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This article has been written by Gaurav Puri and Aman Guru, 3rd year law students at Symbiosis Law School, Pune.

INTRODUCTION

The controversy of the un-notified Part III of the Insolvency and Bankruptcy Code (Code) is the current legal issue vis-à-vis the rights of the Personal Guarantors bestowed upon by the Code. In August 2018 the Supreme Court of India in the matter of State of Bank of India v V. Ramakrishnan & Anr [1] pronounced in its judgment that the right of moratorium under Section 14 of the Code will not be applicable to the personal guarantors. It is argued that the decision of the Court will deny the personal guarantors of the rights laid down in the Code and the same goes against the objective and the intent of the Code having wide ramifications to the procedure of Insolvency. The meaning of Moratorium according to the Oxford dictionary signifies “A Legal approval to debtors to postpone payment”. 

Moratorium as far as the Code implies a period wherein no legal procedures for recovery, enforcement of security premium, sale or transfer of assets, or termination of basic contracts can be instituted or proceeded against the Corporate Debtor.[2] This suspension of the procedure is key as it adjusts the benefits of the Corporate Debtor subsequently giving the credit managers clearness with respect to the budgetary prosperity of the Corporate Debtor and giving them an arranging stage to figure a resolution plan.

NOT PROVIDING MORATORIUM TO PERSONAL GUARANTORS GOES AGAINST THE LEGISLATIVE INTENT

The intent behind Section 14 is consequently clear i.e. to not make any charge of the property under debt and keep the assets of the Corporate Debtor together during the Corporate Insolvency Resolution Process (hereinafter ‘CIRP’). At the point when the cooling off period is given to the Debtor the acknowledgment of the obligation on the off chance it happens through the assets of the personal guarantor, he steps into the shoes of the Creditor via his right of Subrogation as visualized under Section 140 of the Indian Contract Act.[3] This right finds its origin in the landmark case of Morgan v Seymore [4] where it was held that a surety who has performed the obligations of the principal which are the subject of his guarantee is entitled to stand in the shoes of the creditor and to enjoy all the rights that the creditor had against the principal.” Once this privilege is practiced a charge is automatically made on the Debtors property which conflicts with the very objective and purpose behind Section 14(1) (b). [5] 

In this way, the purpose of the code does not appear to debar only those suits or procedures which affect the assets of the corporate debtor, as these does not appear to be just one of the parts that is barred; the second should be the assets of the personal guarantors so as to finish the procedure as conceived by the Code.

LIABILITY WITHOUT ADEQUATE RIGHTS: AN ANOMALY

The Allahabad High Court in Sanjeev Shriya v. State Bank of India, [6] took the view that, Moratorium period applies to the enforcement of a guarantee against a personal guarantor to the debt. In addition, relying on the scheme of provisions of Section 30 read with Section 31 of the IBC Code identifies with the approval of the resolution plan, the NCLAT has held that:-

“From the aforesaid provisions, it is clear that ‘Resolution Plan’ if approved by the ‘Committee of Creditors’ under sub-section (4) of Section 30 and if the same meets the requirements as referred to in sub-section (2) of Section 30 and once approved by the ‘Adjudicating Authority’ is not only binding on the Corporate Debtor’, but also on its employees, members, creditors, guarantors and other stakeholders involved in the ‘Resolution Plan’, including the ‘Personal Guarantor.”

Section 31 of the Code therefore provides that once the resolution plan as approved by the Committee of creditor’s takes effect, it shall be binding on the corporate debtor as well as the personal guarantor.

Thus, since the resolution plan of the corporate debtor ties the personal guarantor, the moratorium ought to likewise apply to the personal guarantor. 

The Court under S. 14(3) (b) divided personal guarantor as a separate class with respect to just moratorium. In this way, it is logical to advance that the ‘clarification’ implemented as S. 14(3) (b), in connection to the same debt, characterizes personal guarantor as a different class when contrasted with the corporate debtor however the anomaly of the circumstance is that absence of a moratorium to Personal Guarantors makes is that it keeps the liability of the Guarantor qua the creditor the equivalent yet does not give them comparative rights as the debtor. Accordingly, this classification concerning the applicability of the moratorium is arbitrary and has no nexus with the objective sought to be accomplished by the enactment.

The wider ramification of not providing the moratorium time frame to Personal Guarantors likewise lie in the way that the majority of these personal guarantees are given by subsidiaries or director of the same company. When the debt is reimbursed by the Guarantor becomes a creditor therefore in a position where he can control the Insolvency Proceedings and changing the composition of the Committee of Creditors (hereinafter ‘COC’). This may suitably crash the CIRP and any resolution plan that the COC may define or formulate, consequently crushing the degree and purpose for the Code by altering the position of the Corporate Debtor.

A CASE AGAINST SECTION 128 OF THE INDIAN CONTRACT ACT

The Insolvency Law Committee by its report dated 26.03.2018 [7], which has been vigorously depended upon while enacting the clarification to S.14, points upon the liability of the principal debtor and surety being co-extensive, joint and several as mentioned under Section 128 of the Indian Contract Act. [8] The law proclaimed is that the creditor need not exhaust his remedy against the debtor and can straightforwardly approach the guarantor for the fulfilment of his debt. In any case, one should not lose sight of the fact that the way that IBC prescribes the strict timelines for the completion of CIRP. 

Therefore, the fear expressed and concern of the committee of creditor that creditor would be left high and dry for a prolonged period of time if personal guarantors are additionally brought under the protective ambit of S.14, is neither legitimately sound nor practical. Since IBC is a special law and a complete code in itself the judiciary needs to be guided by the objective and the purpose of the Code with respect to Personal Guarantors.

The Committee has clearly erred in keeping the personal guarantor’s out of S.14 inter-alia on mere apprehension of abuse of the moratorium provision by the personal guarantor and by attempting to have a ‘creditor-friendly’ approach. However, having said that such a clarification or clarified S.14 has not just dampened the corporate environment and would likewise prompt complexities in the CIRP where the creditor(s) has initiated separate legal proceedings against the personal guarantors, in connection to the same debt.

CONCLUSION: THE WAY FORWARD

Section 96 and 101 despite being not notified yet provide the moratorium benefit to the Personal Guarantors. Therefore it can be deduced that such a right was intended to be given to them with the purpose of the Code. The legislature must notify the said right to provide relief to the Personal Guarantors as they are in a dubious position where they are unable to utilize a right that has been given in the Code for the process of insolvency to go on smoothly. 

The rationale behind furnishing Guarantors with the right of moratorium forms a fundamental part of the Code. The Legislature has via the above-mentioned provisions brought out the scheme of the Code. The Courts henceforth must be guided by a purposive interpretation and read Section 96 and 101 inside Section 14 and furnish the Guarantors with the valuable rights enshrined in the Code.

ENDNOTES

[1] State Bank of India v. V. Ramakrishnan, [2018] 149 SCL 107 (SC)

[2] Section 14, Insolvency and Bankruptcy Code, 2016

[3] Section 140, Indian Contract Act, 1872

[4] Morgan v. Seymour, 1 Chan. Rep. 120, 21 Eng. Rep. 525 (1637)

[5] State Bank of India v. Mr V. Ramakrishna & M/s. Veesons Energy Systems Pvt. Ltd., Civil Appeal No. 3595 and 4553 of 2018

[6] Sanjeev Shriya v. State Bank of India, 2017 SCC OnLine All 2717

[7] Report of the Insolvency Law Committee, Ministry of Corporate Affairs, Government of India, (Mar. 2018), http://www.mca.gov.in/Ministry/pdf/ILRReport2603_03042018.pdf.

[8] Section 128, Indian Contract Act, 1872

This article has been written by Shambhavi Sinha and Nihal Deo, 3rd year law students at Symbiosis Law School, Pune and Gujarat National Law University, Gandhinagar respectively.

Introduction

The very first thing that arises amongst the problems faced by the banking industry is regarding the origin of the NPA crisis. One possible reason is that financial decisions taken by the Indian institutions were clouded by a deceptive futuristic windshield. The genesis of the bad loans can be traced back to the periods when the economic growth was strong in the year between 2006-2008. The extrapolate growth rate and over-optimism about the future made the banks make mistakes by accepting higher leverage in investment projects. The repo rate, which is the rate at which RBI lends money to its clients was lowered to 5 percent from 7.75 percent [1] and thus between the FY08 and FY12, the increase in bank credit was 19percent per annum. It was also assumed that the interest cost could be absorbed because in those years the corporate sales were growing on an average of 15-20 percent on a recurring basis. Unfortunately, this picture perfect scenario was hit by problems like slow growth, government permissions and foot-dragging, loss of promoter and banker interest, malfeasance and fraud. This surrealism was thus shattered as the bank credit growth rate came down to 11 percent between FY13 and FY17. Therefore, it was the flawed assumption of progressive expectations with a growing economy that went wrong in the scenario. Now the issue of non-performing asset(NPA) faced by banks is controlling the headlines and it has become compelling to analyse how the Indian banking system stands on a global level.

NPA crisis in India

The most important challenge for public and private sector banks [2] is that of Non-performing assets. RBI has introduced a number of mechanisms from time to time to deal with NPAs, for example; Corporate Debt Restructuring which was solely a contractual agreement between the lender and the corporate and Joint Lenders’ Forums which instructed banks to take prior identification to handle the growing situation of stressed assets. The strategic debt Restructuring mechanism and S4A Scheme were some of the other projects by RBI which were initiated in the right direction but could not gain desired results. It was in the year 2002 that the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI Act ) was passed and it led to the speedier recovery of bad loans as the banks were able to seize the assets directly without the Court’s intervention to recover loans. 

The structure of SARFAESI Act was made in such a way that it not only provides for a separate method to banks to recover their assets but also aids the existing process of recovery through Debt Recovery Tribunals. After the enactment of the SARFAESI Act, recovery through DRTs also got a boost which is clearly evident from the above graph. However, it is also seen that after 2010-11 there has been a constant decline in the percentage of NPAs recovered through DRT, SARFAESI and Lok Adalats. One of the prime reasons for the decline in the recovery appears to be the fact that the total amount involved has continuously increased.  This shows that these methods to recover NPAs have failed [3] when the amount involved is huge.

However, many loopholes were found in the SARFAESI Act which allowed for its misuse. The banks had to take the Court’s help to seize secured loans and the incessant delay in court proceedings defeated the purpose of the Act which was to liquidate the bank’s assets. On the other hand, since the borrowers could not approach the Court under the Act, they were vulnerable to abuse by banks, which used the Act as a quick-fix method to recover and liquidate assets without giving the buyer adequate time to pay a delayed payment.

Thus in the year 2016, the Insolvency and bankruptcy Code was established to merge the existing laws related to insolvency and bankruptcy. This code shifted the balance of power from the debtors to creditors. The Creditors are allowed to measure or consider the feasibility of a debtor as a business decision and concur upon a plan for its revival or swift liquidation. A new institutional framework, comprising of a regulator, professional related to insolvency, information utilities, and other mechanisms are created to provide a formal and time-bound insolvency resolution process. 

As per the data received by Crisil [4] the recovery of debt amount through IBC was Rs. 70,000 crore in the fiscal year 2019 which equals to twice than Rs. 35,000 crore that was recovered in the fiscal year 2019 through existing debt recovery mechanisms like DRT, SARFAESI, Lok Adalat and Enforcement of securities interest Act. However even IBC has certain limitations, for example, average resolution timeline for cases as set out in the code is 270 days but in reality disposal of such cases through IBC resolve 324 days or sometimes even more. Furthermore, NCLT is burdened with a large number of cases. But even then, it can be fairly said that Insolvency and Bankruptcy code has more hits than misses in three years of its formulation. 

Analysis of NPA on a Global level 

The latest data released by RBI shows the NPA rate of 10.8 percent [5] as on December 2018 and India holds the top stop among the BRICS nations. Studying how other nations tackled their NPA problems would help India in formulating effective policies to reduce this crisis in the banking industry. The nations which the highest NPA rates are Greece, Italy, Ukraine, Ireland, and Russia. In fact, Greece [6] has an NPA of 46 percent and the country is under great pressure from the European Central Bank. The Central Bank of Russia has created an institution called bad Bank to handle the situation of stressed assets in the country. Portuguese banks have substantially reduced their NPA with the help of strong economic growths, increased loan recoveries, write-offs and sale of NPA portfolios. On the other hand, Latin American countries like Brazil, Argentina, Turkey have an NPA rate of less than 3 percent despite problems in terms of currency and growth. In the advanced counties with large economies like the US, the UK, Japan, and Germany, there are many avenues of finance for enterprises apart from the banking industry and thus they have NPA ratios of less than 2 percent.

Furthermore, it is very interesting to note that in the early 2000s while China’s NPA was far greater than India’s but since then China has historically reduced their NPAs and today it scores well at 1.7 per [7] cent. It would be prudent to analyse how our neighbour dealt with their NPA crisis with such great efficiency. China implemented a four-point policy to address the crisis. It started by spearheading reforms of the state-owned enterprises and strengthening banks by reducing their level of debt. The second thing that China did was to create asset management companies, equity participation, and asset-based securitization. This strategy is even backed by the International Monetary fund. The third important measure was ensuring that the government discounted the financial loss of debt and to allow debt-equity swaps in existence of a growth opportunity. The last measure was to produce incentives such as as exclusion from administrative dues, transparent evaluations standard and tax breaks. Some general policies which were followed in most of the countries to reduce the NPA were the closure of banks, mergers, and acquisitions and government capital injection, recapitalization of banks, etc. Most of the crisis-hit nations followed the following two reforms [8]:

1. The centralized mechanism through Asset management companies – This approach was used by countries like Mexico, Philippines, Spain, US, Sweden, and Japan wherein Asset management companies purchase the bad loans from banks at a discount after raising the money with the help of government-backed bonds. 
2. Decentralized creditor-led restricting strategy-  Countries like Norway, Chile, Thailand, and Poland majorly relied on this, mechanism wherein the banks or the financial institutions themselves resolve the issue of bad debts.  

Conclusion 

NPAs have not only been an issue for the banks but rather has been an issue for the economy as well. The cash secured up by NPAs directly affects the benefit of the banks as a number of Indian banks are profoundly reliant on interests from it. In spite of the fact that numerous means have been taken by RBI also to decrease NPAs, they are insufficient to control it. The administration needs to accelerate the recuperation procedure of advances and furthermore needs to decrease the required loaning period to segment it as one of the real supporters of the bank’s NPAs. The tribunals need to introduce some sort of automated procedure to ensure that such cases are disposed off easily and the burden on judiciary decreases. Additionally, the right monetary and money related strategies alongside RBI’s strict supervision should be sufficient to solve this problem.

ENDNOTES

[1] https://rbi.org.in/scripts/PublicationsView.aspx?id=15836

[2]https://rbidocs.rbi.org.in/rdocs/Publications/PDFs/0RTP20161778B7539711F14E088A31D52351BF6440.PDF

[3]https://shodhganga.inflibnet.ac.in/bitstream/10603/50703/11/11_chapter_02.pdf

[4] crisil.com/en/home/newsroom/press-releases/2019/05/in-three-years-of-ibc-more-hits-than-misses.html

[5]https://economictimes.indiatimes.com/industry/banking/finance/banking/bank-gnpas-improved-to-10-8-pc-net-npas-to-5-3-pc-in-september-rbi/articleshow/67325570.cms

[6] https://data.worldbank.org/indicator/fb.ast.nPer.Zs

[7] https://www.ceicdata.com/en/indicator/china/non-performing-loans-ratio

[8]https://www.researchgate.net/publication/265399343_Dealing_with_NPAs_Lessons_from_International_Experiences

This article has been written by Abhishek Naharia, a 4th year law student at Rajiv Gandhi National University of Law, Patiala.

E-commerce or Electronic Commerce means the buying and selling of the goods and services through an online mode that is internet [1]. India is the fastest growing market in E-Commerce sector and the revenue generated from this sector is expected to make a growth of around US $80 Billions in a matter of 3 years, from US $39 Billion in 2017 to US $120 Billion in 2020 [2]. The growth rate comes out to be around 51 percent annually, which is the highest in the world.

The issue of entering into Anti-Competitive Agreements that cause Appreciable Adverse effect on the market under Section 3 and that of Abuse of Dominance under Section 4 is not a contemporary one, and has been emerging now since over a period of 6 years and counting. It was post 2012 period where India saw itself amongst the fastest emerging economies in the Asia Pacific region, and thereby the people were ready to transact through internet. The factors that deem to have sped the success of online retailers are widened internet reach, easier access to the phones and other electronic gadgets, manageable mode of payments and the luring offers which fascinate consumers in a very effective manner.

The year 2014 saw a couple of exemplary cases in the E-commerce sector with Mohit Manglani v. M/S Flipkart India and Others (case 80 of 2014) [3] and Ambitious Marketing v. Snapdeal.com and SanDisk Corporation (case 17 of 2014) [4] were the most prominent ones. Where in Mohit Manglani the Competition Commission of India (hereinafter referred to as CCI) opined that not every random market can be construed as a relevant market under Section 2(r) of the Competition Act, 2002 by ruling in favour of the Online retailers and absolved from all the charges that were being laid upon them under the Act. In Ambitious Marketing, the CCI held that there was no abuse of dominance by the Companies as the online retailing done between them was a part of the prudent business policy.

The move to regulate the E-commerce sector comes in the light of Union Commerce Minister’s statement in the Parliament discussing the steps which the Central Government is taking for preventing the top guns in the E-commerce market like Amazon and Flipkart to give huge discounts to the consumers. The Competition Commission of India had earlier stated that the issue was not within its purview in entirety, resulting in shifting the onus to the Department of Industrial Policy and Promotion (DIPP). Draft Policy Papers have already been taken into consideration by various stakeholders and fruitful results are expected out of the meetings [5]. The relevant provision of Competition Law that the Government and Authorities are looking upon is Section 5 and 6 of the Competition Act, 2002. Where certain thresholds need to be satisfied under Section 5 of the Competition Act for an Acquisition to take place, Section 6 lays down numerous grounds which the Competition Commission of India needs to take into consideration while deciding whether the Acquisition is or is likely to cause an appreciable adverse effect on the Competition. The claims by retail shops comes in the light of the takeover of Flipkart by Walmart. The demand along with this by the retail shopkeepers is to insert a sunset clause in the law regulating these big firms to cut out the huge discounts, as the sunset clause will fix an upper limit to the prices of the products [6]. Further, the Competition Act also regulates the anti-competitive agreements under Section 3 and regulates of the Abuse of Dominance by a firm under Section 4.

The issues underlying Section 3 are the exclusive supply agreements that the firms enter into with the retailers. Basically, exclusive supply agreements are agreements between two or more enterprises and it is entered into when the enterprises undertake to deal in exclusivity with each other [7]. A recent example of such agreement could be for instance market for selling Amazon Echo, where Amazon exclusively deals with the manufacturers of the product for exclusive supply of the product and as a result sells it to the consumers through only one particular platform that is Amazon [8]. Similar products and services being rendered through E-commerce platforms are causing troubles for Brick and mortar retailers. Further, Resale Price Maintenance (RPM) is a major issue under Section 3 as the consumer in the cases of RPM may end up paying more than what was needed at the first place [9]. RPM occurs when the manufacturer of the product sets the price of the product in the downstream market (market where the retailers and consumers of the good operate) and disallows in an indirect manner the retailers right to earn profits from the consumers [10]. Moreover, the major concern relating to Section 4 includes the Abuse of Dominance by a firm in the relevant market by engaging into anti-competitive acts such as Predatory Pricing and Denying market access to the new entrants and competitors. Predatory pricing basically occurs when an enterprise decided to price its goods at such low rates below the Average Cost Price such that it creates barriers to entry for the new competitors and results in driving the existing competitors out of the market [11]. In the E-commerce market, a recent example was before the Competition Commission of India when Kaff Appliance filed an information against Snapdeal for selling products at a huge discount and at the same time not guaranteeing the Warranty of the product, and the CCI had ordered enquiry in this matter.

The new E-commerce policy that is being framed is based on the Inventory based model of commerce, where no Foreign Direct Investment is allowed. In the wake of the new E-commerce regulations being framed in India, the U.S. Government earlier this year had shown concerns for the largest Investors in the market, Walmart and Flipkart as the trade through the FDI sector (Foreign Direct Investment) shall be restricted now. The US Government is now taking assistance of bilateral trade between the two countries as a means of reducing the losses that Amazon and Flipkart shall incur. The US says that the such Companies should be given concession on the sole criteria that they are investing such huge amounts in India. Further, the legal issue which surrounds the E-commerce under Competition Law in India is the delineation of relevant market. Now when we talk about the E-commerce sector, the Commission considers whether the online platform is only an intermediary providing services of a platform or a distributor in the vertical chain [12]. The Commission has been mostly of the view that though the online and offline markets differ in terms of the discounts they give and the mode in which the service is being provided, both of them are mere different channels (means) of distribution, thus they constitute the same relevant market [13]. Similarly, it was also held in the case that sale through both online and offline channels need to be considered while determining the Appreciable Adverse Effect on the Competition [14].

Efforts are being taken in the direction of Consumer Welfare with regards to the end result of Competition Law in India and abroad. A peaceful harmonisation thus needs to take effect while preventing anti-competitive agreements and abuse of dominance by any enterprise in the E-commerce sector. Irrespective of the mediator in the market chain of products or services, i.e. online retailers or brick and mortar retailers, the intent and effect of the Competition Law must be to regulate healthy competition in the relevant market and reach consumer specific goals. The intent of the Competition Act, 2002 can be traced through its preamble wherein it specifically provides with stricter goals of Consumerism and Effective Competition. Therefore, without hindering the new competitors in the relevant market, the primary aim of the E-commerce sector should be to operate with innovative techniques in consonance with rules and regulations prescribed by the Competition Commission of India [15], as Competition Law aims at preventing the Competition and not the Competitors.

ENDNOTES

[1] E-Commerce, Brian Holak and Ben Cole.

[2] E-Commerce Industry in India. India Brands Equity Foundation, An Initiative of the Ministry of Commerce and Industry, The Government of India.

[3] Mohit Manglani v. M/S Flipkart India and Others, (Case 80 of 2014).

[4] Ambitious Marketing v. Snapdeal.com and SanDisk Corporation, (Case 17 of 2014).

[5] Suresh Prabhu to Review E-Commerce Policy, may propose to restrict deep discounts, M. Divan.

[6] E-commerce policy review may focus on deep discounts, ET Bureau.

[7] Section 3(4)(b), The Competition Act, 2002.

[8] In Re: All India Online Vendors Association, (Case no. 20 of 2018).

[9] E-commerce and Competition Law; challenges and way ahead, Indian Competition Law Review, Siddharth Jain and Sameer Jain.

[10] Section 3(4)(e), The Competition Act, 2002.

[11] Section 4(2)(a), The Competition Act, 2002.

[12] Implications of E-commerce for Competition Policy, OECD.

[13] Ashish Ahuja v Snapdeal, (Case no. 17 of 2014).

[14] Jasper Infotech v Kaff Appliances (Case no. 61 of 2014).

[15] Competition Commission of India, Research Reports on E-Commerce and Competition Law.

This article has been written by Manas Raghuvanshi, a recent graduate of Jindal Global Law School, Sonipat, currently working as an associate at the Chambers of Ms. Heena Mongia.

Corporate reorganisation is concomitant with changes in control of assets and equity shareholdings. ‘Take over’ refers to the accession to the equity share capital along with assets and liabilities of a public company by another corporate entity, which can be both private and public. Viewed from a different angle, a take-over, or tender offer, refers to a situation where a corporate personality offers the members of another company to sell their shares at a determined price. A takeover might be friendly in case the board of directors of the target company rolls out the red carpet for such corporate reorganisation or it might be hostile in case the board of the target company takes a dim view of such corporate revamp and in consequence the acquirer makes an offer to the shareholders directly. Empirical research shows that corporate reorganisation has been increasingly preferred both in domestic and international business spheres.

On stand-along basis, both takeover and corporate governance have enjoyed volumes of academic attention. This essay drudges up the intercourse between takeovers and corporate governance. Takeovers and corporate governance are invariably concomitant for the reason that the former provides sufficient motivation to corporate entities to bolster their corporate governance mechanisms. Manne’s conception of “market for corporate control” is premised on the idea that market peters out the fiscal worth of the stock of an inefficient company, which, in turn, falls prey to the acquirer. The prospect of a takeover alone is a carrot and stick to rejig their governance practices. Imminent takeover proposal hangs like Damocles’ sword on the board of directors of the target company and, resultantly, since the board can be sacked for dismal performance, it gives an earful to the management. Theoretical literature is suggestive of the fact that in the face of a takeover threat there is an alignment of the interests of the managers and shareholders, which sine qua none for good corporate governance. The intensification of the takeover bid results in sacking of the poorly performing managers by the board of the target company as the board members too can be shown the door in case the company is targeted as a result of mediocre performance.

The market for corporate control, where managements of rival acquirers lock horns for the right to control corporate resources, has a significant impact on managerial labour market. In addition, scholarly engagement with corporate reorganisation has revealed that in a corporate revamp, the governance schemes of all the companies involved tend to adopt the governance practices and structures of the company that has the highest merit. Lel and Miller [1] undertake an in-depth analysis of empirical data and find out: firstly, the setting into motion the takeover proceedings puts the heat on the management including the CEO for the substandard performance; secondly, in states that provide rickety protection to investors, the turnover and M&A regulations have a significant effect on the propensity to lay off inefficacious CEOs. In conclusion, they draw the inference that in corporations with shabby corporate governance norms the market for corporate control acts as a disciplinary stick. In non-synergetic takeovers, or disciplinary takeovers, profits accrue as a result of alteration in the non-value maximisation of operational strategies of the target company’s management. In concise, it is suggested that the takeover market is instrumental in influencing the non-value maximising behaviour of upper echelons of corporate management.

Moreover, robust corporate governance in target company adds to the economic value of the takeover transaction for the said company’s shareholders. Conversely, corporate governance baulks at the idea of a target company making a detrimental deal with the acquirer. Sound corporate governance is remunerated by ‘governance premium’ and desultory governance goes hand-in-hand with profit plummet. Corporate takeover market functions as “court of last resort” or an external factor that cracks the disciplinary whip on the management of the target company that is plagued with dilapidated governance mechanisms. Kumar and Ramchand [2], too, talk about curtailing agency costs in the context of takeover and dissects the role of international takeover market to trim down controlling shareholder moral hazard for corporate entities with higher value-added from acquisitions.

The mere triggering off the takeover regulation, a law that aims to oversee and facilitate takeover activity by tearing down hiccups to mergers and acquisition transactions and perk up both information dissipation and minority shareholder protection, has a disciplinary effect on the management. Additionally, it is academically documented that corporate governance mechanisms are usually absent in companies that operate in countries that provide weak investor protection. This is illustrated from the fact that U.S. corporate firms, as a consequence of solid investor protection regime, have embraced sound firm-level corporate governance mechanisms. As a corollary, the treat of takeover, which effectively disciplines the management, that springs forth from the initiation of the takeover regulation plays an instrumental role in adoption of governance systems in countries with shabby investor-protection laws.

ENDNOTES

[1] Ugur Lel & Darius P. Miller, Does Takeover Activity Cause Managerial Discipline? Evidence from International M&A Laws, 28 THE R. FIN. STUDIES 1588, 1616 (2015), available at http://www.bris.ac.uk/efm/media/conference-papers/corporate-finance/takeover-activity.pdf

[2] Praveen Kumar & Latha Ramchand, Takeovers, Market Monitoring, and International Corporate Governance, 39 RAND J. ECO. 850 (2008), available at https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1756-2171.2008.00041.x

This article has been written by Rongeet Poddar, a 4th year student at West Bengal National University of Juridical Sciences.

The principal bench of the National Company Law Tribunal (“NCLT”) in New Delhi has recently rejected a petition filed by the financial creditor, ICICI Bank, to initiate a corporate insolvency resolution process (“CIRP”) against the debtor company Era Infrastructure (India) Limited (“EIIL”) under Section 7 of the Insolvency and Bankruptcy Code, 2016. (“IBC”) The reasoning advanced by the NCLT is that ICICI Bank had already initiated a CIRP against Era Infra Engineering Private Ltd., the corporate guarantor and parent company of EIIL.

The court relied on the National Company Law Appellate Tribunal (“NCLAT”) decision in Dr. Vishnu Kumar Agarwal v. Piramal Enteprises wherein the NCLAT had held that once an insolvency claim against a corporate guarantor is admitted, the financial creditor cannot initiate a claim against the other corporate guarantor. The appellate tribunal had opined that the financial creditor has the freedom to file two simultaneous claims against the principal borrower and the corporate guarantor or against two corporate guarantors. However, in the event that one of the applications is admitted, a second application cannot be admitted for the same default and claims. An exception for filing multiple insolvency claims was carved out by the NCLAT wherein the corporate debtors combined to form a joint venture company.

A contract of guarantee is an integral component of modern day commercial transactions as it offers an assurance to the creditor that if the principal debtor fails to fulfil his contractual obligations of performance, the surety will offer an alternative recourse for the same.  Section 126 of the Indian Contract Act defines a contract of guarantee as a contract to perform a promise or due discharge of the liability of a third person in the event of his default. According to Section 128 of the Indian Contract Act, the liability of the surety is co-extensive with that of the principal debtor, unless otherwise provided for by the contract. The Insolvency Law Committee Report has also highlighted the need to allow the financial creditor to pursue simultaneous proceedings against the principal debtor and the guarantor since this characteristic is the very basis of the guarantee contract. The decision of the principal bench of the NCLT in ICICI Bank v. EIIL is contrary to Section 128 as it extinguishes the ability of the financial creditor to bring a simultaneous insolvency claim against the principal debtor due to the prior admission of an identical claim against the guarantor. The implication of this decision is that the lender now has to elect between pursuing alternative remedies against the guarantor and the principal debtor. Furthermore, the decision of the NCLAT in Dr. Vishnu Kumar Agarwal v. Piramal Enterprises also negates Section 146 of the Indian Contract Act which allows co-sureties to be jointly and severally liable for the same debt.

Interestingly, in ICICI Bank v. Vista Steel Private Limited case, the NCLAT has overruled a decision of the Kolkata Bench of the NCLT and assented to the initiation of a CIRP against the corporate guarantor when an insolvency claim had already been admitted against the principal debtor. The Kolkata Bench of the NCLT had barred a separate insolvency proceeding against the corporate guarantor on account of the moratorium order passed under Section 14(1) (a) of the IBC against the principal borrower. The NCLAT has remitted the case back to the Kolkata Bench for admission of the application.

The NCLAT in Ferro Alloys Corporation Limited v. Rural Electrification Limited recently held that the IBC does not specify rights, obligations and liabilities of a guarantor who is also a ‘financial creditor’. Therefore, the same had to be interpreted from the provisions of the Indian Contract Act which exclusively enshrines the law of guarantees. On this basis, it was held that it is not necessary to initiate a CIRP against the principal debtor before initiating the process against corporate guarantor.

On the whole, the position of the adjudicatory authorities is quite incongruous. On one hand, there is an acceptance to read the provisions of guarantee in the Indian Contract Act into the IBC to facilitate interpretation. On the other hand, the recent decision of the principal bench of the NCLT in ICICI Bank v. EIIL appears to display sufficient reluctance to read the IBC provisions in light of the law of guarantee as elucidated in the Indian Contract Act. The uncertainty in the law is likely to have a detrimental impact on the ease of doing business. Thus it is necessary to streamline the law in the interest of commercial efficacy. Adjudicatory authorities can consider consolidating the CIRP in case of duplication of insolvency claims in a contract of guarantee to ensure that the liability of the principal debtor and the corporate guarantor remains truly co-terminous. [1] The attribution of joint and several liability of the corporate guarantors also needs to be evaluated in the same vein. The provisions of the IBC must be harmonized with the law of guarantees in the Indian Contract Act such that the interests of the financial creditor are considered paramount.

ENDNOTES

[1] R. Hariharan & A. Rakhecha, Lenders face a choice between debtor, guarantor (India Business Law Journal), available at https://www.vantageasia.com/lenders-face-choice-debtor-guarantor/

This article has been written by Adyasha Mohanty, a 4th year B.B.A. LL.B student at Symbiosis Law School, Noida.

“The future of any new-age technology lies in the regulations that govern them. Artificial Intelligence (AI) promises a high growth potential in a number of sectors” [i] said the former Chief Justice of India, Dipak Mishra at the first International Conference on Law and Regulation of Artificial Intelligence. Due to rapid development in technology, artificial intelligence (hereinafter referred as ‘AI’) shall soon have a major role to play in the corporate boardrooms. Recently, a Hong Kong based venture capital firm, appointed an algorithm named ‘Vital’ (Validating Investment Tool for Advancing Life Sciences) to its board of directors [ii]. The algorithm was given a right to vote on decisions regarding investments to be made by company. Vital was appointed so that it can automate the due diligence process and use huge data sets to analyse trends that are impossible for humans to fathom [iii]. However, Vital was not given the right to vote on all the financial decisions of the company as it had not obtained the status [iv] of corporate director under the corporate laws of Hong Kong. It was only a member with observer status. Similarly, in India, the corporate laws are not sufficient to govern or match the challenges that will be posed by AI in near future. In such a scenario, if AI is given a position in the corporate boardroom, the major governing issues that may arise for the directors of the company is cybersecurity and data governance which now is firmly a corporate governance concern as per the Uday Kotak Committee Report on Corporate Governance.

ROLE OF AI IN THE BOARDROOM AND THE EXTENT TO WHICH HUMAN DIRECTORS CAN RELY ON IT

AI can be divided into three forms on basis of allocation of decision rights between man and machine [v] namely assisted, augmented and autonomous AI [vi]. In assisted AI, it is its sole responsibility to execute specific tasks but the decision making right remains with human beings. In augmented AI, the right to make decisions is shared between human and machine so that they learn from each other. In autonomous AI, it’s only the machine that can take decisions because of its ability to quickly decide on matters which requires analysis of huge data sets [vii]. In the case of assisted and augmented AI, certain (if any) decision rights are delegated however the autonomous AI has the potential to replace the human director. This brings us to answer two questions i.e. firstly, whether directors can delegate decision rights to AI as per Indian laws and secondly, how their duties as directors affected?

DIRECTORS TO DELEGATE TO AI

In India, the Board of Directors are bound by the maxim ‘delegatus non -protest delegare’ which means a delegate cannot delegate. When a higher source delegates any decision making power to a person, he cannot delegate the same power to someone else unless the original delegation explicitly authorises it. Board of Directors are appointed by shareholders because of their competence, skill and integrity which cannot be delegated to another. However this rule is flexible. They can delegate their functions to extent allowed by the Act or the Article of Association. So far, there is no case law or code which answers the question if human directors can delegate their decision rights to AI.  As per Section 179 (3) of the Companies Act, 2013, the Board of Directors may delegate powers such as investing monies, granting loans, giving guarantee or security by passing a resolution in the board meeting to (1) Committee of Directors, (2) Managing Director (3) Manager (4) Any other principal officer of the company and (5) The principal officer of a branch office. On basis of literal interpretation machines don’t qualify to fall under any of the abovementioned categories because Section 152 of the Companies Act, 2013 requires a person or an individual to be appointed as ‘director’ (this provision rules out every possibility for an AI to replace human directors in India), Section 2(53) requires ‘manager’ to be an individual and Section 2(59) defines an ‘officer’ to be a director, manager or key managerial person. Clearly, the law is tailored for human beings and not AIs or machines. This shows, at most, assisted AI can be employed thereby leaving no scope for augmented or autonomous AI. Similarly the US corporate law doesn’t allow the directors to delegate duties which are related to core management decisions. Therefore, it can be said that even if AIs are given the power to execute or take decisions, the ultimate management functions should remain with the human directors.

DUTY OF DIRECTORS AND CYBERSECURITY WITH RESPECT TO AI

Section 166 of the Companies Act, 2013 endows upon a director several duties which he has to follow and upon breaching them he shall be punishable with fine not less than one lakh rupees which may extend to five lakh rupees. A director has duty to pursue the best interests of the stakeholders, act in good faith, exercise his duties with due and reasonable care, skill and diligence, avoid conflict of interest so that he can promote the objectives of the company and maintain good governance. This endows upon a director the duty to maintain the confidentiality of the sensitive information, commercial secrets, technologies, unpublished price of the company unless approved by the board or required law. In such a scenario, data governance (such as data storage or privacy under the Information Technology Act, 2000) can be a major threat since AIs function using the large data sets of information they hold about the company and its customers. The failure of the directors to ensure implementation, adequacy and effectiveness of proper systems to comply with the cybersecurity requirements may result in breach of director’s duties under Section 166 and Section 134 of the Companies Act, 2013. In addition, Section 85 of the Information Technology Act, 2000 holds the person in charge of the conduct of the business of the company (essentially the director as per clause (2) to be guilty if there is any contravention by the company of the provisions laid down in Information Technology Act or its Rules.

CONCLUSION

Considering the aforementioned analysis, we can conclude that even if AIs become part of the boardroom, human directors will be solely responsible for the core managerial decisions. With the advancement of technology, one could even imagine that human directors could be replaced by the AIs. The world Economic Forum’s Global Agenda Council on the Future of Software and Society conducted a large scale survey to predict the time when the world may witness some game changing technologies taking over the globe. As per the survey [viii], more than half of the respondents expect AIs to be on the board of the directors of the companies as early as 2025. However, such aspects are extremely debatable in the absence of the strong regulatory framework.

ENDNOTES

[i] Our Bureau, “AI needs strong legal framework to attain maximum potential”, the Hindu Business Line, available at https://www.thehindubusinessline.com/info-tech/ai-needs-strong-legal-framework-to-attain-maximum-potential/article26366838.ece.

[ii] Rob Wile, “A Venture Capital Firm Just Named An Algorithm To Its Board Of Directors — Here’s What It Actually Does”, Business Insider, available at https://www.businessinsider.com/vital-named-to-board-2014-5?IR=T.

[iii] Nicky Burridge, “Artificial intelligence gets a seat in the boardroom” Nikkei Asian Review, available at https://asia.nikkei.com/Business/Companies/Artificial-intelligence-gets-a-seat-in-the-boardroom.

[iv] Ibid.

[v] Anand Rao, “AI everywhere & nowhere part 3 – AI is AAAI (Assisted-Augmented-Autonomous Intelligence)”, usblogs PWC, available at http://usblogs.pwc.com/emerging-technology/ai-everywhere-nowhere-part-3-ai-is-aaai-assisted-augmented-autonomous-intelligence/.

[vi] Ibid.

[vii] Ibid.

[viii] World Economic Forum’s Global Agenda Council on the Future of Software and Society, “Deep Shift – Technology Tipping Points and Societal Impact”, Survey Report, September 2014, available at http://www3.weforum.org/docs/WEF_GAC15_Technological_Tipping_Points_report_2015.pdf, at p. 21.

This article has been written by Madhura Bhangle, an L.L.M student at School of Law, NMIMS University, Mumbai.

Corporate governance can be encompassed to be rules or practices which helps a company to balance interest of various persons allied to the company. Nowadays, it isn’t sufficient for a Company to only be profitable; it additionally needs to exhibit great corporate governance through environmental awareness, moral conduct and sound corporate governance practices which is achieved only when role of Auditors are determined, with adequate independency and accountability. Competitive environment makes it vital to evaluate the roles and responsibilities of Auditors as it acts as a bridge to gap the theory and reality of corporate governance. Appropriate and effective implementation and amendments in the legal framework will help to ascertain and make Auditors position stronger in the corporate sectors, with adequate independency and accountability. Independence is a cornerstone in the auditing profession as it acts like a foundation for shareholders and general public’s trust. The opinion of the auditor must not be biased or aligned towards management ideology. The auditor’s views and financial reports shall not to influence by the management or majority shareholders.

Auditing independence is an important pillar to good governance, company’s accounts reflect a true picture of the business. Statutory auditor / external auditor ought to independent of the views of management and swift in detecting frauds. The term auditing independence first importance post Enron case, where Enron used multiple accounting tactics to inflate the earnings. Arthur Anderson one of the big five auditing and accountancy firm was held accountable and guilty in this case which lead to enactment of Sarbanes Oxley Act 2002 “to protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws and for other purposes”. This act also stated rotation of auditors, oversight mechanism and other prohibition of non-auditing services to enhance independency. 2002 committee formed under Naresh Chandra also examine aspects of corporate governance amongst the major recommendation was of auditing independence. According to the study only 72% of companies have complied with the ‘independency norms’ since 2013 to 2017 [1]. And there are further are in process of adherence to the same, this gives an idea of the lack of implementation even the norms being stringent in nature.

In order to observe independency of auditor and also to boost audit quality following key aspects play important role:

• Auditor appointment and Rotation
• Avoidance of Conflict of Interest
• Prohibition of non-auditing services
• Joint/ Combined audits
• Auditors protection
• Auditor’s oversight

Auditor is appointed till the conclusion of sixth annual general meeting. Companies Act 2013 provides for compulsory rotation of auditors helps increasing the independency. The companies that need to mandatorily rotate auditors are all listed companies and unlisted public companies having paid up capital of rupee ten crore and more and all private limited companies with paid share capital of rupees twenty crores and more. Listed company or class of companies stated to have mandatory rotation shall not appoint any auditor for more than one term of five consecutive years where an audit firm shall not be appointed for more than two consecutive years of 5 years each. For this purpose if the auditors hold office prior to the commencement of act this period shall also be included [2]. There is cooling period for 5 years were in the auditor can’t provide auditing services to the company. This rotation of auditor have surprisingly a positive effect on the independency wherein the auditor after the period shall aloof of the management ideology. Whenever a new auditor is appointed after the previous one is completed its period of appointment can evaluate the financial accounts independently without prejudice which assistances in detection of frauds. However there are studies stating the contrary view where in a long term relation of auditor and management would help to assess risk and detect fraud by the pattern of investment and expenses [3]. It was observed that the audit rotation may reduce efficiency and quality of audit as the company may appoint a wrong or a less efficient auditor who is unable to implement the audit practices appropriately. It may also lead to higher cost for the company in appointments and evaluation of new auditor who may or may not be in same position as to knowledge as the old one. The alternative would not rotation of audit firm but rotation of audit partners and enhanced role of audit committee who would act as filter in the management and the auditor. Naresh Chandra Committee has suggested rotation of audit partners and at least 50% of audit team to rotate every 5 years.

Avoidance of conflict of interest is one of the better way to enhance independence. There are certain disqualification for auditors. An employee, partner, officer, relative of partner, person who has direct business relationship, relative and director, person involved in fraud for 20 years and convicted for same, any person rendering services to company, subsidiary, holding company of the same shall be disqualified to be an auditor of that company.[4]

Section 144 of Companies Act 2013, prohibits several non-auditing services to be rendered to the company which is being audited or its holding subsidiary company. The services are “accounting and book keeping services, internal audit, design and implementation of any financial information system, actuarial services, investment advisory services, investment banking services, rendering of outsourced financial services, management services”. Prior to Companies Act 2013, Auditors charged less auditing fees than to the prevailing market rate of fees and make up the deficit by providing services of non- auditing nature like tax advice, management consultancy. This gave rise to commercial interest in the firm, questioning the auditor’s ability to protect the shareholders and public interest.

To empower the auditor to work without fear of removal, it is imperative to give them insurance from any punitive action undertaken by management. As needs be Section 140 of the Act gives that an auditor can be expelled before the expiry of his term only by passing a special resolution and only after prior approval of the Central Government. The auditor being removed should likewise be given a reasonable chance of being heard. Additionally if an organization wishes to designate an auditor other than the retiring auditor, the resigning auditor should be given an exceptional notice. Then such retiring auditor must give a representation in writing which is then forwarded to ROC. If same not done then, the auditor has to read it out in general meeting. Likewise, if an auditor wished to resign before period of completion he has to give a statement from 30 days to the company and also to ROC indicating the reasons and facts for resignation. This gives an auditor a fair chance to justify the wrong if done. Stringent provisions to remove an auditor helps in maintaining the integrity and helps auditor to raise voice irrespective of management’s opinion. Thus this leads to fair and just protection of auditors thus improving independency. Joint audits also act like idea for improvement in audit quality. Committee by ICAI has recommended by Standard on Auditing (SA) 299 about the ‘Responsibility of Joint Auditors’. There is need for joint audit as it acts like a check on the financial auditor. If one auditor attempts misrepresentation other auditor can ratify it.

To ascertain efficient and effective audit quality, it is required to have a regulatory oversight mechanism for auditors. Such body would act like a supervisory body to ascertain auditor’s role, independency and integrity. Public Company Accounting Oversight Board (PCAOB) is established under Sarbanes Oxley Act to regulate the audit of public companies so as to ensure the shareholders and investors are protected from any fraud and improve reporting by augmenting the preparation of informative, accurate and independent audit reports for companies. The Board has powers to register audit firms, establish auditing, quality control, ethics, independence and other standards relating to the preparation of audit report, conduct inspection and investigations to ensure compliance with audit and accounting standards. Similarly in India, The National Financial Reporting Authority (NFRA) set up under Section 132 of the Companies Act is in charge of checking and implementing the consistence with bookkeeping norms and auditing standards and for directing the quality of administration of the auditors related with adherence to such standards. The Authority additionally have the ability to explore, on a reference made by the Central Government, matters relating to misconducts committed by any member or accountant. In 2018, MCA issued National Financial Reporting Authority Rules, 2018 (NFRA Rules) to formulate policies and monitor enforcement of accounting standards by companies & also to inculcate penalties for contraventions by finance ministers. However NFRA activities are in limbo. There is yet a long way of its. NFRA has varied delegated powers by Central Government it has power to investigate, levy penalties and ban auditors for misconducts. But, it is not the only motive of audit regulators. The all-encompassing objective is to enrich audit quality which, in turn, will boost investor protection and public interest and improve independency and accountability. The PCAO reviews not only financial deficiencies also undertakes remedial measures to support audit firms in solving quality control problems. Operative NFRA would help reduce misconducts on auditor’s part and help improve confidence of shareholders. It is thus determined a full functioning oversight mechanism is mandatory for reviewing fraudulent activities by the auditors.

In this growing and changing era, there is mandate for a fully functioning over sight body and adherence to laws and regulation to ascertain corporate governance. Strengthening the independence of the auditors will help them to raise against unbiasedly against the miss management and ascertain full accountability to the shareholders.

ENDNOTES

[1] Grant Thornton, The Future of Audit in India, Prime Data Based Group available at http://www.primedatabasegroup.com/primegroup_logo/The%20Future%20of%20audit%20in%20India_MFR%20Report.pdf .

[2] Rule 6(3)i of Companies (Audit and Auditors) Rule, 2014.

[3] Kendall O. Bowlin, Jessen L. Hobson, Surprising Effects of Mandatory Auditor Rotation on Audit Quality International Federation of Accounts, Dec 15 2015, available at https://www.ifac.org/global-knowledge-gateway/viewpoints/surprising-effects-mandatory-auditor-rotation-audit-quality.

[4] Section 141, Companies Act 2013.

This article has been written by Manisha Singh, a 5th year B.A. LL.B (Hons.) student at University School of Law & Legal Studies, Guru Gobind Singh Indraprastha University.

The Competition Commission of India (“CCI”) has been established under Competition Act, 2002 (“Act”) to investigate any cases and/or complaints that come before it. To fulfil the primary function of the CCI which is to conduct enquiries into contraventions of any of the provisions of the Act, the Director General (“DG”) is appointed by the Central Government.

Essentially, an inquiry is initially conducted by the CCI either upon receipt of a reference or its own knowledge or information received in accordance with either Section 19 for anti-competitive agreements, abuse of dominance. For combinations, inquiry is conducted under Section 20 of the Act. The Commission has to come to a prima facie opinion that a case exists and once it comes to such conclusion it directs the DG to conduct an investigation.

Inquiry and Investigation into Anti-Competitive Agreements and Abuse of Dominance: [1]

The procedure of inquiry by the CCI is enumerated under Section 19 of the Act i.e. inquiry in cases of certain agreements alleged to be in contravention of the Act or information alleging abuse of dominant position by an enterprise, is conducted by the Commission in the manner explained below:

The CCI upon receipt of reference or its own knowledge or information received under Section 19 with regard to anti-competitive agreement or abuse of dominance, has to come to a prima facie opinion that a case exists and once it comes to such conclusion, it shall direct the DG to make an investigation into the matter.[2] If the CCI does not find a prima facie case, it will close the case, pass an appropriate Order and forward the Order to the concerned persons.

DG is required to submit a report on his findings to the CCI within the time as may be specified by the Order of the Commission such that:

1. If the DG recommends that no case of anti-competitive agreement or abuse of dominance exists and/or there is no contravention of the provisions of the Act, the CCI shall invite objections/suggestions from the concerned parties [3]. Upon consideration of these objections or suggestions if CCI agrees with the DG, it shall close the matter. If CCI does not agree with the recommendation of the DG, it may order further investigation by DG or may itself conduct further investigation.
2. If DG in its report recommends, that there is a contravention of the provisions of the Act and the CCI is of the opinion that a further inquiry is required, it shall investigate into such contravention in accordance with the provisions of the Act.

It was observed in CCI v SAIL,[4] that at the very onset the CCI enquires into the matter and if, at the inquiry level, it is of the opinion that prima facie a case for contravention exists then, it directs the DG to investigate into the matter under Section 26 of the Act.

The scope of investigation by DG was discussed in Excel Crop Care Limited v. Competition Commission of India & Another.[5] In this case, the SC was of the view that the DG should investigate the matter in accordance with the direction given by the CCI. The SC found that the purpose of a DG investigation is to, “cover all necessary facts and evidence in order to see as to whether there are any anti-competitive practices adopted by the persons complained against”. Therefore, “the starting point of the inquiry would be the allegations contained in the complaint” but during the course of the investigation “if other facts also get revealed and are brought to light”, according to the SC, “the DG would be well within his powers to include those as well in his report”.

The SC has decided the above on the basis that at the initial stage, the CCI “cannot foresee and predict whether any violation of the Act would be found upon the investigation and what would be the nature of the violation revealed through investigation”. Accordingly, the SC holds that a restriction of the investigation process “would defeat the very purpose of the Act”.

Therefore, the order passed by the SC has broadened the boundaries/ paradigm of DG investigations. The DG is well within its power to investigate other facts regarding a contravention (not considered by the CCI) which the DG discovers later, during the course of the investigation.

Inquiry and Investigation into Combination by CCI: [6]

Section 20 of the Act empowers the Commission to inquire into whether a combination has an appreciable adverse effect on competition in the relevant market in India. The commission can initiate inquiry upon its knowledge, on information received or a reference received from the central government, state government or a statutory authority. The law provides for several filters before the Commission can commence an inquiry against a proposed transaction of combination. These are:

1. If the result breaches the statutory thresholds;
2. Prima facie causation of appreciable adverse effect on competition in the relevant product and geographic market within India.[7] Factors relating to ascertaining appreciable adverse effect on competition have been statutorily provided in the law, thereby, minimising arbitrariness. [8]
3. Local nexus or “de minimis” thresholds have been provided under the law for overseas transactions having adverse effect in India. Cross-border transactions which do not exceed the statutory “de minimis” thresholds shall be exempted from being inquired into by the Commission.[9]
4. Government-aided enterprises are not exempted from being scrutinised thereby ensuring a level-playing field between private and public sector competing enterprises.[10]

Section 20(4), by way of guidance, casts an obligation to have due regard for all or any of the factors mentioned in the said provision while determining whether a combination has appreciable adverse effect on competition in the relevant market or not.

On coming to a prima facie opinion that the combination is likely to cause or has caused appreciable adverse effect on competition within the relevant market: [11]

1. The commission shall issue a show cause notice to parties to the combination calling upon them to show cause within 30 days of receipt as to why investigation of such combination should not be conducted.
2. After the receipt of the response from the parties, the commission may call for a report from the DG in the time as may be specified.
3. After receipt of the response and the report of the DG, if the commission is of the prima facie opinion that the combination has or is likely cause appreciable adverse effect on competition, it may direct the parties to publish the details of such combination within 10 days of such direction for the knowledge of general public and the persons affected or likely to get affected by such combination.
4. The public or the effected parties are required to file their objections/suggestions, if any, with 15 days of such publication.
5. Within 15 days of the aforementioned period of 15 days, the commission may call additional information from the parties to the combination.
6. The parties are required to submit the additional information with 15 days of the after expiry of 15 days during which the information was sort.
7. The Commission is mandated to proceed with the matter within 45 days of the expiry of the 15 days provided for furnishing the additional information.

Hence, as illustrated in the chart above, the Commission initiates under Section 19, an inquiry upon its own knowledge, on information received or on a reference received from Central Government, state government or a statutory body, into whether a combination has an appreciable adverse effect on competition in the relevant market in India or not. Upon coming to prima facie opinion that the combination is likely to cause or has caused an appreciable adverse effect, the Commission will investigate the matter in accordance with Section 29 of the Act.

ENDNOTES

[1] Sections 19 and 26 of the Act.

[2] Section 26(3) of the Act; the DG does not have any suo moto powers and cannot initiate any inquiry on its own.

[3] The Act does not empower the CCI to invite objections/suggestions from general public. Objections/ suggestions are limited to the concerned persons i.e. if there is reference then to Central and State Governments or the statutory authority and if the inquiry is based on information then to the person who has provided such information.

[4] Page 15, para 28, (2010) 10 SCC 744.

[5] Page 25, para 36, (2017) 8 SCC 47.

[6] Sections 20 and 29 of the Act.

[7] Sections 2(r), (s), (t) read with Sections 19(5), (6) and (7).

[8] Section 20(4) of the Act.

[9] Section 5 of the Act.

[10] Section 2(h) read with 2(1).

[11]  Section 29 of the Act.

This article has been written by Radhika Madaan, a 1st year B.B.A LL.B student at Symbiosis Law School, Hyderabad.

Corporate Social Responsibility is a means whereby society can be assured that large corporations are well run institutions to which investors, lenders, shareholders and consumers can confidently commit their funds and other contributions. Its importance is felt to demonstrate greater disclosure, more transparency, better shareholder value and paying back the society for the greater good. The CSR under the draft of Companies bills, 2009 was voluntary, however the same is upheld to be mandatory under section 135 of Companies Act, 2013 and with that India has become the world’s first country to make CSR compulsory by the provisions of law in April, 2014. The Financial year of 2015-16 has observed an increase of approximately 28% in respect of spending of CSR. As per the modern thinking or Societal Marketing Concept it is the obligation of any corporate or firm to invest its part of resources for the greater good of the society. This is because a firm takes its resources from the society and therefore has a social and moral responsibility to pay back the society; a firm cannot limit its perspective to wealth maximization or profit maximization. According to EU Commission “CSR is a concept whereby companies integrate social and environmental concerns in their business operations and in their interactions with their stakeholders on a voluntary basis” [1]

BACKGROUND AND STRATEGIC DEVELOPMENT OF CSR IN INDIA

CSR is a three pillared concept based on Sustainability, transparency and accountability. The concept of CSR has originated in India via the philanthropic activities i.e. donations, relief work, charity etc. It is believed that CSR in India still remains in the ambit of such activities however the same has moved from institutional building to community or society development along with the welfare. One of the factor influencing companies to undertake CSR can be the demand and awareness spread across the communities. With rapid growth, industrialization and too much competition CSR has now developed and has become Strategic in nature, resulting into reporting of various activities undertaken by the companies in order to attain public confidence.

The companies Act, 2013 has mandated the implied concept of CSR by amending the provisions of companies act, 2013. Section 135 of the act makes CSR compulsory for certain class of the companies. The primary development made by such provision is that it makes certain class of the companies to spend not less than 2% of the average net profit. Further Schedule VII of the act brings forward the list of various CSR activities pinpointing community development as the core principle. However the draft of CSR rules put forward the idea to look beyond the philanthropic and community development concept.

SECTION 135, COMPANIES ACT, 2013 and CSR RULES

The CSR within the clause 1 of section 135 is applicable on every company having net worth of rupees five hundred crore or more, or turnover of rupees one thousand crore or more or a net profit of rupees five crore or more during any financial year. CSR is also applicable on foreign companies having a place of business in India. Clause 5 of the provision makes its compulsory for a company to spend at least 2% of the average net profit for last 3 years (net profit before tax). If a company falls under any of the criteria of the section 135(1) then it must comply with the certain rules (CSR rules).[2]

(1) A company must constitute CSR Committee Board consisting of at least three directors, out of which minimum 1 shall be independent in nature. Section 149 of the act makes it compulsory for certain public companies to appoint independent directors but it must be noted that CSR rules makes it clear that if a company is not required to appoint an independent director under section 149 than it is not necessary for such company to appoint an independent director. Additionally in case of private companies whereby only 2 directors are appointed as directors then only 2 directors constitute a CSR Committee Board.

(2) Such board is required to discharge CSR Responsibilities (section 135(3)): to formulate and recommend to the board CSR policy which shall indicate the board the activities which must be undertaken by the company as per the schedule VII, to recommend the amount of the expenditure to be spend on the CSR activities, to monitor such established CSR policy by the company, they must also institute a transparent mechanism for implementation of CSR projects undertaken.

(3) Any company falling under the ambit of CSR policy shall formulate its corporate social responsibility net i.e. it must include all list of CSR projects or programs (such activities must fall under schedule VII of the act), it must provide the modes and manner of the performance of such activities, CSR policy must provide the monitoring process, further CSR policy must ensure that any surplus arising from such CSR activities aren’t a part of company’s profit. It shall however be noted that any CSR activity shall not include those activities which are under the normal course of action of the business (a construction company building orphanages will not be considered to perform any CSR activity) –section 135(4) [3]. Rule 4 CSR Rules provides that all CSR activities are to be undertaken in accord with the CSR policy.

(4) As per rule 7 of CSR Rules, CSR expenditure would include all the expenditure which includes contribution to the corpus for CSR activity as approved by the board of directors on the recommendation of the committee

(5) As per rule 8 of the CSR rules the board report shall have an annual report on company’s CSR activities in the format provided in the annexure to the CSR rules. [4]

SCHEDULE VII OF THE COMPANIES ACT, 2013 [5]

Schedule VII of the act put forward the list of various CSR activities. According to schedule VII of the act the following activities are considered as CSR activities:

(i) eradicating extreme hunger and poverty; (ii) promotion of education; (iii) promoting gender equality and empowering women; (iv) reducing child mortality and improving maternal health; (v) combating human immunodeficiency virus, acquired immune deficiency syndrome, malaria and other diseases; (vi) ensuring environmental sustainability; (vii) employment enhancing vocational skills; (viii) social business projects; (ix) contribution to the Prime Minister’s National Relief Fund or any other fund set up by the Central Government or the State Governments for socio-economic development and relief and funds for the welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women; and (x) such other matters as may be prescribed.

The ministry of corporate affairs by a circular dated 18/06/2014 provided certain clarifications. According to it entries made under section VII must be interpreted liberally i.e. CSR activities must be read in broad and as per the annexure it includes the following as well:

(1) Promoting road safety shall be considered in promoting education (2) drivers training are to be covered under vocational skills (3) treatment to road accident victim is to be covered under promotion of heath care (4) providing aids and appliances to the differently able person are to be considered in promoting heath care (5) consumer education and awareness to be covered under promoting education (6) donation to IIM for conservation of building and renovation of classroom is CSR (7) setting up non academic techno park or development of rural or slum area is CSR (8)renewal energy projects are covered under CSR (8) setting up trauma care around highways or disaster relief is CSR.

Summarizing it can be concluding, corporate social responsibility is a modern concept whereby companies aims to integrate social and environmental concerns in their business operations. CSR is a three pillared concept based on Sustainability, transparency and accountability. The CSR under the draft of Companies bills, 2009 was voluntary, however the same is upheld to be mandatory under section 135 of Companies Act, 2013 and with that India has become the world’s first country to make CSR compulsory by the provisions of law in April, 2014. Further Schedule VII of the act put forward the list of various CSR activities. CSR is important as it demonstrate greater disclosure, more transparency, better shareholder value and paying back the society for the greater good. The article therefore highlights the importance, scope and various provisions related to the corporate social responsibility.

ENDNOTES

[1]http://www.mondaq.com/india/x/754042/Corporate+Governance/Corporate+Social+Responsibility+Amendment+Enforced

[2] Section 135 of companies act, 2013 http://www.mca.gov.in/Ministry/pdf/CompaniesAct2013.pdf

[3] Section 135 of companies act, 2013 http://www.mca.gov.in/Ministry/pdf/CompaniesAct2013.pdf

[4] CSR Rules, 2016

[5]  Section 135 of companies act, 2013 http://www.mca.gov.in/Ministry/pdf/CompaniesAct2013.pdf

This article has been written by Rushabh Vidyarthi, a 3rd year B.L.S. LL.B student at Rizvi Law College, Mumbai.

INTRODUCTION

The Supreme Court of India on 5th of December 2018 upheld the Bombay High Court order in the case of Vodafone India Ltd. & Ors. v Competition Commission of India (CCI). Setting aside the procedural investigation initiated by the DG [1] pertaining to a complaint contending that that Cellular Operators Association of India (COAI), which comprised of major telecom operators functioning in India namely; Vodafone India Limited (Vodafone ), Bharti Airtel Limited (Airtel), Idea Cellular Limited (Idea), Telenor (India) Communications Private Limited (TICPL), Videocon Telecommunications Private Limited (VTPL) had allegedly acted in concert and denied Points of Interconnection (POI) to a newly formed entrant in the market namely; Reliance Jio India limited (RJIL). The substratum of the complaint filed before the Competition Commission of India (CCI) was that the denial of the said POI was an egregious violation of the Competition Act 2002. [2]

The Supreme court jettisoned the said investigation and in turn held that the said matter fell within the purview of the Telecom Regulatory Authority of India (TRAI) and that the CCI must wait for the findings of the TRAI. The Judgement raised eyebrows on several factors including the repercussions that the same would have on the powers of the CCI and its autonomy. The effect of the judgment is rather disconcerting as far as sectoral overlaps between the Competition Act and other special legislations would arise in future. The paper aims to analyse the position of the CCI in light of the said pronouncement further solutions adopted in foreign jurisdictions for such loggerheads are attempted to be discussed and emulated.

FACTUAL BACKGROUND AND THE COURT’S VERDICT

The doors of the CCI were knocked in order to investigate into the alleged denial of POI by the COAI to RJIL. The same contended that COAI had entered into alleged cartelisation and the denial of POI placed fetters around the growth of RJIL into the telecom market. In addition to the same the COAI action of ignoring RJIL’s request for increasing the said POI resulted in call failures and the same hampered with RJIL’s operation in the telecommunication market. Another allegation was that all the cellular operators refused portability to its users who wished to switch to RJIL. It was accordingly contended that the same had an Appreciable Adverse Effect on Competition (AAEC) and accordingly the cellar operators deserved to be penalised for the same by the CCI.

A challenge was placed to the said investigation initiated under the Competition Act by way of a Writ Petition filed before the Bombay High Court. The Court in turn found much substance the contention that the said matters fell within the purview of TRAI and not the CCI.

The said judgment of the CCI was assailed before the Supreme Court on many a grounds. Arguments were advanced that the CCI and the TRAI were two separate bodies constituted by way of two separate legislations. In case of statutes operating in different fields there was no statute repealing the other [3]. The Competition Act was also alleged to have an overriding effect [4]. On the other hand on behalf of the cellular operators it was contended that the TRAI was to have jurisdiction of the instant case and that was reflective from the statements and objects of the statute governing the TRAI [5] on these grounds it was contended that the Telecom Disputes Settlement and Appellate Tribunal (TDSAT) was a more plausible forum to investigate into such issues of telecommunication.

The Judgement reflects a careful scrutiny of these submissions in seriatim and a  comparison of the statement and objects of both the statutes that was taken stock off. The need for the legislature enacting sector specific judgments was discussed and ultimately the Court found it apposite that the TRAI would be the astute body fit to investigate into issues of such sensitivity. The CCI in turn would have to wait for the findings of the TRAI and at the current stage it would be premature to conclude if the said action of the cellular operators would have AECC or no.

IMPLICATIONS OF THE JUDGEMENT

The said judgement no doubt sent shock waves to the CCI having far reaching consequences on its autonomy and placing fetters on its scope. However what is disconcerting is that the same to an effect enfeebles the position of the CCI as a regulator. This judgement no doubt will act as a guiding part for determination for future jurisdictional conflicts. In this effect attention is drawn to two specific statutes indubitably raise concern over their jurisdictions in light of the Competition Act. The Electricity Act 2003 for instance that establishes the Central Electricity Regulatory Commission (CERC) paves way of a direct overlap in terms of its statute as the same specifies matters having adverse effect on competition to fall within its purview [6]. A similar trend is seen in the case of The Petroleum and Natural Gas Regulatory Board Act, 2006.  The statement and objects of the said Act empowers the commission to look into matters which deal with abuse of dominant position and adverse effect on competition in the market [7]. Determination of jurisdictions in cases such as these Acts is rather fraught with confusion and unresolved controversy.

In the alternative, what crosses one’s mind is that is it only in such cases where the statute prescribes for dealing with competition related issues that the Court must oust the jurisdiction of the CCI and if the same pattern is encouraged would it not set at naught the objectives of the Competition Act.  However what demands observation is that in the instant no provision specifically precluded the jurisdiction of the CCI and the Apex Court chose to yet oust the CCI. What would happen in cases wherein the other statute prescribes for competition regulation is a disquieting question.

Further “prima facie” case as mentioned in the statute which is a prerequisite for onset of investigations is now in jeopardy. The Apex Court ruling would now compel the CCI to not only convince itself of existence of a prima facie case in order to proceed with its inquiry but also convince itself that it does not transgress upon the jurisdiction of any other body [8]. Rather doing all of this can yet keep this ‘prima facie’ in its true sense or does it necessitate a full fledged inquiry.

In addition to this, the wordings used in Section 3 that require establishment of mere presence of collusion get significantly watered down [9]. However the option of allowing parallel inquires by both these institutions is left unanswered [10]. Allowing parallel investigations by both the regulators would have rather well respected their comity and autonomy in addition future loggerheads amongst statutes would not have the leeway to proceed with the assumption that the CCI is in a form a rather subordinate body and it needs to depend on the findings of another authority.

LESSON FROM FOREIGN JURISDICTIONS

An overview on the Australian regime in light of the instant case can in no way be disregarded. The same places its antitrust law on a high pedestal. All issues relating to industry specific competition law matters [11] have been encompassed within the umbrella of competition law [12]. As regards to telecommunications and competition law the Australian regime incessantly aims at not only preventing overlaps but also enacting legislations to match the changing trend.  Such approach rather sounds much plausible and prevents the issue of jurisdictions from becoming so vague. The matters are thus regulated by the Australian Competition and Consumer Commission (ACCC).  This in turn enhances the idea that antitrust law per say is not a sector specific law but rather deals with situations which have AAEC and are not limited to a particular sector.

Position in other foreign jurisdictions as well does not leave it to the decision of the court to decide jurisdictions. There is utmost clarity as to whether a particular authority shall exclusively enjoy the right to adjudicate upon a particular issue. Or in the alternative concurrently both can adjudicate upon the said issue. At last the most plausible alternative that is suggested is one wherein there is consultation amongst the two authorities which are at loggerheads with each other.  This would rather facilitate proper adjudication of the issue as required.

CONCLUSION

Prolific tradition of enacting sector specific laws is bound to raise issues of overlaps however comity of authorities cannot be compromised with. The instant judgement can most possibly open floodgates for future wherein the CCI’s jurisdiction to adjudicate upon issues can be successfully questioned. The competition Act 2002 almost completes a decennial anniversary this year in India. The judgment however to an extent tramples upon the autonomy of the CCI and the objectives with which it was enacted. The same by no means is pleasant for the CCI which is ousted before it could successfully flourish as an important adjudicator of such a pivotal branch of commercial law.

ENDNOTES

[1]  Section 19, The Competition Act 2002, (12 of 2003)

[2]  Section 3(3)(b), The Competition Act 2002, (12 of 2003)

[3]  Haridas Exports v. All India Float Glass Manufacturers’ Assn. & Ors. (2002) 6 SCC 600

[4]  Section 60, Competition Act 2002 (Act 13 of 2003)

[5]  Telecom Regulatory Authority of India Act, 1997.

[6]  Section 60, Electricity Act 2003

[7] The Petroleum and Natural Gas Regulatory Board ACT, 2006 NO. 19 OF 2006 [31st March, 2006.]

[8]http://www.mondaq.com/india/x/804632/Antitrust+Competition/Prima+Facie+Troubles+In+Finding+CCIs+Jurisdiction

[9]  Pradeep S. Mehta and Parveer S. Ghuman, ‘Did the SC Solve the Impasse Between India’s Competition and Telecom Regulators’ The Wire, 18, Dec 2018.

[10]  Id.

[11]http://www.mondaq.com/australia/x/525196/Trade+Regulation+Practices/Harper+Bill+and+related+competition+law+reforms+released+for+consultation

[12]  https://www.azbpartners.com/bank/role-of-cci-in-regulated-sectors-overlapping-jurisdictions/