits its application. The court affirmed that the circulars are binding on the tax authorities, but it is important to note that they are supposed to be applied within the legal environment in which they are issued. The amendments implemented by the Finance Act, 2012, Chapter X-A GAAR incorporation, and changes to Rule 10U have essentially changed this situation by mandating an evaluation of effective control and management. Therefore, the Court ruled that though a TRC is a requirement, it is not a conclusive requirement under Section 90(4) of the IT Act. 

    Additionally, the doctrine of substance over form as applied in the case of McDowell and Co. Ltd. v. Commercial Tax Officer was referred to emphasize that colourable instruments that aim to evade tax cannot be justified as tax planning and that cross-border structure should be evaluated based on the actual economic nature of the arrangement and not the legal structure. 

    The Court affirmed the findings of the AAR and approved functional piercing of the corporate veil, observing that the real control and power of decision-making of Tiger Global was not in Mauritius, but in the United States. The use of the ‘Head and ‘Brain’ test,  along with the Place of Effective Management described the Mauritian entities as a see-through structure, which did not have an independent existence. This decision, therefore, confirms that real commercial substance is required of treaty benefits and tax authorities are permitted to ignore intervening corporate levels where control is evidently exercised in other areas. 

    CONCLUSION

    The case of Tiger Global is an important judgment that indicates India’s attitude towards how the advantages of the tax treaty can be construed concerning the cross-country corporate arrangements. The Court not only simplified confusion about the India- Mauritius DTAA but also suggested a gradual change in the attitude to rely only on the formal treaty residence to the tactical review of the investment and control structure of the corporate management. It demands a change in the box-ticking compliance to ex-ante accounting of the presence of a strong commercial justification. In addition, the Court has distinguished investments and arrangements, which means that the exit structuring will now be evaluated irrespective of the entry date; even the grandfathered investments made before April 2017 will be taxed according to GAAR when the exit arrangement is defined as a tax avoidance measure. Thus, PE/VC frameworks must clarify their geography of control and verify expenditure limitations as per the LOB provision.

  • Bridging the Gap in Indian Group Insolvency: Integrating Planning Proceedings

    Bridging the Gap in Indian Group Insolvency: Integrating Planning Proceedings

    BY KRITI MEHTA, THIRD- YEAR STUDENT AT NIRMA UNIVERSITY, AHMEDABAD

    INTRODCUTION

    The world has witnessed the prevalence of enterprise groups with the advent of globalisation and market integration. Particularly in India, as of March 2020, companies which are listed in the NIFTY 50 Index reported having an average of 50 subsidiaries. Despite restrictions by the Ministry of Corporate Affairs on subsidiary layers, complex corporate structures persist, creating challenges like operational linkages, group disintegration, and loss of synergies. In the absence of a comprehensive framework for resolution, it results in reduced value of the asset, inefficient treatment of creditors of solvent entities within the enterprises, prolonged delays, among others. Therefore, a holistic framework for group insolvency becomes pertinent to prevent inconsistent adjudication and erosion of collective enterprise value.

    Firstly, the blog evaluates the pre-existing international approaches to group insolvency and examines the legislative response of the UK to the same. Secondly, the blog argues that India’s current insolvency framework is inadequate for group insolvency and adopting the procedure for planning proceedings as proposed in the United Nations Commission on International Trade Law (‘UNCITRAL’) will enable coordinated restructuring. Against this backdrop, it is imperative to acknowledge that the present discussion is confined to the domestic dimension of group insolvency only

    INTERNATIONAL FRAMEWORK ON GROUP INSOLVENCY  

    Internationally, two remedies address complexities arising in group insolvency. These are procedural coordination and substantive consolidation.  Procedural coordination preserves the principle of separate legal existence as laid down in Salomon v. Salomon. Additionally, it also streamlines procedural elements like the filing of cases, timelines of submissions, and coordination among key stakeholders like insolvency professionals and creditors. Conversely, substantive consolidation dispenses with the legal principle of separate legal entity by pooling all the assets and liabilities of the entities for insolvency resolution. This approach leads to the equitable treatment of creditors, particularly where the management of corporate entities is intertwined and meaningful disentanglement is not probable.

    However, this approach has drawn significant criticism from scholars worldwide as it undermines corporate autonomy. These companies have separate legal existence, but they are a single economic unit; therefore, the court has to lift the corporate veil and give precedence to the single economic entity principle. Consequently, its application is an exceptional remedy, invoked only when a separate legal existence will frustrate the principle of equitable distribution during resolution. While these approaches are developed in other jurisdictions, their legal adoption in India remains limited, necessitating judicial innovation. In the Indian insolvency regime, the doctrine of a separate legal entity is deeply rooted. This necessitates the adoption of procedural coordination between the corporate entities, since the substantive coordination will lead to pooling of assets and liabilities. This undermines the principle of separate legal existence. Thereby, procedural co-ordination aligns with the Indian jurisprudential analysis without unsettling the settled doctrines of separate legal existence and single economic entity principle.

    LEGAL FRAMEWORK IN INDIA

    The Insolvency and Bankruptcy Code, 2016 (‘IBC’), lacks a legal framework governing group insolvency. Judicial interpretation has played a pertinent role in filling the legislative vacuum. In Embassy Property Developments Private Ltd v. State of Karnataka, the Court acknowledged the jurisdiction of the National Company Law Tribunal (‘NCLT’) to consolidate insolvency proceedings of entities that form part of the same corporate group under 60(5)(c) of IBC, 2016. Further, in State Bank of India v. Videocon Industries, the NCLT Mumbai bench evolved the twin test to determine the necessity of consolidation. The test examined certain ingredients, viz, common control, common liabilities, pooling of resources, interlacing of finance, intricate link of subsidiaries, singleness of economic units, and common pooling of resources. The court underscored that consolidation should be denied only if it is prejudicial to the stakeholders or violates the objectives of the code.

    The judiciary further shed light on the operational difficulties inherent in the group insolvency process through the Jet Airways case. The Apex court highlighted operational challenges in group insolvency, including intertwined assets and liabilities among the entities, a lack of coordination between authorities and the resolution professional (‘RP’), which leads to procedural delays. While the ad hoc measures are employed by the adjudicating authorities, the absence of codification impedes the successful resolution of group insolvency proceedings.

    Recognising these challenges, the 2025 Insolvency and Bankruptcy Code (Amendment) Bill 2025 (‘Bill’) attempted to introduce a robust framework for group insolvency by including Chapter V-A. However, these efforts are not immune to criticism as the Bill does not incorporate planning proceedings, as introduced by the UNCITRAL on Enterprise Group Insolvency (‘MLEGI’) under section 2(g).

    GROUP INSOLVENCY AND PLANNING PROCEEDINGS

    Planning proceedings are a specialised process under group insolvency resolution designed to develop a combined plan for restructuring or liquidation. This concept of planning proceeding is envisaged under MLEGI. Under Article 2(g), for proceedings to qualify as a planning proceeding in a domestic dispute, two conditions must be satisfied:

    1. The proceedings must involve the participation of more than one group member for implementing the group insolvency solution; and
    2. A group representative must be appointed, who will facilitate coordination among the group members.

    This indicates that the planning proceeding is an insolvency proceeding of one of the group members in which one or more groups of the enterprise voluntarily participate. A group insolvency solution is the objective of these proceedings. It may pertain to the reorganisation, sale or liquidation of assets or operations of the companies to protect and enhance the combined value of the group.

    The distinction between planning and the main group insolvency proceeding is conceptual as well as functional. A main group insolvency proceeding is initiated in the jurisdiction where the debtor has its Centre of Main Interest, and its scope is confined to the default of a corporate debtor only. Under the Indian insolvency regime, there is no parallel regulatory framework like Article 2(g) of MLEGI that addresses procedural coordination during insolvency. Recently, through judicial intervention, there have been group insolvency proceedings, but the efforts remain constrained.

    ANALYSIS

    Under the Indian insolvency regime, the rigid distinction between the parent and the subsidiaries, coupled with the exclusion of the related entities from participation in the insolvency process, undermines the revival of the corporate debtor. Through the incorporation of planning proceedings within the domestic framework, the insolvency process can become more proficient. Such coordination facilitates the revival of the CD owing to the efficient management of the assets between subsidiaries and the parent company.

    In contrast to the Indian framework,  planning proceedings operate as a coordinated framework which envisages the restructuring of the multiple entities in the enterprise group. The court is authorised to approve inter-company financing, stay of actions or central administrative actions within a group. This preserves the going concern value of the insolvent entities, and also curbs the domino effect of structural and functional complications post-insolvency on the related entities of the group.

    The model law states that planning proceedings generally warrant the participation of related solvent entities through the appointment of a single RP that serves multiple affiliates, and ensures better coordination and long-term profit. This is in contrast to existing Indian insolvency framework, which restricts participation to insolvent entities only, foreclosing the possibility of contribution of resources for a collective recovery. The adoption of planning proceedings offers several potential benefits for the domestic insolvency framework.  The Insolvency and Bankruptcy Board of India working group observed that the separate insolvency of the group enterprise reduces credit value. The consolidation of multiple Corporate Insolvency Resolution Processes (‘CIRP’) into one planning proceeding leads to maximisation of assets, reduction in duplication, prevents conflicting resolutions and leads to better coordination. It also incentivises stakeholders, like the creditors, to lend more finance as they can file inter-company claims.The planning model would therefore mitigate the domino effect of the group distress.

    Hence, the Indian legislature may warrant examination of a tailored framework by defining planning proceedings within the domestic insolvency framework, consistent with Indian standards. The authorities must avoid verbatim adoption of the model law as evidenced by the conundrum of interpretive debates on Section 34, Arbitration and Conciliation Act 1996, that arose during Gayatry Balwaswamy’s judgment.

    To incorporate domestic needs, the law must also authorise the NCLT to grant relief under the planning proceeding. The legislature may take reference to MLEGI, Article 26, which requires separate approval from a member of the CoC. Any plan approved under the planning proceeding should be binding on all the participants, upon sanction by the NCLT. When the international model law is calibrated to align with domestic needs, it will lead to better adjudication, coordinated restructuring, and the prevention of value erosion from fragmented proceedings.

    PLANNING PROCEEDINGS IN THE UK

    The United Kingdom is among the few jurisdictions which actively implemented MLEGI, particularly planning proceedings. The proposed framework authorises a group representative to seek relief, for instance, injunctions, stays on the order, etc, to protect the value of the group. Pertinently, the framework allows participation of foreign creditors without necessitating parallel proceedings.  The applicable law for creditors will be the one that would have applied if the insolvency proceedings had been commenced. The UK also considered examining the interaction between MLEGI and 26A of the (UK) Companies Act 2006, which provides for restructuring plans. The government remarks that despite the broad definition of planning, the model did not incorporate restructuring plans, which may be pertinent for the successful implementation.

    Notwithstanding the proactive stance, the proposed implementation by the UK parliament reflects anomalies. A primary concern arises under Article 5 of MLEGI, which mandates the designation of a competent authority. Although the UK consultation suggested that an accountant in bankruptcy could potentially act as an authority, they have clarified that they don’t intend to create new institutional bodies. Hence, it is ambiguous which institution or court will be entrusted with the statutory function under Article 5. This institutional indeterminacy has direct repercussions on the creditor treatment, as fragmented adjudicatory treatment creates divergent approaches that undermine the efficiency of the proposed law. While the model law leaves it to the domestic court to manage the conflict, there have been no guidelines from the appropriate authority.

    CONCLUSION

    The growing pertinence of group insolvency has exposed the limitations of the IBC in addressing the challenges to financial distress. Judicial interventions have tried to fill the vacuum, with little success owing to the problems of value erosion and loss of operational synergies, among others. In this context, the MLEGI provides a unique solution through the introduction of planning proceedings. It preserves the dominant legal principle of separate legal existence while also facilitating collective restructuring without adopting substantive consolidation. Therefore, it necessitates the statutory introduction of planning proceedings with tailored domestic safeguards. Additionally, the appellate court should be empowered to grant interim reliefs including appointing a group representative, to ensure information symmetry across group entities. A calibrated implementation of the planning process will enhance value maximisation and strengthen creditors’ confidence in the Indian insolvency regime.

  • Tick-Box to Truth – SEBI’s 2025 Clarifications and the Crisis of Director Autonomy

    Tick-Box to Truth – SEBI’s 2025 Clarifications and the Crisis of Director Autonomy

    BY HARSHITA DHINWA AND RAM SUNDAR SINGH AKELA, FOURTH- YEAR STUDENTS AT NUSRL, RANCHI

    INTRODUCTION

    The first six months of 2025 saw a historic culling of Independent Directors from Corporate boardrooms in India where more than 150 Independent directors voluntarily resigned from numerous listed companies, not in anticipation to join new ventures but as an ultimate defense against the unprecedented growth in regulatory scrutiny and personal liability. The prime mover in this instance is the Securities and Exchange Board of India’s (‘SEBI’) 2025 clarificatory note on “Material pecuniary relationship” with securities under Regulation 16(1)(b)(iv) of the Listing Obligations and Disclosure Requirements (‘LODR’) Regulations 2015. However, a deeper look into the high-profile cases such as InfoBeans Technologies 2025, Byju’s 2024-25, Paytm Payments Bank 2024, Dewan Housing Finance Corporation Limited 2021-23, and Punjab and Maharashtra Co-operative PMC Bank 2019 -20 show a systemic connection where in all of them, the directors identified promoter domination, limited information about the financial data, and the threat of retrospective legal action as the main drivers. The main motive is to strengthen such governance by rewiring what the concept of independence means, to go beyond formal financial bright-lines to examine the relative economic and social frameworks that CEOs and nominal IDs should be freed from.

    SEBI’S 2025 CLARIFICATIONS: A SHIFT IN STANDARD OF INDEPENDENCE

      SEBI’s informal guidance to InfoBeans Technologies on May 14. 2025, clarifying “material pecuniary relationship” under  Regulation 16(1)(b)(iv) of the LODR Regulations left a big shift in independent directorships as a mere formula compliance to its substantive decision-making by independent directors, which saw a significant shift from size and revenue-based materiality assessment.

      Historically, Section 149(6) of the Companies Act, 2013, defined independence with the help of a quantifiable limit where pecuniary transactions not exceeding 10% of a director’s total income over two preceding final years would be considered independent.  SEBI’s clarification introduced a more wholesome evaluation of ongoing relationship, indirect economic ties and potential biasness to judgment, without numerical limits. Through InfoBeans, SEBI evaluated an Independent Director’s (‘ID’) proposed consultancy with an overseas subsidiary, compensated with 10% of their income, noting that materiality under LODR lacks a fixed ceiling, urging boards and Nomination and Remuneration Committee (NRC’s) to prioritize substance over form in its assessment of independence.

      This aligns with the Ministry of Corporate Affairs’ (‘MCA’) General Circular No. 14/2014, which excluded sitting fees and reimbursement from assessment of pecuniary relationship while focusing on autonomy. Moreover, the J.J. Irani Committee Report (2005) recommended assessing materiality from the director’s or Recipient’s perspective, proposing a 10% income threshold for transactions, that is, the key consideration will be whether the scale of financial involvement is substantial enough to compromise the director’s involvement. According to ICAI’s “Technical Guide on the Provision of Independent Directors from Corporate Governance Perspective, 2021”, the method of fiscal compilation should be disregarded, while also citing MCA’s October MCA’s 2018 Offences Committee Report recommended a 20% cap (Excluding sitting fees) to curb the erosion of directors’ discretionary powers and to standardize the governance framework. Due Diligence Norms demand prime disclosures and retrospective inspections on “friendly” directors to prioritize independent directors’ bias-free judgements over formally induced compliance. This change challenges the board to rethink their appointment and oversight role, ensuring that IDs are free from any social and economic influence.

      THE MASS DEPARTURE: CRISIS DISGUISED AS COMPLIANCE

        SEBI’s clarification has nearly provoked a boardroom Exodus, with almost 549 IDs resigning in FY25, of which, 94% mid-term, most of which were serving on National Stock Exchange  comparable to 2019’s wave, where 1390+ IDs quit. Resignation is more seen in firms facing financial distress, regulatory sanction, or governance lapses, and where ID’s report promoter-driven opacity, restricted access to financial data and fear of personal liability is rampant. For instance, the IDs of Byju’s resigned stating promoter-controlled decision-making and lack of financial transparency, as reported in MCA filings. Paytm’s directors exited fearing personal liability when the Reserve bank of India imposed penalties for non-compliance, while PMC Bank’s directors were investigated for failing to detect loan irregularities. The IL&FS crisis, where IDs were liable for oversight failures despite limited access to information, sets a precedent. Further, a 2025 NSE report noted a 30% resignation spike post-clarification, showing a crisis masked as compliance. The InfoBeans guidance multiplied fears of retrospective liability, as SEBI’s overall scrutiny exposed IDs to risk for past decisions, even beyond what they have in control.

        This “regulated retreat” arises from an inherent imbalance in structure where IDs face fiduciary and criminal liability under Section 149(8) of the Companies Act and SEBI’s review of regulatory provisions related to independent directors, but lack veto power, access to audit reports, or whistleblower protections. Unlike the system governing the U.S., where the Business Judgment Rule shields diligent directors, India’s framework leaves IDs in a much vulnerable position. It has been seen that IDs were penalized in  SAHARA India v. SEBI for promoter-driven judgments despite restricted authority. The legality was defeated in Chanda Kochhar V. SEBI, where IDs were examined for endorsing inequitable loans exposed under Section 149 as parental predominance over promoters. ID Nusli Wadia, who was revealed in the Tata-Mistry saga, also exposed parental superiority. This appears in the MCA’s 2018 Offences Committee Report, pointing ID liability concerns as one of the motives for quitting, which requests increased safeguarding of Section 149. The absence of being able to manage this risk without authority is what, in fact, leads good directors to quit high-risk companies, which in turn triggers the need for our IDs to be upgraded seamlessly, plus for the governance to re-establish its integrity

        THE PAPER-THIN PROMISE OF INDEPENDENCE

          Section 149(6) of the Companies Act, 2013, and Regulation 16 of LODR, create a mirage of independence by prioritizing formal disqualifications such as past financial ties, shareholding, or employment over functional autonomy.  In promoter-dominated firms, constituting 60% of listed entities, IDs are often selected by promoters, undermining their primary role as stakeholder guardians. The Kotak Committee Report (2017) criticized NRCs for acting as rubber stamps, failing to rigorously vet independence as evidenced in Dish TV India Ltd. (2021 BSE Filing), where minority shareholders challenged ID appointments for lacking autonomy and exposing promoter overreach. Similarly, in N. Narayan v. SEBI, IDs were penalized for governance lapses without direct involvement, highlighting judicial overreach that generally disregards Section 149(12)’s liability limits.

          The absence of the safe harbor Doctrine and the Delaware–style “entire fairness” test, which protects directors by scrutinizing conflicted transactions, worsens the ID exodus. Originally a creature of U.S. corporate law, the Safe Harbor Doctrine protects directors from liability arising out of decisions made in good faith, with due care and in the best interests of its company, even though outcomes can come out adverse. In the state of Delaware, the theory is codified in the “Business Judgment rule” which presumes director are diligent unless proven otherwise. This sharply contrasts with Section 149(12), which limits ID liability to act with knowledge or consent, but is inconsistently enforced as seen in the Narayan v. SEBI case.

          In addition, the U.K.’s Stewardship Code, issued by the Financial Reporting Council, mandates BODs and institutional investors to prioritize long-term value, transparency, and stakeholder interests, and requires annual disclosure of voting policies and dissent. Principle 7 emphasizes board independence, urging directors to challenge management constructively. In Royal Dutch Shell plc, the Code’s application compelled directors to disclose climate-related governance decisions, thereby enhancing accountability. India’s Regulation 25 mandates separate ID meetings, but these lack the Code’s rigor, as seen in the case study of Yes Bankfiasco , where IDs failed to curb risky lending due to promoter dominance and limited collective action.

          REIMAGINING INDEPENDENCE – A BLUEPRINT FOR REFORMS

          Halting the departure and regaining trust requires the implementation of reforms in India’s corporate governance. Firstly, since promoter dominance affects 60% of listed companies, it must be controlled by mandating independent third-party nomination panels as proposed per CII . These Panels will compromise minority shareholders, institutional investors and industry experts ensuring that ID appointments are based on expertise and autonomy. Secondly, in addition to the self-declaration under Section 149, promoters should explicitly state whether they have any prior economic, social, or historical relationships with ID candidates, either professionally or financially. This will be supported financially by NRCs and audited by external auditors, thus maintaining transparency and individual choice, preventing such promoter-led appointments. Thirdly, the implementation of the safe harbor doctrine for IDs who are on-record documents of dissent in board minutes. SEBI has recommended this in its consultation paper on directors’ protections, reducing the threat of multiple resignations due to IDS fearing punishment for not protecting the company.

           Fourth, flexibility and competitiveness in remuneration: SEBI in 2019 proposed capped stock options needing both shareholder and minority approval. Here, remuneration is competitive with attracting high-caliber talent but that does not compromise their independence. By the 2018 Report for MCA unlike high fees, which consider sitting fees insufficient, this alignment’s alternative ID incentives with the businessman’s interests; therefore, they should be retained. Fifthly, regular training on finance, risk, and compliance should be guaranteed and Formal evaluations of ID performance should be conducted. Sixthly, using Regulation 25 separate ID meetings to arrange red flags and Section 150’s databank and expertise tests for experienced IDs should be streamlined; these reforms would make ids empowered overseers, not ornamental figures.

          CONCLUSION

          Independence now feels like  escape, not strength. What was obtained to construct what SEBI 2025 will build has instead exposed the unwillingness of our setup to deny real power but equally demand responsibility. The interpretation of “material pecuniary relationship” under Section 149(6) (c) of the Companies Act and Regulation 16(1)(b)(iv) of SEBI’s LODR Regulations, certainly post-SEBI’s InfoBeans guidance, shows a stark shift from tick-the-box to substance. Independence can be assessed not just on paper but equally in spirit, making it free from past ties, undue influence or hidden loyalties. Independence must be both real and visible for effective governance.

          To stem the prevalent exodus of IDs and reinstate confidence in corporate governance, Section 149(6), (12) of the Companies Act, and Regulations 16 and 25 of LODR should be amended to include a safe harbour doctrine for the protection of dissenting IDs, a guarantee for full access to audit data & whistleblower protection, and independent nomination panels without influence of promoters. Remuneration should be fixed with independence safeguards to balance autonomy and talent attraction in the industry, and a materiality threshold should be codified to ascertain pecuniary relationships.  These amendments will ensure independence, substantive rather than symbolic, and they will strengthen integrity in corporate governance.

        1. From Price Control to Market Discipline: Reading SEBI’s Base Expense Ratio Reform in Comparative Perspective

          From Price Control to Market Discipline: Reading SEBI’s Base Expense Ratio Reform in Comparative Perspective

          BY AADIT SHARMA, SECOND YEAR STUDENT AT RMLNLU, LUCKNOW

          INTRODUCTION

          India’s mutual fund industry has experienced accelerated growth with assets under management increasing from ₹72.2 lakh crores in May 2025 to ₹80.8 lakh crores by November 2025 with retail investors having a larger chunk in the market. It is in this context of rapid market expansion and retail involvement that the Securities and Exchange Board of India’s (‘SEBI’) circular dated 17 December 2025(‘Circular’) introducing the Base Expense Ratio (‘BER’) has been primarily discussed as a numerical or transparency-driven intervention. The earlier Total Expense Ratio (‘TER’) was a single, all-inclusive umbrella cap that bundled together the fund’s core management fees, distributor commissions and operating costs along with various statutory and regulatory levies (such as GST, STT, Stamp Duty and SEBI fees) into one consolidated percentage. The now introduced BER includes unbundling of costs. It states that the BER will only include the base core scheme-level expenses such as management fees, distribution costs and routine administration, while statutory and regulatory levies are excluded and charged separately on actuals. 

          This article argues that the BER framework reflects a measured shift by SEBI from merit-based price control towards disclosure-led market discipline, while consciously stopping short of full deregulation. When viewed in a comparative international context, the reform reflects a cautious alignment with global regulatory trends rather than a blind replication of foreign models.

          FROM BUNDLED CONTROL TO SELECTIVE TRANSPARENCY

          Prior to the circular, mutual fund expenses in India were regulated under a TER framework that bundled discretionary fund management fees with statutory and regulatory levies such as GST, Securities Transaction Tax, exchange fees, and SEBI charges. Although nominally framed as a disclosure-based ceiling, the TER regime functioned substantively as merit regulation because SEBI did not merely mandate disclosure of costs but prescribed binding ceilings on total expenses regulated under SEBI (Mutual Funds) Regulations, 1996. By prescribing category-wise caps on the aggregate chargeable expense, SEBI effectively determined what constituted a ‘reasonable’ cost structure for mutual funds, embedding its regulatory judgement directly into cost limits. Investor protection under this framework was achieved less through competitive pricing or informed choice and more through ex ante regulatory intervention. Even where SEBI permitted limited add-ons such as the additional allowance of up to 0.05 basis points in specified circumstances, including exit load–linked expenses, the underlying architecture remained one of bundled cost control, with statutory pass-through levies obscuring the true pricing of fund management services.

          The BER reform marks a deliberate reconfiguration of this approach. By separating core fund management costs from statutory and regulatory levies, now charged on actuals, SEBI has partially withdrawn from adjudicating the fairness of total expenses. Instead, it has enabled investors to evaluate the pricing of asset management services independently of compulsory charges. This shift represents a recalibration rather than an abandonment of regulatory control: while aggregate cost assessment is displaced in favor of transparency and comparability, SEBI has consciously retained category-wise caps on the base component. This reflects continued skepticism about the disciplining capacity of markets in a retail-dominated ecosystem. However, the reform is not without structural consequences. Although statutory levies are excluded for all funds under the BER framework, the practical benefits of this change are not evenly distributed. Large Asset Management Companies (AMCs)which typically operate close to the regulatory TER ceiling benefit from the removal of mandatory levies such as GST and transaction-related taxes from the capped expense head, as this reclassification restores usable pricing space and cushions margin pressure without requiring any adjustment to headline fees. Smaller AMCs, by contrast, generally price their schemes below regulatory caps and therefore derive limited incremental flexibility from the reform. While the BER framework advances transparency, but does not significantly change competitive conditions, as its practical benefits accrue mainly to AMCs constrained by existing expense ceilings. This outcome underscores the limits of disclosure-led governance in addressing distributive and competitive asymmetries that were previously moderated through aggregate cost controls.

          COMPARATIVE PERSPECTIVE: CONVERGENCE AND DELIBERATE DIVERGENCE

          A.    United States: Disclosure Without Price Ceilings

          In the United States (‘US’) mutual fund regulation is   administered by the Securities and Exchange Commission (‘SEC’) under the Investment Company Act of 1940. It is premised on a combination of disclosure, investor education and procedural safeguards rather than direct regulation of fee levels. The SEC does not impose ceilings on expense ratios; instead funds are required to disclose management fees, distribution expenses (including 12b-1 fees) and operating costs in standardized formats leaving pricing discipline to investor choice and competitive pressures. The SEC requires that mutual funds disclose the expense ratios in key documents such as the prospectus and shareholder reports enabling investors to compare costs across funds.

          By contrast SEBI’s BER framework reflects a more cautious regulatory stance. Although disclosure has been strengthened through cost unbundling, SEBI has retained category-wise caps on base expenses, signaling an institutional judgement that disclosure alone may be insufficient to discipline pricing in a predominantly retail market.

          B. European Union: Transparency with Behavioral Framing

          The European Union’s (‘EU’) regulatory framework particularly under the Packaged retail and insurance-based investment products (PRIIPs), places strong emphasis on cost transparency through mandatory Key Information Documents . The EU regulatory framework is premised on the view that disclosure is effective only when it can be readily understood by retail investors. Accordingly, the PRIIPs regime requires investment costs to be presented in standardized formats and in many instances to be expressed in monetary terms over defined holding periods rather than only as percentages. This approach reflects an explicit regulatory acknowledgement that purely numerical disclosures may not be sufficient to inform investors in decision-making.

          SEBI’s BER framework aligns with the EU’s approach in unbundling costs and enhancing comparability across schemes but differs in its method of disclosure. While the Indian framework improves numerical transparency by separating base expenses from statutory levies it does not mandate behavioral framing or investor-oriented presentation of costs.  The reform enhances visibility of pricing components  but stops short of shaping how investors interpret or process that information.

          Taken together, these comparisons indicate that SEBI’s reform represents hybrid regulatory design. It borrows transparency mechanisms from global best practices while retaining structural controls suited to domestic conditions. The result is neither full convergence with them nor resistance to them but selective adaptation.

           THE LIMITS OF DISCLOSURE AS INVESTOR PROTECTION

          Disclosure-based regulation rests on the assumption that investors are able to read, understand and meaningfully compare cost information across financial products. In practice, this assumption is unevenly satisfied in India’s predominantly  retail driven mutual fund market. Levels of  low financial literacy are entangled with perceived complexity and limited information on investors’ part. As a result, the investors rely on intermediaries, brand reputation or recent returns rather than cost metrics when making investment decisions. In this context, the BER framework may improve the visibility of expense components without necessarily altering investor behavior. While headline base expense figures are now easier to identify, investors may underappreciate the cumulative impact of statutory levies charged separately or may continue to prioritize short-term performance over cost efficiency. As a result, transparency may not translate into effective market discipline. This does not undermine the regulatory rationale of the BER reform, but it highlights an inherent limitation: disclosure can function as a meaningful tool of investor protection only where investors possess the capacity and incentives to use the information disclosed.

          CONCLUSION: MAKING TRANSPARENCY EFFECTIVE

          The introduction of the BER marks a recalibration of mutual fund regulation rather than a completed transition. By unbundling statutory levies from core scheme expenses SEBI has created the conditions for improved cost comparison but transparency alone will not ensure market discipline unless it is operationalized through complementary regulatory practices.

          To realise the BER framework’s potential, post-implementation monitoring must assume central importance. SEBI should systematically track how expense structures evolve under the new regime and whether cost efficiencies are passed on to investors or absorbed within margins and distribution incentives. Periodic, category-wise publication of BER trends could strengthen competitive pressure without additional rulemaking.

          The impact of disclosure also depends on how intermediaries operate. In a market dominated by retail investors, transparency at the scheme level will have limited effect if distributors continue to shape investment decisions without regard to costs. Unless distributor incentives and point-of-sale disclosures reflect BER-related cost differences, investors are unlikely to use this information in practice. In addition, small improvements in how costs are presented such as showing base expenses alongside statutory levies can help investors better understand the total cost of investing, even without introducing formal behavioral mandates.

          Read this way the BER reform is best understood as a foundational step. Its success will depend less on arithmetic recalibration and more on whether transparency is translated into sustained pricing discipline through monitoring, intermediary oversight and usable disclosure.

        2. The Insolvency Blind Spot: Why India Needs a Tailored Resolution Framework for Cooperative Banks

          The Insolvency Blind Spot: Why India Needs a Tailored Resolution Framework for Cooperative Banks

          SOMESH RAI, FIFTH- YEAR STUDENT AT DBRANLU, SONEPAT

          INTRODUCTION

          The Insolvency and Bankruptcy Code (‘IBC’) was brought in the year 2016. The IBC brought in speed, certainty, and transparency, and for a while, it seemed that India had finally bridged the gaps in its insolvency regime. However, the events of 2020 exposed a critical blind spot in this seemingly comprehensive framework. Even as the IBC extended its ambit to corporate entities, partnerships, and individuals, cooperative banks, an important financial institution and integral part of India’s credit system, remained outside its scope. The fall of the Punjab & Maharashtra Cooperative Bank revealed the blind spot of IBC and its inadequacy to deal with the insolvency of cooperative banks, leaving depositors highly vulnerable and regulators constrained. The problem is not only historical but a persistent threat, underscored by more recent incidents of co-operative banks like the New India Co-operative Bank in early 2025. The core blind spot remains in the failure of a framework to handle the failure of co-operative bank is still dangerously absent.

          COOPERATIVE BANKS IN INDIA

          Cooperative Banks are community-driven financial institutions that work on a democratic principle different from commercial banks. Commercial banks, which are typically incorporated under the Companies Act, 2013, are ideally profit-driven enterprises. They are financial institutions that are owned by shareholders, managed by professionals, and driven by a primary objective, which is maximizing the profit for their investors. At their core, commercial and cooperative banks are built on different philosophies.

          The fundamental difference lies in who holds the power. While commercial banks are owned by shareholders, cooperative banks are owned and managed by their members, who control the institution through a democratic process based on the “one person, one vote” principle. This democratic governance, where members elect their own board of directors, is the cornerstone of the cooperative model.

          THE TWO CAPTAIN SHIP

          Imagine a single ship with two captains steering it, each with their own set of maps and responsibilities. This is, how a cooperative bank is regulated. The two captains here are the Reserve Bank of India (‘RBI’) and the Registrar of Cooperative Societies (‘RCS’). The RBI is responsible for the bank’s “banking and financial” functions. This includes issuing licenses to a new cooperative bank under Section 22 of the Banking Regulation Act 1949, setting prudential norms like the capital to risk-weighted asset ratio and non-performing asset classification, and regulating its core banking operations under the Banking Regulation Act, 1949. RCS is a state-level authority (or central, for multi-state societies) that governs the bank’s “cooperative” character. The RCS is in charge of incorporation, registration, management, board elections, and, most critically, the audit and liquidation under Section 86 of the Multi State Cooperative Societies Act, 2002, (or winding up) of the society under the respective State Cooperative Societies Act. Cooperative Banks are formed either under acts of the state legislature, depending on their coverage in a state, or under the Multi-State Cooperative Societies Act of 2002, an act of the Parliament of India, if they provide their services in multiple states. The Multi-State Cooperative Societies Act governs the cooperative character of banks. In contrast, the Banking Regulation Act, 1949, grants the Reserve Bank of India certain powers related to the financial functioning of banks.

          This bizarre split originates from the Constitution of India itself. Under the Union List, the Central Government has exclusive power to legislate on “Banking” as per Entry 45, List I. In contrast, under the State List, the state governments have power over “Co-operative societies” as per Entry 32, List II. This constitutional division is the legal bedrock of the dual control problem.

          This split establishes a no-man’s land when it comes to regulatory oversight, giving a chance for malpractices to occur. The Punjab & Maharashtra Cooperative Bank crisis is the textbook example of this two-captain system failing catastrophically. This meant that the RBI, the country’s financial watchdog, could see the major red flags in PMC’s lending practices through its false balance sheets and fake entries showing NPA’s as standard assets But even when it spotted these problems, its hands were tied. Under the Banking Regulation Act of 1949, it simply didn’t have the direct power to punish the managers responsible for the fraud.  

          On the other hand, there was the Registrar of Cooperative Societies. This was the authority in charge of the bank’s management and board, but they often lacked the specialized financial expertise to really understand the complex risks involved in modern banking. This created a perfect catastrophe. PMC’s board, which answered mainly to the registrar, was able to manipulate records and hide its massive, fraudulent exposure to Housing Development & Infrastructure Limited for years, knowing that no single authority had complete and effective oversight. It was a classic case of shared responsibility becoming no one’s responsibility, where each regulator could just assume the other was watching, allowing the fraud to grow unchecked until the bank imploded.

          THE INSOLVENCY BLINDSPOT

          When any big company in India goes down, we immediately hear three letters: IBC. The Insolvency and Bankruptcy Code, 2016, is our country’s modern and powerful tool for addressing corporate failure. So, when a cooperative bank fails, the most logical question is, why can’t we just use the IBC?

          The answer is buried in the legal provisions of the IBC itself, and it is the primary reason cooperative bank depositors are left vulnerable. IBC’s main tool is the Corporate Insolvency Resolution Process initiated against a “corporate debtor“.

          This is where the legal trail begins-

          1. Who is a “Corporate Debtor”? The IBC defines it under section 3(8) as a as a “corporate person” who owes a debt to someone.
          2. Who is a “Corporate Person”? Under Section 3(7) of the IBC, it is defined as a “corporate person” as a company, a Limited Liability Partnership (LLP), or any other body with limited liability explicitly excluding any financial service provider.
          3. What is a “Financial Service Provider”? The IBC then defines a “financial service provider” in Section 3(17) as any entity engaged in the business of providing “financial services” under a license from a financial sector regulator. The definition of “financial services” in Section 3(16) is broad and includes activities like “accepting of deposits”.

          A cooperative bank, by its very nature, accepts deposits from the public and is partially regulated by the RBI. This makes it a “financial service provider” under the IBC’s definition. Because financial service providers are excluded from the definition of a “corporate person,” hence a cooperative bank is not considered a “corporate debtor.” Therefore, the entire machinery of the IBC, designed for swift and efficient resolution, cannot be applied to it, which creates a legal loophole, a blind spot of the Insolvency and Bankruptcy Code 2016.

          It was a deliberate attempt by The Bankruptcy Law Reforms Committee, which drafted the IBC, to keep the financial institutions out of the standard Corporate Insolvency Resolution Process(‘CIRP’) for particular reasons, such as

          1. Systemic Risk: A bank is deeply interconnected with the rest of the financial system. Its failure can trigger a domino effect, causing a “contagion” that could destabilize other healthy institutions and the economy as a whole.
          2. Nature of Creditors: The creditors of a bank are thousands, sometimes millions, of ordinary depositors whose life savings are at stake unlike commercial creditors. A standard insolvency process is not designed to handle this kind of widespread public impact.
          3. Need for a Specialized Framework: Due to these unique risks, lawmakers believed that financial firms required their own specialized framework for resolution. Section 227 of the IBC empowers the union government to create special rules for the insolvency of financial service providers.

          The problem is that while the government did use this power to notify a special framework for certain large Non-Banking Financial Companies, cooperative banks were left out. They were excluded from the primary IBC process but were never included in a viable, alternative one. They were left stranded in a legal grey zone, subject only to the old, slow, and inefficient winding-up processes under the control of State Registrars. This deliberate, yet incomplete, legislative action is the ultimate reason why the failure of a cooperative bank becomes a prolonged nightmare for its depositors.

          FIXING THE BLIND SPOT: IS THERE A WAY FORWARD?

          The 2020 amendment to the Banking Regulation Act was a good first step, but it didn’t go far enough. While it tightened the rules to help prevent future failures, it left the fundamental insolvency gap wide open. The real nightmare for depositors isn’t just a bank failing but the broken, slow-motion, and completely uncertain resolution process that follows. Recognizing this, the RBI constituted an Expert Committee on Urban Co-operative Banks, chaired by former Deputy Governor N. S. Vishwanathan. Its key recommendations included A Four-Tiered Regulatory Framework The idea was to classify Urban Cooperative Banks into four different tiers based on the size of their deposits. It recommended the creation of a national-level apex body for Urban Cooperative Banks, now established as the National Urban Co-operative Finance and Development Corporation (‘NUCFDC’) to provide capital, liquidity support, technological infrastructure, and fund management services.

          Nevertheless, even these vital reforms do not fix the insolvency blind spot. They are a preventative medicine, and not a surgical process. They aim to keep the patient healthy but offer no new procedure if the patient suffers a catastrophic failure.

          The ultimate solution must be legislative. The government needs to either amend the Insolvency and Bankruptcy Code to bring cooperative banks under a special, tailored version of the CIRP or create an entirely new, parallel resolution regime for them. The “two captain ship” must now be decommissioned and a new law must establish a single, empowered resolution authority. The RBI can be the sole authority with all financial oversight, supervision and resolution power vested in it limiting RCS to its cooperative governance. This new framework must be time-bound unlike the traditional slow liquidation process to both preserve the bank and protect depositors. A tier-based framework should be brought in where smaller banks in tier 1 should have a simplified process for swift amalgamation or mandatory payout of insured deposits within 15-20 days. And for larger banks a bridge bank can be established to ensure uninterrupted service to depositors during the liquidation process. Further in cases where a cooperative bank is showing signs of financial distress (but is not yet collapsed), the RBI could trigger a “Supervised resolution period.” During this time, the banks management will be statutorily required to prepare a pre-packaged merger or sale plan with a healthy institution like the pre-packed resolution process given for MSMEs under IBC. If the bank’s health deteriorates past a certain point, this pre-approved plan can be activated instantly which will prevent the post collapse chaos. Until these legal loophole in the IBC are closed, the money of millions of Indians will remain exposed to the very paradox that brought PMC Bank to its knees, the paradox of a bank that is not entirely a bank when it matters most.

        3. Expanding The Meaning of Sufficient Cause under Section 58 (1)

          Expanding The Meaning of Sufficient Cause under Section 58 (1)

          BY PRIYAM MITRA, THIRD- YEAR STUDENT AT NLSIU, BANGALORE

          INTRODUCTION

          Through judicial pronouncements and legislative clarifications, the seemingly unbridled power of free transferability of public companies is constrained by two clauses: one stating that any contract between two or more persons would be enforceable as a contract (proviso to Section 58(2)) and; secondly, the public company may refuse to register this transfer of shares by showing sufficient cause (Section 58(4)).

          There is considerable literature on why employee stock option schemes are introduced in various different ways. Specifically in firms where there are capital constraints, which is often the case in unlisted public companies, these strategies are often deployed for the purposes of “employee retention and sorting”. It is also well established that after the lock-in period of these schemes, these shares are to be treated in the same way as other equity shares; this means that for public companies this would lead to principles of free transferability being applicable thereon upon such shares given to employees.

          It is the argument of the paper that in this context, the meaning given to the term “sufficient cause” under section 58(4) must be read in an expansive manner so as to cover instances where allowing further transfer of these allotted shares would be perverse to the interests of the company. To do this, the NCLAT judgement of Synthite Industries Limited v. M/s Plant Lipids Ltd. (2018), which emphasises directors’ duties under Section 166(2) would be relied on.

          FOUNDATIONS OF EMPLOYEE STOCK OPTION PROGRAMS AND POSSIBLE ROADBLOCKS

          A. Reasons for ESOP Schemes

          As mentioned before, there has been a growing trend in industries where rather than providing incentives to employees to work, ESOPs are used for sorting and selection of those who are optimistic about the future of the company. This is why it makes sense for even public companies to get the benefit of ESOPs even though traditionally there should have been no restrictions on the transferability of public company shares. However, what is often overlooked in analysis is then how do those who receive these options exercise them and whether these transactions can be restricted in view of other important consideration as out lined later (namely whether there is sufficient cause to believe that the transfer would result in harming the interest of all shareholders).

          B. Nominee Directors

          Before the enactment of the Company Act 2013, there had been academic concerns expressed with respect to independent directors receiving stock options. The reason for this was rooted in the fact that independent directors, by the nature of their role, had to be independent of any pecuniary interest in order to perform their function. Stock options in this context would dampen this independence and rightfully, Indian law averted this error through the SEBI (Share Based Employee Benefits) Regulations, 2014. The rules define “employees” as explicitly not including “independent directors” (Rule 2(1)(f)(ii)).

          However, inadvertently, the category of nominee directors has been categorically excluded from the category of independent directors under Section 149(6) of the Companies Act, 2013, and this means that they are covered under the definition of employee for the purpose of stock option schemes. To understand why this is a possible roadblock to achieving the purpose of stock option schemes, the peculiar role of nominee directors has to be analysed.

          Nominee directors have become a regular part in corporate structures in India. Due to them owing their duty to the nominator but sitting on the board of directors. There is always a speckle of concerns related to conflict of interest. Indeed, it has been observed in decisions that in a situation where these two interests are at conflict, they would be placed in an “impossible position”. Coming back to why this is an issue in the context of ESOPs, it must be understood that while the ESOPs cannot be transferred to any third party (the option to buy (Rule 9)), the shares issued to nominee directors pursuant to ESOPs, however, may be transferred to the nominating institutions. This conspicuously places the nominee directors in such a position where the nominating institutions may meddle in the functioning of these directors pushing for transfer of these lucrative shares.

          There could be an argument that there is a solution already implicit in the rules. That is, the companies may choose any period as the lock-in period (the period during which these shares cannot be transferred). However, unlike the provisions on sweat equity (3 years), there is no such minimum lock-in period prescribed. It is difficult for companies to deploy one single lock-in period for all kinds of employee and having such a strict period would be prejudicial to the employees’ interests. Therefore, it is argued, in exceptional circumstances Section 58(4) must be used to restrict transactions on a case-to-case basis.

          SUFFICIENT CAUSE UNDER 58(4)

          To solve the issues identified in the previous section, this paper proposes an expansive reading of sufficient cause under Section 58(4) as a possible solution. To understand the contemporary legal position, analysis must start from before the introduction of the Companies Act in 2013. Section 58(4) of the 2013 Act clarifies the position established by Section 111A of the Companies Act, 1956. Section 111A (3) provided an exhaustive list of instances (contravention of and law in India) wherein such refusal would be upheld. It was consistently held by the Courts that sufficient cause had to be read in this narrow manner.

          The recent line of cases starting from Mackintosh Burns v. Sarkar and Chowdhury Enterprises, recognise the wider ambit of sufficient cause under the Companies Act 2013. Mackintosh’s reasoning was based on simple facts of a competitor trying to buy shares in a company, a simple case of conflict of interest, hence, the Supreme Court concluded that at least in such cases, sufficient cause would entail something more than mere contravention of law. Synthite goes further and provides more robust reasoning even though the fact scenario here was very similar to Mackintosh. The court accepts the appellants arguments and holds the wisdom of the Board of Directors in high regard by forming a link between their fiduciary duty (Section 166(2)) to act in a bonafide manner and advance the company’s interests, to their refusal of registration of transfer (under Section 58(4)) (paras [10],[16],[22]). This effectively means that their refusal to register shares in this case was deemed reasonable because the board acted in a bonafide manner to advance the interests of the shareholders.

          In fact, a recent case heard by the Delhi High Court in Phenil Sugars Ltd. v Laxmi Gupta, was decided in a similar vein as that of Synthite (though the NCLT decision is not cited) wherein the Court held that registration of shares can be restricted where:

          “[27]There is an apprehension that the transfer is not in the best interest of the company and all its stakeholders including the shareholders;

          ii. The said apprehension is reasonable and there is material on record to support the apprehension.”

          The case is a monumental step forward. Till now, the cases primarily dealt with the transfer being done to a competing company, however, in this case, the court considered the refusal to be reasonable as the transferees had a history of meddling in the corporate affairs of the company through constant complaints. On the twin test laid down, the High Court considered the cause to be sufficient.                                                                                           

          CONCLUSION: RESTRICTING TRANSFER OF ESOP SHARES THROUGH SECTION 58(4)

          Realising the purpose behind ESOPs, that is, rewarding and more importantly retaining employees and shares within the company, leads to the conclusion that the board must be given the power to refuse registration of transfer. This is solidified by the emerging jurisprudence in India with respect to the ambit of sufficient cause under Section 58. It is argued that this determination would vary greatly with the unique facts and circumstances of each case.

          In case of nominee directors transferring the shares to their nominating institutions, one must look at the standard put forth by Synthite (invoking the directors’ fiduciary duty in making this decision)and the courts should not be constrained by the restrictive interpretation that sufficient cause would exist only when shares are transferred to competing companies (Phenil Sugars). It must be accepted that “deferring to the Board’s wisdom” would surely encompass such situations where a transfer would defeat the purpose of ESOPs and indirectly derogate the interests of all stakeholders. If nominee directors transfer shares to their nominating company, then they would be put in a precarious situation caught in between conflicts on interests.

          However, this does not mean that all ESOP receivers would be estopped from transferring their shares, this determination has to be made considering all the terms of the ESOP and the relationship that the company shares with the employee. What this paper has argued is that sufficient clause has to be interpreted in a wide way so as to restrict any transaction that would be prejudicial to the interests of all shareholders. Transfer of ESOP shares (usually) at a lower price needs to be maintained within the company and its employees, specifically when it is at a nascent stage; this should surely constitute sufficient cause.

        4. Contesting The ‘Big Tech’ Tag: India’s Digital Competition Bill At A Turning Point

          Contesting The ‘Big Tech’ Tag: India’s Digital Competition Bill At A Turning Point

          BY UJJWAL GUPTA AND BHAVISHYA GOSWAMI, SECOND- YEAR STUDENTS AT RMLNLU, LUCKNOW

          INTRODUCTION

          With India’s digital economy being nearly five times more productive than the rest of the economy, technological​‍​‌‍​‍‌​‍​‌‍​‍‌ companies have become central economic actors of a rapidly digitalising India, which prompted the need for a digital competition law to prevent the build-up of market power before it materialises. The Digital Competition Bill, 2024 (‘DCB’), aims at introducing ex-ante oversight to ensure competition in digital markets, thus complementing the already existing ex-post regime under the Competition Act, 2002. The DCB envisages a regime to identify Systemically Significant Digital Enterprises (‘SSDE’) and to impose conduct obligations on them.

          However, the draft has sparked discussion about whether its design manages to achieve the proper balance between restraining potential gatekeepers and protecting the growth of India’s tech ecosystem. While industry players and policy-makers generally agree on the necessity to control highly concentrated digital power, they are still worried that this tag may negatively affect rapidly growing Indian companies. The emerging proposal to allow companies to contest their SSDE designation reflects this balance-seeking approach. It indicates that the balance between protecting competition and giving the regulated entities fair treatment is not lost, i.e. the control does not hamper the innovation, investment, and the rise of domestic digital ​‍​‌‍​‍‌​‍​‌‍​companies.

          The SSDE DESIGNATION DEBATE

          One​‍​‌‍​‍‌​‍​‌‍​‍‌ of the key ideas of the DCB is SSDEs, which are entities that, due to their scale, reach, or market interlinkages, require ex-ante regulatory oversight. Under section 3 of the draft Bill, a company may be designated as an SSDE if it meets certain financial and user-based criteria. For example, a turnover in India of ₹4000 crore, global market capitalisation of USD 75 billion, or at least one crore end users. Besides, the Competition Commission of India (‘CCI’) can also identify an enterprise as an SSDE, even if it does not meet these quantitative criteria, by using qualitative factors like network effects, market dependence, or data-driven advantages. This allows the CCI to take preventive measures by identifying “gatekeepers” before their dominance becomes monopoly power.

          However, the Parliamentary Standing Committee and industry associations have pointed out that India’s comparatively low user threshold (one crore end users) might inadvertently prematurely rope in rapidly growing domestic firms, like Zomato or Paytm, that are still in the process of consolidating their market positions. By equating India’s digital scale with that of smaller Western markets, the Bill could act as a silent killer of innovation, deterring investment and freezing the entrepreneurial spirit. The concern is that the Bill’s broad definition of “systemic significance” could lead to a growth penalty and disincentivize the very growth India seeks to encourage under its “Digital India” and “Startup India” programs.

          Globally, the DCB draws clear inspiration from the European Union’s Digital Markets Act, 2022 (‘DMA’) and the UK’s Digital Markets, Competition and Consumers Act, 2024 (‘DMCC’). Each of their aims is to control the gatekeeping power of big tech companies. However, the implementation of the measures varies. The DMA is limited to ten defined “core platform services”, and it has already identified seven gatekeepers: Alphabet, Amazon, Apple, Booking, Byte Dance, Meta, and Microsoft. Moreover, it permits rebuttals under exceptional circumstances, a measure that is not in the current draft DCB. The DMCC creates the concept of “strategic market status” for dominant firms and thus puts more focus on tailor-made conduct rules. As per Schedule I, the draft DCB identifies nine “Core Digital Services”, similar to the DMA, excluding “virtual assistants”, and introduces “Associate Digital Enterprises”, defined under section 2(2), an Indian innovation to ensure group-level accountability.

          III. The Case for a Rebuttal Mechanism

          As established earlier, a ‍​‌‍​‍‌major concern of technology firms about the DCB is the lack of a mechanism to challenge a designation as an SSDE. These firms see such a designation as bringing problems of high compliance costs and of reputational risk to them, thus potentially labelling them as monopolistic even before any wrongdoing is established.

          The Twenty-Fifth Report of the Standing Committee on Finance recognised this problem. It stated that the current proposal has no provision for rebutting the presumption of designation based on quantitative thresholds, i.e., the Committee suggested referring to Article 3(5) of the DMA by implementing a “rebuttal mechanism in exceptional cases”. This would allow companies that meet or exceed quantitative criteria to demonstrate that they do not possess the qualitative features of gatekeepers, such as entrenched dominance or cross-market leveraging.

          Article 3(5) of the DMA is a good example in this case. Under it, companies can show “sufficiently substantiated arguments” which “manifestly call into question” their presumed gatekeeper status. In ByteDance v. Commission, the General Court of the European Union set a high standard for the issue and demanded that the companies bring overwhelming evidence and not mere technical objections. Firms like Apple, Meta, and Byte Dance have used this provision as a ground to challenge their identification; however, the evidentiary burden is still significant, and market investigations go on despite the fact that compliance with obligations is expected within six months after designation. Yet, the EU’s model illustrates that a rebuttal does not weaken enforcement; rather, it enhances it by allowing for flexibility in rapidly changing markets without compromising the regulator’s intention.

          The implementation of a similar mechanism in India would be beneficial in several ways. It would enhance the predictability of regulation and discouraging the over-designation of large but competitive firms, and also send a signal of institutional maturity consistent with international standards. In this context, the Centre is reportedly considering the introduction of an appeal mechanism that would allow firms to contest their designation after a market study on the digital sector is completed. However, the government still needs to deal with the possible disadvantages, such as the delay of enforcement against dominant players, the procedural burden on the CCI and the risk of strategic litigation by well-funded ​‍​‌‍​‍‌​‍​‌‍​‍‌corporations.

          IV. Dynamic vs. Fixed Metrics: Rethinking ‘Big Tech’

          The biggest challenge in DCB lies in the criteria for identifying SSDE as choosing between fixed quantitative metrics and dynamic qualitative assessments will shape administrative efficiency and long-term success. DCB follows primarily fixed metrics based on the DMA , having fixed quantitative criteria such as valuation or turnover for SSDE designation.

          The biggest advantage of fixed metrics is its speed and legal certainty. It becomes very simple vis-à-vis the administrative screening process when one has clear numerical boundaries, which then allows CCI to quickly identify the potential firms that pose competitive risks. However, this approach has attracted a lot of criticism. Industry stakeholders opine that the thresholds in DCB are “too low” and oversimplistic in the wage of a unique economic context and population scale of India.

          Another limitation is the risk of arbitrariness; if the benchmark were solely based on numerical terms, it could disconnect from the regulatory framework in finding a genuine entrenched competitive harm. For instance, in a market as large as India, having a high user database may only reflect the successful scaling and effective service delivery rather than having the real ability to act as an unchallengeable bottleneck. This challenge, where restriction is just imposed because a firm is successful irrespective of conserving if that firm has demonstrated any specific harmful market power, has led to a widespread demand that SSDEs forms should be allowed to contest this designation, and this tag should be revoked if they prove not to be harmful in the competitive or entrenched market power.

          On the other hand, the dynamic criteria are recognised in the DMCC, where the firm must possess ‘substantial and entrenched market power’. Through this, the UK regime can put conduct requirements based on qualitative and contextual market analysis, rather than quantitative analysis. However, its effective application requires resources vis-à-vis institutional capacity and legal justification while imposing terms on powerful firms.

          The dynamic criteria have been recognised by the CCI itself and provided a roadmap, which highlights the challenges arising out of the structural control that the big players have across the entire AI value chain and AI ecosystems, especially the control over data, computing resources, and models. The definition of the “significant presence” shall expand beyond turnover and should incorporate the firm’s control over the proprietary and high-quality resources, such as high-end infrastructure.

          V. The Road Ahead: Regulation without Stifling Growth

          The DCB will have a significant responsibility to manage the compliance needs of such a large country in its evolving shape. For that, the government is considering the establishment of a dedicated Digital Markets Unit within the CCI. It will be responsible for communicating with industry, academia, regulators, government, and other stakeholders, and facilitating cross-divisional discussions. It will avoid any structural damage caused by delays in the above-mentioned things.

          Yet another challenge is the very limited capacity of Indian regulators compared to other jurisdictions, which leads to the execution of prescriptive and technically complex regulations being extremely challenging. This deficiency in terms of specialised economists, data scientists, and technology lawyers would be the deciding factor in this fast-changing world, and India needs to cope with this as soon as possible.

          India’s number one priority is job creation through rapid growth, so that we can achieve sufficient wealth for all age groups. In the present scenario, policy experts have criticized the DCB, saying that it is “anti-bigness and anti-successful firms” that discourage Indian firms from expanding globally. Therefore, the DCB should maintain a balance that gives a fillip to competitiveness in the market while upholding the digital scale and innovation of one’s country.

          The DCB overlaps with the recently implemented amendments to the Competition Act, 2002. The Competition (Amendment) Act, 2023, has introduced the Deal Value Threshold, which makes it compulsory for any merger and acquisition that exceeds INR 20 billion to be notified prior. The problem would be the friction between the conduct control that the DCB would govern through its conduct rules and prohibitions, and structural control, because the mergers and acquisitions are subject to DVT clearance under the Competition (Amendment) Act.

          This dual scrutiny increases the legal complexity and transactional costs. Thus, if the proposed Digital Markets Unit under DCB lacks clear guidelines as to harmonise the existing inconsistencies between the conduct requirements and merger clearance conditions. This would lead to nothing but slowing down essential acquisitions imperative for scaling of the firm, and would contradict the overall aim of promoting efficient market dynamics.

        5. Insolvent Airlines, Invisible Assets: India and Global Norms

          Insolvent Airlines, Invisible Assets: India and Global Norms

          BY AADITYA VARDHAN SINGH AND MANYA MARWAH, THIRD- YEAR STUDENTS AT IIM, ROHTAK

          INTRODUCTION

          The insolvency of the jet airways has impacted the economy of India and has it slowed down. The resolution plan of Jet Airways could only realise nearly Rs. 400 crores whereas the claims of the financial creditors amounted to almost Rs. 8000 crores. While the physical assets such as upside on Aircraft sales, ATR inventory, etc. were well taken into account, the intangible assets that the airline held, failed to serve the interests of the creditors and could not reap the return of the money lent.

          What went unrealised were almost 700 intangible assets in the form of airport slots which could have satisfied a significant amount of the creditors’ claims. These intangible assets are the airport slots: which are powerful operating rights, defined as a permission granted by the airport operator to use their infrastructure essential to arrive or depart at a level 3 airport on a specific date and time.
          The standard mechanism for allocating slots in India partially follows the Worldwide Airport Slot Guidelines (‘WASG’) developed by global aviation bodies like Airports Council International (‘ACI’), International Air Transport Association (‘IATA’), and Worldwide Airport Coordinators Group (‘WWACG’). Slots are assigned twice yearly, for the summer and winter seasons, and few airlines are reassigned their historical slots, primarily known as “Grandfather rights”. Airlines that utilise 80% of the slots keep it for the next season, famously known as “Use-it-or-Lose-it” rule. If the airline fails to comply with the 80% threshold, the slot goes back into the pool available to other airlines to apply and use.

          This article aims to analyse the current position of the Indian insolvency framework in the event of airline administration and how the status of airport slots in India as being untransferable has impacted the interest of stakeholders and undermined the assets recovery from airlines during insolvency.

          NATURE OF AIRPORT SLOTS: REGULATORY PERMISSIONS OR MONETIZABLE ASSETS

          Understanding Airport Slots and Their Regulation

          Airport slots are limited and therefore highly regulated by the Directorate General of Civil Aviation (‘DGCA’), an office attached under the Ministry of Civil Aviation (‘MoCA’). The existing framework is governed by the MoCA Guidelines for Slot Allocation, 2013, which restricts the transfer of airport slots, except in cases involving mergers and acquisitions or temporary rearrangements approved by the Airport Coordinator.

          This present framework that governs the allocation of airport slots deems them to merely be regulatory permissions granted by the airport coordinators rather than monetizable and transferable assets. India has witnessed multiple airline collapses, including Jet Airways, Kingfisher Airlines, and Go First. Each of these had substantial slot holdings at major domestic and international airports, which could have been of great help in reducing the financial burden on the airlines to some extent. Still, unfortunately, our insolvency framework doesn’t recognise them as an asset.

          CLASH WITH IBC OBJECTIVES

          The Insolvency and Bankruptcy Code, 2016 (‘IBC’) was designed to maximize the value of assets of insolvent companies, aiming to preserve and rescue viable businesses. According to the Code’s objectives, it seeks:

          “…to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons…for maximization of value of assets…in a time-bound manner.”

          However, ignoring slots, holding immense monetary value as assets, undermines this purpose of the IBC. The current guidelines issued in 2013 do not align with the code which was enacted in 2016 with an intent to prioritize the interests of the creditors in the event of insolvency, For example, when Jet ceased operations in April 2019, it had some of the most lucrative slots at Heathrow, Mumbai, and Delhi. However, since Indian aviation law doesn’t recognize slots as assets, the Resolution Professional couldn’t monetize them under the IBC.

          Despite multiple representations, the DGCA and MoCA refused to reallocate the historic slots to the resolution applicant, the Kalrock-Jalan Consortium, stating in an affidavit:

          “On the date of moratorium, Jet had no slots and had also lost the right to claim historicity.”

          The inability to treat slots as tradable assets meant Jet’s potential revival lost steam. The resolution applicant had no assurance of getting the airline’s most critical operating assets i.e. its airport slots. However, the DGCA reallocated Jet’s slots to rival airlines, creating further complications and deterring a clean resolution.

            In India, slots can neither be transferred nor exchanged for monetary benefits. In the event of airline insolvency, the DGCA, the authority regulating the allocation of slots in India, throws back the slots owned by airlines into the slot pool, depriving the original airline of something that could have generated millions of dollars if recognized as assets.

          GLOBAL PRACTICES: RECOGNITION AND MONETIZATION OF SLOTS

          Understanding the approach followed by other major jurisdictions towards slot trading during insolvency events is imperative to ensure proper policy formulation.

          European Union: Monetizing Slot Transfers

          The European Union (‘EU’) slot allocation is governed by EU Regulation 95/93. Article 8(4) of this document provides for airlines to transfer or exchange airport slots, with or without monetary compensation, subject to the approval of the airport coordinator. The intent behind such a liberal approach is to protect the financial interest of airlines’ creditors during insolvency proceedings and allow airlines to realize economic interest by exchanging their high-value airport slots with other airlines for their less valued airport slots and monetary benefits for the balance. Through such structured transfers, the value of these assets is not wasted but utilized to recover some part of the value for the stakeholders.

          United Kingdom: Judicial Recognition of Slot Rights

            Through the significant ruling of the United Kingdom (‘UK’) Court of Appeal (‘the court’) in Monarch Airlines Ltd v Airport Coordination Ltd (2017), the judiciary reinforced the recognition of airport slots as intangible assets holding crucial economic value. Even though the UK ceased to be part of the EU, it still holds some of the principles and regulations followed earlier, and this is one of them. In this case, Monarch Airlines had entered administration, lost its operating license, and all the aircraft on lease were returned. When the airline lost the slots, it possessed under ‘grandfather rights’, the court upheld its right over the historic slots, dismissing the argument of future slot allocation purely based on current operational status, and declared such practice as arbitrary and contrary to the regulatory framework. Even though the court explicitly declined the outright sale of slots, it permitted structured exchange and transfers involving monetary consideration.

            IATA Worldwide Airport Slot Guidelines (WASG)

            India’s currently followed guidelines reflect partial adherence to the IATA WASG. Under clauses 8.11 and 8.12 of these guidelines, transparent and coordinated Slot transfer and slot swapping are allowed with or without monetary consideration. These international practices promote liquidity in the aviation market, especially during airline insolvency.

            India aims to transform itself into a global aviation hub, which is impossible without aligning its domestic rules and regulations with those of globally adopted practices. Some Indian airports like Delhi and Mumbai have massive passenger traffic, and slots at these airports carry significant economic value. However, the insolvency event of Go First, where the slots held by the airline were reallocated in the slot pool by DGCA, providing other airlines the opportunity to avail themselves, reflected the restriction imposed on slot trading in the secondary market by existing guidelines. Therefore, recognizing slots as transferable assets and enabling their regulated transfer or exchange becomes of prime importance to improve market liquidity, protect creditors’ interests, and encourage investment in the aviation sector.

            PROPOSED SLOT TREATMENT IN INSOLVENCY

            Post the shift of treatment of slots from ‘regulatory permissions’ to ‘intangible monetizable and transferrable assets’, there is a need for complete overhaul in the framework regarding the treatment of slots as soon as an airline is declared insolvent. As per Chapter 9, Coordination after Final Slot Allocation, Section 8 Part (i) slots can only be held by an airline with a valid operating licence – “Aircraft Operators Certificate (‘AOC’)” When an insolvency proceeding is initiated against an airline, it does not automatically become inoperative and hence still has the power to hold the slots. The airline in this time period shall be entitled to either transfer the slots and monetize them until the airline holds the AOC, subject to the final approval by the DGCA, or since the status of ‘Airport Slots’ is an asset, therefore the Resolution Applicant may initiate a ‘free and transparent’ bidding process which shall be regulated by DGCA for final approval. The bidding process shall be completed within a reasonable time as determined by the authorities concerned.

            CONCLUSION

            Indian laws have developed considerably ensuring liberal behaviour and balancing it with reasonable regulatory oversight. However, the challenge of monetizing slots in India presents a critical void in the current insolvency framework, particularly in the aviation sector. The case of Jet Airways depicts the failure of legal framework in realising the rights of airline of its historic airport slots holding immense commercial value.

            Learnings from international regimes such as EU and UK reflect that a liberal and structured approach towards slot trading can protect the creditors’ interests during financial distress and improve liquidity in the market enhancing investor’s confidence. Though the threat of potential monopolization persists, well planned and formulated policies and regulations can mitigate these concerns. So, the real question is: Can India truly afford high-value assets like airport slots in insolvency proceedings, or is it time to rethink our legal definitions of value before subsequent airline bankruptcy costs us more than grounded planes?

          1. Decoding Residuary Jurisdiction: Why NCLT cannot release PMLA Attachments

            Decoding Residuary Jurisdiction: Why NCLT cannot release PMLA Attachments

            RITURAJ KUMAR , FIFTH – YEAR STUDENT AT RMLNLU, LUCKNOW

            INTRODUCTION

            The interplay of the Insolvency and Bankruptcy Code, 2016 (‘IBC’) and the Prevention of Money Laundering Act, 2002 (‘PMLA’) has been an issue of deliberation since the introduction of the IBC. The conflict is quite natural as both statutes have a non-obstante clause suggesting each has an overriding effect. This leads to a situation where both statutes claim primacy in case of conflict. Further, they both have divergent objects. The IBC aims to maximise the asset during the Corporate Insolvency Resolution Process (‘Resolution Process’), whereas the PMLA provides for confiscating assets arising from or engaged in money laundering. This becomes a significant barrier during the resolution process.

            The discussion around the primacy of the statute and whether a moratorium imposed under Section 14 of the IBC would extend to the attachment made by the Enforcement Directorate (‘ED’) under Section 5 of the PMLA has been a concern for almost a decade.  This blog does not delve into the above issue and restricts its scope to why the National Company Law Tribunal(‘NCLT’) cannot release attachments of a corporate debtor confirmed by the Adjudicating Authority under the PMLA. The National Company Law Appellate Tribunal (‘NCLAT’) in Anil Goel for Dunar Foods v. ED recently affirmed this position that the NCLT cannot release such attachments. However, the legal position on this issue remains unsettled as the Bombay High Court in Shivcharan v. Adjudicating Authority and Anr (‘Shivcharan’) had previously authorised the NCLT to release such attachments while exercising its residuary jurisdiction. Currently, the Shivcharan judgement is pending before the Supreme Court of India for final determination of this issue. In this light, this blog examines the residuary jurisdiction provided under the IBC and argues how Shivcharan judgement disregards the established legal principle and procedure in an attempt to achieve the objects of the IBC.

            RESIDUARY JURISDICTION OF THE NCLT

            Residuary jurisdiction has been vested in the NCLT under Section 60(5)(c) of the IBC. However, it is limited to deciding matters related to the resolution or liquidation of the Corporate Debtor, and it does not provide an inherent jurisdiction. This aligns with the Embassy Property Developments Pvt. Ltd. V. State of Karnataka and Ors case, where the Supreme Court of India asserted that the NCLT cannot replace the legitimate jurisdiction of other courts or tribunals when the issue does not arise solely from or relate to the insolvency of the corporate debtor. By extension, this would equally apply to a special statute like the PMLA where the attachment was confirmed by the Adjudicating Authority under Section 8(3) of the PMLA.

            The attachment under the PMLA relates to the ‘proceeds of crime’ derived from the criminal activities associated with the scheduled offences. These crimes threaten the integrity of the financial system and affects the public at large. These offences are prosecuted by the state and are in the realm of public law. The PMLA was introduced to fulfil India’s international commitment to combat money laundering, aligning with the Vienna Convention (1988) and the United Nations Convention against Transnational Organised Crime (2000).  Such matter, being in the realm of public law, cannot be brought within the phrase “arising out of or in relation to the insolvency resolution” as enshrined under the aforementioned section.

            This position has been recently reaffirmed in Kalyani Transco v. M/s Bhushan Power and Steel Ltd. , where the division bench of the Supreme Court held that the NCLT or NCLAT does not have any authority to adjudicate upon a public law like PMLA. The NCLT, deriving its jurisdiction from the provisions of the IBC and constituted under the Companies Act 2013, is a coram non judice to direct the ED to release the attachment. 

            NCLT AUTHORITY DURING THE RESOLUTION PROCESS 

            During the resolution process, the primary duty of a Resolution Professional is to run the Corporate Debtor as a going concern.Recently, in the case of Mr Shailendra Singh, Resolution Professional of Foxdom Technologies Pvt Ltd V. Directorate of Enforcement & Anr, the Resolution Professional invoked the residuary jurisdiction to defreeze the account of the Corporate Debtor, which was frozen by the Adjudicating Authority under PMLA. The NCLT held that they do not have the power to issue directions to the ED in this regard. It reiterated the stance adopted by the NCLAT in Kiran Shah v. Enforcement Directorate Kolkata that the jurisdiction to deal with matters related to attachment and freezing of accounts under PMLA vests exclusively with the authorities designated under the PMLA. If aggrieved by any action, the Resolution Professional can seek appropriate remedies under the PMLA itself. The statute provides adequate mechanisms for resolving concerns and claims. This clear demarcation of jurisdiction ensures that the PMLA remains independent of IBC and serves its legislative object.

            NCLT AUTHORITY AFTER APPROVAL OF THE RESOLUTION PLAN 

            While the forum for releasing attachments during the resolution process is relatively clear, the situation becomes complicated after approval of the resolution plan under Section 32A of the IBC  It states that the Corporate Debtor cannot be held liable for the prior offence committed by the erstwhile promoter, and protects the property from being attached.

            In Shivcharan judgement, the Bombay High Court reinforced this interpretation that after approval of the resolution plan, the Adjudicating Authority under the PMLA must release the attachments. It also stated that this is the only means of ensuring that the right, as stipulated in Section 32A of the IBC, will start to flow. This position is supported by the Supreme Court’s decision in Manish Kumar v. Union of India which upheld the constitutionality of Section 32A. Article 141 of the Constitution of India ensures consistency in the interpretation of law and set a judicial precedent where all lower courts follow the ruling made by the Supreme Court of India. Consequently, the PMLA Court is bound to comply and give effect to the Section 32A by releasing the attachment.

            However, the Shivcharan judgement erred in empowering the NCLT to release the attached property made under the PMLA under the residuary jurisdiction. The Bombay HC read something not expressly provided in the law and authorised NCLT to adjudicate upon the issue falling into the purview of another court. Though this judgment seeks to achieve the object of the IBC, it overlooks the relevant precedents and established principles. Notably, it stands in aberration with the Gujarat Urja Vikas Nigam Ltd. v. Amit Gupta, where the Supreme Court issued a note of caution to NCLT while exercising the residuary jurisdiction. The Apex Court noted that the NCLT has jurisdiction to adjudicate disputes that arise solely from or relate to the insolvency of the corporate debtor. It has to ensure that they do not usurp the legitimate jurisdiction of other courts or tribunals when the issue extends beyond the insolvency of the corporate debtor.

            Additionally, this approach is also in conflict with the principle of harmonious construction, which is applied to reconcile conflicting provisions within a statute or two different statutes. A harmonious construction cannot extend to the limit which renders one provision completely redundant. The Shivcharan judgement makes the provisions of the PMLA nugatory by bypassing the PMLA courts, and authorises the NCLT to release the attachment.

            Moreover, allowing the NCLT to discharge the attachment practically implies that the NCLT is sitting in an appeal against the Adjudicating Authority of the PMLA, where the latter confirmed the attachment made by the ED.  This goes against the settled principle that the forum to hear the appeal is to be tested in reference to the forum which passed the original order. Since the attachments are confirmed under Section 8(3) of the PMLA by its Adjudicating Authority, it must be discharged either by the same forum or by the appellate forum under Section 26 of the PMLA constituted thereunder. In short, the Adjudicating Authority under the IBC i.e. NCLT cannot assume the role of Adjudicating Authority under the PMLA.

            A WAY AHEAD

            As the appeal of the Shivcharan judgement and related cases are pending before the Supreme Court, a clear jurisdictional boundary must be established by a conclusive ruling. The authority to discharge attached property must rest with the PMLA Court unless a legislative amendment says otherwise. The PMLA Court is a competent forum authorised by the law to deal with attachment and permitting the NCLT to adjudicate on such matters only causes jurisdictional conflict and confusion among the litigators, forcing them to move from one court to another.

            However, while adopting this approach, Section 32A of IBC must be given effect. This provision represents the last expression of the intent of the legislature, as it was introduced through an amendment in 2020. After approval of the resolution plan, the PMLA court must be mandated to release the attachment. This ensures that the protection under the said provision can take effect, and the Successful Resolution Applicant is not made liable for the prior offence. For Section 32A to operate effectively, the perquisite prescribed therein must be satisfied, namely that the new management is not related to the prior management and is not involved in the alleged offence. In practice, the PMLA Court often encounters difficulties in determining compliance with these requirements while considering the release of attachments. To address this issue, the NCLT may issue a No Objection Certificate (‘NOC’) while approving a resolution plan, specifying that the statutory conditions of Section 32A are met. Such an NOC will affirm that a promoter is not regainingcontrol or laundering assets through the resolution process. It will prevent jurisdictional conflict and will not cause unnecessary hardships to litigating parties. In effect, this will ensure that resolution applicants are not discouraged, and revival of a corporate debtor is not obstructed.     

            This conflict between the IBC and the PMLA reflect the difficulty of reconciling two statutes having divergent objects and non-obstante clause. To maintain the independence of both statutes, a consistent position has to be adopted defining a clear jurisdictional boundary ensuring the revival of a corporate debtor is not discouraged. A conclusive ruling by the Supreme Court in this regard or an appropriate legislative amendment is essential to resolve this conflict and bring much-needed clarity to relevant stakeholders.