Corporate Law

Why Tech Startups in India Worry About Competition Law

Competition Law: It is quite undeniable to state that an individual’s life revolves around new tech especially given the odious times of the pandemic. with its increased usage in our daily lives, companies like Facebook and Google seem to be omnipresent. Thus the influence they present on anybody’s life is tremendous and sometimes unwarranted.

This especially presents a problem for the individual if such an undeniably tremendous power goes unchecked and unregulated. Given the burgeoning influence it has on society and the catastrophic circumstances it might have in the future given the spread of fake information, the Government has taken matters into its own hand. This has led to the initiation of newer regulations and rules with regard to competition.

These laws are more geared to deal with the burgeoning, unchecked power of big tech firms. It can, in fact, be stated that such laws are being passed to curtail the growing influence and power of the big techs.

Historical Development of The MRTP Act

the monopolies and restrictive trade practices law was passed in 1962 to regulate and curtail the monopolistic trade in the Indian economy. It is here to be noted that initially it was initially had a socialistic character and did not apply to the public sectors.

It was due to this attribute of non-regulation of the public-owned entities like the banks, corporations, etc. that led to the passage of the Competition Act in 2002. Its main objective was to emphatically deal with anti-competitive agreements. In compliance, it also wanted to end the abuse of a dominant position and the acquisitions in the economy.

But what actually led to the debacle of the MRTP act? It was mainly due to the inefficiency that had crept into the system due to bias that had seeped into the system. It had led to a bias against the private sector which wasn’t quite accommodating. On the other hand, the liberalization in 1991 had shaken the foundation of the robust MRTP structure in the Indian economy. It was also perhaps due to a lack of clarity on a variety of definitions that made it quite ambiguous.  

Thus with liberalization in trade, robust competition law was effectively needed as trade and competition are effectively intertwined. But this also meant that Competition laws had effectively monitored the cutthroat competition that was presented by the foreign corporations to promote healthy competition and protect consumer interest. 

It is to be noted that with increasing Competition law regulation, the system has become reductant and crippling. It with its regulatory authority has started to emphatically affect the tech companies in big ways in order to regulate their size and market dominance.

In fact, internationally, the authority of Google and  Microsoft has been challenged. Coupled with it the Indian authorities have also invariably placed allegations against Flipkart and Amazon for their increasing discount sales in the economy. On the other hand, allegations have been filed against Facebook for renewing it’s it investment with Reliance Jio.

Though the government in India is emphatically trying to control the competition and monopoly in India, its measures are increasingly becoming reluctant.

It is to be noted that free trade is itself a competition regulator where the inefficient move out of the market. With extra ostentatious and complex competition laws for a developing country, these are usually crippling. Competition laws are a luxury for the developed country that developing countries like India can ill afford.

On the other hand, the government’s new attitude towards regulating the big tech firms has been strongly reflected in the new amendment bill of 2020. This emphatically molds and changes the regulatory structure of the CCI in restructuring procedures for effectively regulating the guidelines. The new bill also increasingly seeks to expand the Act to invariably and quite detestably include the digital markets.

A recent example of the same is the heavy regulations that have been proposed for the arrangement and buyers cartel. With various reductant measures to regulate the digital world with the chief compliance officer and a series of measures, inefficiency is bound to seep in.

With the increasing popularity of the tech companies and corporations, it has been seen that how the tech world is increasingly dealing with the cases such as the ola uber pricing issue and the other google antitrust allegations.

Talking about the mergers laws and the applicability of the competition laws, it is to be noted that the current merger control framework is traditional and hence reductant as CCI approval is needed if the two companies involved in the merger cross a certain limit of assets and turnover thresholds. But given the nature of the tech firms, these are very asset-light and might actually not earn revenue for many years.

This is due to the fact that the company’s more immediate goals are to expand and gain a consumer base in the market. Thus, this might lead to overlooking high-value transactions that might escape scrutiny.  

In fact, the regulation of the digital framework regulation by just CCI will not help. This is due to the fact that it might also require the help of a data protection bill and more importantly the broadcast company of India. Thus, the increasing number of regulations is not the need of the hour but the accommodation of the same is. 

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Is IBC Not The Best Bet in Resolving Distressed Assets?

IBC Resolution on Distressed Assets: Given that the Indian banking sector is plagued by the NPA crisis, its redressal is the need of the hour. The pandemic has wreaked havoc on the economy which has crippled the financial standing of many, especially in India. Thus, it can quite rightly be stated that the economy will definitely see an increase in non-performing assets in the future.

This will be effective due to various reasons, firstly, as aforementioned financial crippling of the masses, secondly, it will be due to failed repayment of loans due to low job rates and lower quality of jobs. Thus, it becomes absolutely crucial that India’s NPA redressal mechanism is well structured and effective.

A ray of hope that was seen in such a system was definitely the Insolvency and bankruptcy code, but given its invention 5 years ago, it is quite rueful to witness that the resolution of distressed assets through its due process has not made any significant or notable progress. The biggest setback of the policy comes when the central issue of recovering stranded loans at fair value cannot be accommodated by the same.

Other issues that plague the IBC mechanism are the untimely resolution of the problems and the delay in arriving at meaningful resolutions. Also, the massive haircuts, that involve the significant amount that the lenders have to forego on their outstanding loans coupled with interests is also a canker for the deal.

It is to be noted that this comes despite several amendments by courts being made to the law. The other grounds which make IBC not so attractive include matters is low recovery and delays. Such a claim has been corroborated by various data out there, and such data talks volumes about the significant drawbacks of the IBC. Recently light was shed on the dubious matter by the regulator Insolvency and Bankruptcy Board of India. The released dataset showed low recovery and resolution of assets, given IBC’s strategical regime.

According to reports, there were 348 insolvency cases that had been successfully resolved as of March 31. It is to be noted that reportedly, banks and financial institutions had recovered around Rs 2 lakh crore. But if the comparison is made, this was recovered from the total claims of Rs 5.16 lakh crore. This presents a haircut of over 60 percent on average.

Moreover, given the data that was released for the fourth quarter of the financial year 2021, 29 insolvency cases were actually and effectively resolved. This emphatically led the creditors to recover about Rs 4,600 crore. This was out of the total claims of Rs 17,389 crore. This effectively shows that given the reports and analysis, the recovery rate stood at just 26.45 percent.

Talking about the time taken, it is to be noted that the average time that was taken to resolve the cases was 459 days. If scrutinized this is effectively quite a breach of the stipulated 180 days. This effectively makes the recovery time more than a year. This is also coupled with various concerns that have been raised over the grossly high percentage of liquidation after a failure of a viable plan.

This detestable attribute of the IBC strategy can lead to the analysis that India is now making a paradigm shift from the globally followed enthusiastic and strategic practice of debtor in possession to the concept of the creditor in possession.

Additionally, it is worthy of mentioning here that the IBC significantly leaves the responsibility of managing the asset in the lurch by presenting the opportunity in the hands of a resolution professional. It is quite an odious attribute as, in all probability, it strategically has very low or no experience in effectively running the industrial units.

As aforementioned, the time taken for resolution is quite long, thus the assets have to significantly undergo a widespread lack of alignment which is always not along with business interest. This quite odiously leads to a downward spiral in the value of assets over an increased period of time. This time period also works until the case is systematically resolved or liquidated.

Not only the long gestation period pesters the whole process but also the humungous legal and administrative cost actually the system which makes it quite uneconomical. In addition to making it a long and drawn-out process, we also witness erosion in the value of assets. This definitely leads to adding up to the lender’s costs, which again is quite uneconomical.

Given all the odious circumstances that plague the IBC system, it is worth mentioning that a structural adjustment is needed to be made to revamp the IBC. Thus, given all the discrepancies it can be rightfully stated that the IBC has lost its relevance. This can be countered by strategically enabling bankers to make economically efficient decisions that are apt in the domain.

This effectively and invariably calls for fair competition. Fair competition can be promoted by reportedly allowing existing promoters to themselves bid for their assets. However, such a suggestion is not followed when somebody, who is a promoter has been proven guilty of fraud.

Thus, in a gist, it can be stated that various factors such as longer gestation period, low recovery rate, and high incidences of liquidation, IBC is slowly losing its relevance in today’s NPA redressal scenario. Thus, it would be quite prudent for the Indian government to take some effective steps that might help redress the issue. This also means that it is the need of the hour that IBC and the banks and financial institutions are made robust and adaptive.

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Digitisation of Courts in India

Digitisation of Courts: The spread of an influenza-like infection plummeted without an alert carrying the world to an extraordinary halt. One fine morning, the boundaries overseeing our regular activities were redesigned exemplarily. The world wound up in a smooth situation, with an obscure infection that radiated in the Wuhan city of China arriving at most nations over the globe.

The rising number of contaminations and announced passings struggled governments unfit to locate a likely answer for tackle the falling apart situation. The quick activities embraced to handle the situation included the fixing of worldwide outskirts, heightening clinical offices, shutting of destinations with enormous network presentation, and eventually authorization of an encompassing shutdown organizing soundness of the residents over other significant contemplations. 

India has been no special case in the continuous undertakings. The epic coronavirus first set in quite a while feet in our nation toward the beginning of March. In the long run, there were plenty of measures started trying to check the spread, with the desire for having the option to oppose the diseases arrive at the age.

The activity of global flights was ended, shopping centers, cafés, and instructive foundations were closed, the open social occasion was precluded, and lastly on March 24th, across the nation lockdown was declared to be employable for the following 21 days initially. Except for clinical administrations and fundamental utilities, the different business foundations needed to shut down physical working with prompt impact. 

In accordance with the progressing improvements, with the announcement of the COVID-19 as a pandemic, the Indian legal executive ended up in a fix. At first with the expanding fear of the spread of the infection in the nation, the activity of the Courts all through the country was combined with preventive measures. There was a breaking point put on the section of lawyers alone in the Court excepting disputants, except if called for by the Court.

The premises were in effect normally disinfected, the temperature of all ingoing staff was being checked, and social removing was being rehearsed overwhelmingly. In any case, the declaration of the lockdown fundamentally implied that the Courts must be closed in the wake of the rising contaminations. In the given situation, could equity be let to endure while the world was destined to spread an obstruct infection? Maybe, not. 

In the event that the Courts were to be shut uncertainly, sitting tight for standardization of the circumstance, the result presumably would have caused harm unrecoverable. The Courts would be been troubled over-limit prompting further overabundances and postponement during the time spent administering equity. The effect of such a shutdown would be grave on fundamentally two fronts, the criminal equity framework and matters identifying with life and individual freedom of people.

It is the obligation of the Court to secure the privileges of the residents, in all the unstable circumstances may be. Remembering such cardinal contemplations, the conceivable way out to adjust the wellbeing worries just as proceed with the way toward apportioning equity was shown up by the shrewd salvage looked for from the “E-Courts Project”. 

This denotes the beginning of another time throughout the entire existence of the Indian Judiciary. There was a significant update in the whole Court structure with the procedures currently being done by video conferencing and the coming of the e-documenting system. At a fundamental crossroads, the possibility of virtual courts should be commended as a hearty system concocted to moderate the obstructions got by the pandemic.

There are a few advantages of hearing by means of video conferencing including no prerequisite of physical nearness wherein parties do go miles to be available face to face under the steady gaze of courts and simultaneously, it will be cost and time viable for the gatherings’ point of view just as the legal executive.

Above all, this will decrease carbon impression. Video conferencing ought to be made discretionary in all courts the nation over for a wide range of issues. Digitalization will lessen the humongous number of pendency of cases under the steady gaze of courts and will be a successful solution for deferred equity. 

Openness is the center capacity of the conveyance of equity. The nature of settling in the court will not be of utility if equity can’t be gotten to by individuals in any case. Thus, the current emergency would be an extraordinary open door for the digitalization of Courts in India. It can likewise help diminish a gigantic excess of cases under the steady gaze of the courts.

In the present-day situation, there can be numerous troubles looked at in the down-to-earth ramifications of virtual courts. Numerous individuals and disputants may confront trouble in exploring a digitalized equity framework that could be controlled by some pragmatic preparation.

Besides, it is a desperate need that the National Informatics Center to make a stage that incorporates highlights of video conferencing and e-recording to supplant the utilization of any outsider exclusive programming for the release of basic open capacities like mediation. As it were, making a cutting-edge equity stage will be brimming with difficulties yet note that this is the initial move towards digitalization of the court framework in a progression of many.

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Competition or Unlawful Contractual Interference

The formalization and maturation of the nation’s business ecosystem have led to a competitive environment ripe for conflict. With growing competition between multinational companies, the tendency of organizations to indulge in anti-competitive practices amounting to Tortious Interference has increased manifold.

Thus, the judiciary is swamped with causes of action for interference with contract or business relations. In light of an adversarial legal system and predatory business environment, the promulgation of a robust and comprehensive law relating to economic torts becomes essential, especially one that recognizes that contractual obligations are sacrosanct and cannot be skewed to a party’s advantage.

The premise of capitalism of free, fair competition without interference from excessive government regulations vis-à-vis courts’ power to enforce contracts and protect against wrongful predatory conduct may be considered as crossing the line into Tortious Interference with another’s contract. Moreover, the court’s inability to establish a coherent, uniform body of law concerning interference claims indicates that the issue may continue to persist and haunt businesses for a long.

In recent years much commercial litigation has involved claims for Tortious Interference with contractual or other business relations. In a recent decision of Inox Leisure Limited vs. PVR Limited, the Delhi High Court further blurred the demarcation between freedom to trade and unlawful contractual interference, as the judgment placed a restraint on the freedom to trade if the person causes a breach or interferes with contractual performance.

Unfortunately, the law in India pertaining to the tort of interference with contractual relations has not particularly evolved with few cases to demonstrate the Indian courts’ view on this aspect. Moreover, this question has not been placed before the Supreme Court to date. With orders passed on the aspect of Tortious Interference, the issues are very fact-based and do not provide an adequate overview of jurisprudence on Tortious Interference, as did the ruling in Inox Leisure Limited vs. PVR Limited.

In theory, all contracts qualify for protection from unreasonable interference. In recent times, non-competition contracts are a recurrent source of litigation in this area of law. The employer in these contracts requires an employee to sign an agreement prohibiting the employee from working for a competitor in the same geographic market. The judiciary has encouraged free trade and the absence of impediment in performing any business activity throughout the country under Section 27 of the Contract Act.

Taking a similar viewpoint, the court in Modicare Limited Vs. Gautam Bali held that Section 27 of the Contract Act makes every agreement by which anyone is restrained from exercising a lawful profession, trade, or business of any kind – unenforceable.

Thus, even if the defendants or any of them, under their agreement with the plaintiff, had undertaken not to carry on or be involved in any capacity in any business competing with the business of the plaintiff, even after leaving employment with/association of the plaintiff, the said agreement, owing to Section 27 would be void and unenforceable and the plaintiff on the basis thereof could not have restrained any of the defendants from carrying on any business or vocation, even if the one which the defendant had agreed not to carry on.

Therefore, as observed from past rulings, it’s no surprise that courts are reluctant to provide an injunction that places a cap on doing a business activity or to approach the client of a competitor company as in many cases it deprives an employee of meaningfully pursuing a livelihood.

This decision clears the way for businesses to enter into such agreements so long as the restraints promote competition and do not violate the rule of reason. Given the vague and ambiguous standards, it remains to be seen how courts will apply the interplay of Section 27 of the Contract Act and Article 19(1)(g) of the Constitution to address the multitude of possible business-to-business agreements and their effects on free-market competition.

Ultimately, the door is seemingly wide open for varied commercial collaborations with accompanying restraints on trade, which no doubt will require greater scrutiny on their economic justification to balance against worker mobility and competitiveness.

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Strengthening Insider Trading Laws

“There is no other kind of trading in India, but the insider variety,” remarked a former president of the Bombay Stock Exchange (“BSE”) in 1992, whereas Mr. Arthur Levitt, Chairman of the Securities Exchange Commission (“SEC”) viewed insider trading as one with utterly no place in any fair-minded law-abiding economy. Between these ends of the spectrum lies the debate on insider trading.

Although India was not late in recognizing the detrimental impact of insider trading on the rights of shareholders, corporate governance, and financial markets at large, the legal regime including the enforcement mechanism relating to the prevention of insider trading remains in nascent stages. The Securities And Exchange Board Of India (Prohibition Of Insider Trading) Regulations, 2015 (“PIT Regulations”) prohibit insider trading while in possession of Unpublished Price Sensitive Information (“UPSI”) subject to certain exceptions.

Regulation 4 of the PIT Regulations contains provisions apropos trading when in possession of UPSI. Trades carried out by a person who has had UPSI would be presumed to have been motivated by the knowledge and awareness of such information in his possession and shall be held guilty of insider trading.

Simply put, any abuse of position or power by insiders for personal benefits, monetary or otherwise, is a fraud on the public shareholders who anticipate unbiased management of the company’s operations in the interests of its shareholders. The 2020 amendments to the PIT Regulations aim at bolstering the level of compliance with the Regulations. In doing so, it mitigates the defects that were plaguing the Regulations.

Prior to the amendment, there was considerable confusion with respect to the handling of UPSI by intermediaries. Notwithstanding the FAQs released by SEBI to address the same, specific details regarding the maintenance of the digital database by such entities continued to remain shrouded in uncertainty.

Further, the list of transactions under Schedule B of the Regulations exempting them from trading window restrictions was un-amenable to additions. This prohibited reasonable expansion of the same to include transactions of like nature. Lastly, there was also an issue of a lack of adherence to the code of conduct under the PIT Regulations.

Recent Amendments to Insider Trading

Through a previous amendment that came into effect on April 1, 2019, SEBI had mandated every listed entity, intermediary, and fiduciary to maintain a structured digital database. This database would have all the details, including the name and PAN details of a person with whom UPSI is shared. This was done to ensure that there was a trail of the information whenever SEBI needed to investigate matters of sharing of UPSI.

Now through the amendment notified on July 17, SEBI has mandated that the nature of the UPSI and the details of the person sharing such UPSI must also be recorded in the database. Moreover, the amendments also provide that maintaining such a database has to be done internally and cannot be outsourced. The database should store data for the previous eight years at any given time.

The second most notable amendment is that the trading window restrictions would no more apply to ‘offer for sale (OFS) and ‘Rights Entitlement’ (RE). Schedule B of the PIT Regulations mandates that there should be a closure of the trading window for designated people and their immediate relatives.

It can be reasonably expected that they possess UPSI, and therefore such persons should not be permitted to trade in securities to which such UPSI relates to that instance. However, through its circular dated July 23, SEBI has also allowed the selling of promoters’ holding by way of OFS and exercising to RE during the period of closure of the trading window.

Through another circular on July 23, SEBI also specified that listed entities, intermediaries, and fiduciaries are now mandated to promptly and voluntarily report any Code of Conduct violation under the PIT Regulations in the prescribed format to the stock exchanges, and any amount recovered from the defaulter shall be deposited in the Investor Protection and Education Fund.

Analysis and impacts of the amendments

The primary benefit of the amendment that mandated a structured digital database is reduced information asymmetry while SEBI investigates matters of insider trading. In cases relating to insider trading, distinguishing the insider who conveyed the UPSI, in any case, turns out to be progressively significant for narrowing down expected guilty parties and following the trail of data.

This was one of the pertinent issues in the ongoing ‘WhatsApp spill’ case wherein after long investigations, SEBI had as of late punished certain people for spilling data identified to be price-sensitive on the famous texting application. Strikingly, since WhatsApp messages are typically ensured through end-to-end encryption, in the previously mentioned case, SEBI could not efficiently recognize the entities involved in the trade, thus setting an alarmingly low standard of proof in such cases. It is trusted that the new organized and structured digital database may help and forestall such cases later on.

The second amendment that cuts a special exception to the trading window is in the light of the ongoing endeavors by SEBI to facilitate the easy routes of raising capital, this is a needed move and will give more chances to listed entities to raise fast capital for viably working for their organizations, particularly during the progressing pandemic. Lastly, the mandatory announcing of infringement of the code of conduct would make a more strong system of compliance.

Conclusion

With each of these amendments, while SEBI has chalked out additional responsibilities for intermediaries and fiduciaries, as well as streamlined its regulatory powers with stock exchanges, the overall impact on the market hygiene remains to be seen. While there seem to be concerned regarding the degree and extent of control that may be exercised by stock exchanges over unlisted entities, the same will depend on the successful implementation of the PIT Amendment and issuance of further clarifications and circulars by SEBI.

As noted above, the requirement of maintaining an enhanced digital database is in line with SEBI’s investigation and surveillance procedure. However, the same may lead to particular operational challenges and issues for the listed company, intermediary or fiduciary, because in addition to maintaining more data for a more extended period, the entity is no longer permitted to outsource the task of keeping the database to a third party.

Market conduct regulation is poised at a critical threshold in India, where a combination of nuanced laws and efficient enforcement can indeed be transformative for our markets. When understood in their true spirit, these amendments are capable of engendering a behavioral shift across corporates, their board, and other key stakeholders, in terms of how we balance commercial interests with accountability for information access.

As the market practice evolves on this, one can only hope that we can achieve that fine yet firm balance, amply aided by even-handed regulatory practices and judicial momentum.

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Lapse of Stay Orders and Judicial Delays

The constitutional predicament of the Supreme Court’s direction in the case of Asian Resurfacing of Road Agency v. Central Bureau of Investigation (“Asian Resurfacing”) assumes significance because of the controversial dictum regarding stay orders. The direction in its essence is that any order that stays civil or criminal proceedings will now lapse every six months unless it is clarified by an exception of a speaking order.

The major grievance is that every order which is passed by the High Courts while exercising its jurisdiction under Article 227 of the Constitution and Section 482 of the Criminal Procedure Code, is virtually annulled with the passage of time.

The decision comes into existence due to the indefinite delays that occur because of stay orders granted by the High Courts, which leads to judicial delays and denies the fundamental right to speedy justice. The Apex Court has observed that proceedings are adjourned sine die i.e. without a future date being fixed or arranged, on account of stay. Even after the stay is vacated, intimation is not received, and proceedings are not taken up.

The concern is that during criminal trials, a stay order delays the efficacy of the Rule of Law and the justice system. The power to grant indefinite stays demands accountability and therefore the trial court should react by fixing a date for the trial to commence immediately after the expiry of the stay. Trial proceedings will, by default, begin after the period of stay is over. In the case where a stay order has been granted on an extension, it must show that the case was of such exceptional nature that continuing the stay was more important than having the trial finalized.

The High Court may exercise powers to issue writs for infractions of all legal rights, and also has the power of superintendence over all “subordinate courts,” a power absent in the Supreme Court as it was never intended to supervise subordinate courts or the High Courts.  

In the case of Tirupati Balaji Developers (P) Ltd v. the State of Bihar, the Supreme Court recognized that despite having appellate powers, the current directive ordered by the Supreme Court takes a precarious position since the High Court cannot be limited in its exercise of power by any restrictions placed on it by the Supreme Court unless the Supreme Court interprets a statute or the Constitution and prescribes it as a matter of law, which is not the case in the directions issued for Asian Resurfacing.

There are two perspectives to this: firstly, the directive does not annul “every order” of the High Court merely with the passage of time. It only causes those orders that “stay the trial proceedings of courts below” to lapse with the passage of time, wherein even those orders can be extended as per the High Court’s own discretion on a case-to-case basis.

If this is considered supervisory or unconstitutional, then Appellate Courts will be left with the little prerogative to safeguard the basic rules of fair procedure. Secondly, the directive itself is not applicable to the interim order granted by the Supreme Court as reiterated in the case of Fazalullah Khan v. M. Akbar Contractor.

It is clear that the demand for justice to be disbursed and a trial to be completed in 6 months is a necessity given the incessant judicial delays and indefinite freezes on criminal cases. Staying trial proceedings for 6 months must be made a thing of the past and should not be stayed for 6 months or more, save in exceptional circumstances.

Allowing trial proceedings to have stayed for longer than 6 months encourages parties to abuse the process of law and move to an appellate court merely to stall a trial that has an inevitable conclusion. Legal procedures, the appointment of judges, and judicial vacancies all contribute equally to judicial delay, the rot has spread far and wide creating systemic delays in the entire judicial procedure.

Although courts will be bound to welcome the judgment in letter and spirit, some pressing questions remain unanswered. It is unclear why the Supreme Court provided “directions” to the High Courts now when it has been cautious in issuing such directions in the past? Further, if the primary motive was curbing the judicial delays and ushering in a change in the way the judicial system works, why is the Supreme Court not bound by its own directive? 

Tags: judicial delays, constitutional conundrum, criminal procedure code, criminal proceedings, judicial procedure, stay orders