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Corporate Law

May 29
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tax on reit

The Imposition of Tax on REIT / INVIT Under The Finance Act 2020: A Critical Evaluation

By Corporate Law, Banking, Media Coverage One Comment

The Imposition of Tax on REIT/INVIT Under Finance Act 2020

Real Estate Investment Trusts and Infrastructure Investment Trusts are rapidly growing investment vehicles that allow developers to monetize revenue-generating real estate and infrastructure assets while also allowing unitholders to participate without owning the assets.

The Indian real estate sector has long campaigned for the creation of “Real Estate Investment Trusts (hereinafter REITs)” and “Infrastructure Investment Trusts (IITs)” (hence InvITs). Although these industry launches were originally permitted a few years ago, their popularity has waned because of the ambiguity surrounding the tax legality of all pass-through transfers. REIT may be defined as a sort of mutual fund that enables investors to invest in real estate.

A real estate investment trust (REIT) is a firm that receives money from interested investors and invests it in real estate projects. InvITs, on the other hand, vary from REITs in that the majority of willing investors often participate in capital investments with a long gestation period.

They are collectively known as “Business Trusts,” and they have enormous potential to aid the government in accomplishing one of the country’s large infrastructure expansion goals while also encouraging the country’s commercial real estate market to improve.

Dividends (received by unitholders of REITs and InvITs) were not subject to tax prior to the approval of the Finance Bill tabled in Lok Sabha. The Finance Minister, Ms. Nirmala Sitharaman, released the Union Budget for the years 2020-2021 and requested several changes. For the fiscal year 2021, the Bill tabled in the Lok Sabha comprised many budgetary and taxation-related suggestions to change the Income-tax Act, 1961 (“Income-tax Act”).

Following the passage of the bill, the government decided to tax profits received by unitholders in REITs and InvITs, jeopardizing the developers’ and road-to-port the builders’ intentions to collect all money from such instruments. It may as well had been a tax policy enforced, but the dividend distribution tax was eliminated in Budget 2020-21, putting the burden of proof on the holders.

Although tax-free SPVs and trusts will remain, unitholders of InvITs and REITs will no longer be exempt. They will also be subjected to be taxed at the applicable income tax rate for the dividend income under the finance act 2020.

Upon the bill’s ratification, there was some unanimity on the fairness of the taxation policy imposed on dividend unitholders, and some remained unaffected by the adjustment in the taxation policy since it was not a major problem and was not unreasonable given that the government had already decreased the corporate tax rate. The aim behind such imposition seems to be convincing as it was to apply one advantage – either exempt the dividends or offer a lower corporate tax rate to the SPVs.

The imposition of tax responsibility on REITs and InvITs, like two sides of a coin, has its own set of benefits and downsides. The idea in the Union Budget to tax the profits obtained in the hands of unitholders/investors was developed after studying the chances of imposing the tax and taking into account the views addressed by real estate industry authorities.

 It would have a detrimental effect on the potential of InvITs and REITs, as a budget choice would go against the government’s immediate efforts. This was done to entice InvITs and REITs to give some tax certainty to long-term infrastructure developers. The introduction of the tax, on the other hand, contributes to the uncertainty among international/foreign investors who are skeptical of India’s tax regime’s stability and will be irreversibly hurt by the tax regime’s unpredictability.

The government’s proposed/passed reforms, as well as the application of a tax on dividends earned by REIT and InvIT unitholders, seem to have a significant influence on the business trust’s future potential in one way or another. Nevertheless, the appeal of these structures remains unresolved following a comparative review of the revisions.

 

Tags: finance bill 2020, reit taxation, the finance act 2020, tax on reit, 2020 finance act, reit tax benefits, finance act 2020, reit dividend tax, finance act 2020 summary

May 27
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intellectual property rights

Intellectual Property Rights VS Open Access Initiatives

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Intellectual Property Rights and Open Access Initiatives

In the wake of the global epidemic, the conflict between open access and traditional IP rights is becoming a significant problem. The essence of IPR and open access is that they are opposed to one another, to the point that approving one is destructive to the other. Let’s break down and find a balance between them.

IPR registration primarily consists of safeguarding one’s intellectual work for innovations and creative works, indicating its origin, and providing the owner unlimited control over that particular product for a certain length of time.

Whereas the fundamental goal of most open-access efforts is to help people and organizations overcome barriers. And to aid individuals and organizations in overcoming legal barriers, sharing and developing knowledge, and addressing global concerns.

 The effort encourages open access sharing and gives information on how to distribute information while avoiding prejudice against any individual or group of individuals. It would also stimulate fresher ideas and solutions to society’s broader issues, as well as provide a fair playing field for all entrepreneurs and people to compete on an equal footing with giant corporations with more resources.

As a result, these ideas are intended to both promote and enable access to individuals who may not otherwise be able to afford it.

The basics of open access, as can be shown, contravene one of the most fundamental concepts of intellectual property rights, which is to safeguard intellectual property. The rationale for the parties wanting legal protection for their IP is mostly commercial profit. The patent helps provide a framework to share protected work without letting go of any commercial benefits like product sales and licensing royalties. For instance, a person can patent his scientific tool and then sell the same to a huge corporation.

As an outcome, the firm may create it in big quantities at a lesser cost, lowering the cost to the customer. For all parties concerned, this is a triple-win situation. The patent owner makes money from the invention, the business sells the item to the consumer, and the customer gets a cheaper product. Copyrights are also for anyone who wants to safeguard their work, such as literary works or movies, while simultaneously benefiting from IP protection.

A large portion of this labor is shown in front of the public to get advantages. Without copyright protection, the author’s work might be duplicated or exploited without the originator receiving any recompense.

Furthermore, a trademark serves as a means of distinguishing one company’s goods or services from those of another. It also allows an owner to restrict other parties from using his or her trademark. A trademark’s main purpose is to provide information about a product’s origin and excellence to help consumers make better purchasing decisions.

It also gives a single owner monopolistic power because a large number of registered marks means fewer marks are accessible for others to use in the public domain.

As a result, in addition to symbolism, a trademark may be extremely valuable to a firm, causing some to incorporate it into their value. Trademarks are perpetually protected as long as they are in use and the owner can defend them. It protects companies from impersonators who want to profit by creating uncertainty in the marketplace by attempting to imitate an already recognized brand.

Striking a balance between traditional intellectual property rights and open access projects may be difficult, because artists may contemplate the consequences of doing something for the greater good, but they are also likely to consider how profitable their invention may be. However, recently this convergence has been seen in the Open COVID Pledge where the world is coming together to fight the pandemic. 

The goal of the committee is to urge organizations all around the globe to share their intellectual property so that we can all combat COVID together. This vow will eventually assist in the defeat of COVID-19 and will benefit humanity as a whole. Participating in this promise may also benefit businesses by generating goodwill and resulting in future commercial benefits.

 

Tags: open access initiatives, intellectual rights, ipr law, intellectual property rights law, ip rights, intellectual property rights, intellectual property protection, ipr act

May 26
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personal guarantor insolvency

The New Legislation of Personal Guarantor’s Insolvency Under IBC

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Personal Guarantor Insolvency

IBC 2016 was created to replace the old framework for insolvency and bankruptcy with single legislation. With the adoption of the IBC, the winding-up procedure was brought under the supervision of the National Company Law Tribunal, guaranteeing prompt and speedy action during the early phases of a firm’s financial default. The IBC’s primary goal is to help distressed corporate debtors.

History of Personal Guarantor Insolvency

As defined by Section 5(22) of the Code, a personal guarantor is an individual who is the surety under a contract of guarantee to the corporate debtor. While the provisions of the IBC pertaining to the insolvency resolution process of corporate debtors were implemented by the Central Government in 2016, the provisions of the IBC pertaining to the insolvency resolution process of corporate debtors were not.

The provisions pertaining to Personal Guarantors to Corporate Debtors’ bankruptcy resolution procedure were not. Prior to the Code’s creation, the Presidency Towns Insolvency Act of 1909 and the Provincial Insolvency Act of 1920 covered insolvency and bankruptcy for all persons, including personal guarantors.

NEW LAW

The IBC shall apply to the personal guarantor of the corporate debtor as of 1.12.2019, according to a notice dated 15.11.2019. Section III of the IBC will only apply to personal guarantors, according to this notice.

The Supreme Court in landmark judgment held that lenders can now initiate insolvency proceedings against promoters, managing directors, and chairpersons who issued personal guarantees on corporate loans if the borrower defaults.

Prior to the Notification concerning Section 60 of the Code, the Debt Recovery Tribunal had jurisdiction over insolvency and bankruptcy procedures against personal guarantors, whereas procedures against corporate debtors for the same default were either underway or became pending before an NCLT. 

This had the opposite effect, delaying the legal procedure and producing inaccuracies in estimating the amount to be recovered from the guarantors. To resolve this issue, Sections 60(2) and 60(3) of the Code were inserted, mandating that bankruptcy procedures against personal guarantors and corporate debtors be conducted by the same court, namely the NCLT.

ADVANTAGES AND DISADVANTAGES OF THE NEW LAW

  1. Consolidation of proceedings safeguards the debtors’ and guarantors’ interests by ensuring that the claim amounts issued to creditors do not overlap.
  2. For creditors, it allows for simultaneous actions before the same court, removing the burden of having to go to two separate forums to recover the same amount.
  3. The new legislation is likely to significantly reduce delays in the collection of creditors’ dues, as the Code mandates a time-bound approach.
  4. In addition to the SARFAESI Act, debt recovery suits, and other civil remedies, creditors now have another option for recovering their loans, resulting in a concentration of power in their hands.
  5. There appears to be no clear provision in Part III of the IBC, 2016 that allows an aggrieved personal guarantor to challenge the adjudicating authority’s decision.
  6. A pro-creditor insolvency framework presently applies to personal guarantors. Liabilities do not exclude guarantors. As a result, organizations must exercise prudence and prudence before issuing assurances in order to protect themselves from unanticipated events.

IMPACT ON THE INDUSTRY

In Lalit Kumar Jain vs. Union of India, the Hon’ble Supreme Court confirmed the legality of the 2019 notice expanding the IBC rules to personal guarantors. The Court also concluded that approving a Corporate Debtor’s resolution plan did not free a Personal Guarantor of their responsibility to repay the Corporate Debtor’s debt owed to an independent contractor.

A distinctive aspect of loans supplied to MSMEs is that it is frequently backed by personal guarantees supplied by promoters (which account for around 29 percent of GDP). Promoters will be encouraged to employ the pre-packaged insolvency resolution procedure for MSMEs to get creditor-friendly outcomes and strengthen credit discipline across the loan market as a result of the decision.

CONCLUSION

Despite being a good legislative attempt at efficiency, asset valuation maximization, and resolution process optimization, the new legislation fails to address the realities of the bankruptcy process.

For instance, an ordinance dated 05.06.2020 halted the implementation of Sections 7, 9, and 10 of the IBC, 2016, which were intended to safeguard corporations against new insolvency actions, citing the COVID-19 epidemic as the rationale. 

However, relevant provisions of Part III of the IBC, 2016 dealing with individual/personal insolvency, including personal guarantors to corporate debtors, are not suspended in the same way, even though it is reasonable to assume that the economic slowdown caused by COVID-19 will affect both corporates and individual guarantors equally.

This has led to the creditors having the option, even during a COVID-19 pandemic, to take action against personal guarantors but not against corporate debtors.

 

Tags: individual insolvency under ibc, personal guarantor ibc, personal guarantee ibc, voluntary liquidation under ibc, personal guarantor under ibc, personal guarantor insolvency, ibc personal guarantor, personal insolvency under ibc, personal guarantor insolvency under ibc, insolvency proceedings against personal guarantor

May 24
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concrete paver path

The Need for Paving a Concrete Path for SPACs

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The Need for Concrete Paver Path for SPACs

Due to the financial shortages that businesses are experiencing as a result of the epidemic, Special Purpose Acquisition Firms, or more accurately, blank cheque companies, might be a haven during these unusual circumstances, highlighting the need for regulation.

SPACs provide firms with a unique manner of public inclination and distinctive advantages over the traditional IPO measure. They provide greater market certainty in valuing equities, lower exchange charges, adaptable arrangements, greater access to the display, more solid brand worth, and market confidence in a substantially shorter period of time.

The limited market instability produced by the general shutdown is partly to blame for the surprise surge in energy prices. Despite the fact that several firms all around the world had postponed their IPOs due to the pandemic, SPACs have been approved to provide them with an exit strategy by supporting them in obtaining financing even during times of extreme volatility.

Indian corporations have been requesting approval for direct posting on foreign stock exchanges for quite some time, but India lacks a defined mechanism on the subject. In the meanwhile, many organizations have sought alternatives, and SPACs have emerged as a viable option. SEBI has recently formed a specialized advisory committee to look at the viability of SPACs in India.

It has prompted the board to produce a report on enabling SPACs alongside controlling norms to reduce the chances under existing legislation. Its recommendations for administrative income assortments through capital additions charges are also being looked upon.

SPACs frequently choose the newest, most distinctive, and futuristic enterprises in the technological and market arena as acquisition targets, allowing the major investor to be addressed directly, ensuring pricing certainty rather than market value volatility. Another advantage of starting a new firm in the early stages is that the costs associated with records and exposure are low, if not eliminated.

Abroad posting permits Indian new companies to get to bigger and more enhanced pools of capital and raise assets at lower costs, diminishing their expense of capital and making them more cutthroat. Abroad business sectors may help new companies accomplish more rewarding valuations as these business sectors have a more profound financial backer biological system that comprehends the dangers implied in a beginning up.

In particular, new firms seek high values based on expectations rather than beneficial history, making them unsuitable or unattractive candidates for an IPO on Indian stock exchanges. In any event, Nasdaq provides access to a larger and more current financial supporter base, as well as the ability to search for values.

Given how this interaction is performed, i.e., the SPAC support discovers the financial donors rather than target undertaking a wide book-building activity, it is reliant on forecasts. As a result, company entrepreneurs should reconsider a Nasdaq listing via SPAC.

The new USD 8 billion arrangement between India’s ReNew Power and Nasdaq listed SPAC RMG Acquisition Corporation II, for which Khaitan and Co went about as the Indian legitimate guidance to RMG II, is among the biggest ever postings including an Indian organization in the US through this course. Also, if the developing buzz around SPACs is any sign, this arrangement might just be trailed by a lot more sooner rather than later.

Investing in SPAC is not without risk, both for the backers and for the retail financial supporters. If the SPAC posts continue at their current rate, the required number of target companies by the end of 2021 might number in the thousands. In any case, there will surely be a limited number of worthwhile targets.

If the supporters are unable to identify a goal or if the investors refuse to approve the agreement, the supporters are left with no options. Furthermore, in the United States, retail financial supporters are allowed to cancel their offers and guarantee reductions even before they are purchased. In any event, such an option is unlikely to be available to Indian investors for a variety of reasons.

In the United States, posting through SPACs has become the norm. India, too, may join this current trend if it has a strong SPAC system. In the Indian economy, new enterprises have a huge duty to complete.

A robust SPAC system will aid India in creating a stable startup environment. It will help the market conclusions and give new channels to capital development. That would lead to increased foreign inflows to help India in its journey towards expanding its economy.

 

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May 17
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adjudicating authority

How Does The Adjudicating Authority Approve The Resolution Plan?

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The Adjudicating Authority

A resolution plan is a proposal that aims to provide a resolution to the problem of the corporate debtor’s insolvency and its consequent inability to pay off debts. It needs to be approved by the committee of creditors (“COC”), and comply with mandatory requirements prescribed in IBC.

The Code (Insolvency and Bankruptcy Code, 2016) attempts to solve corporate debtors’ difficulties by putting them through a corporate insolvency resolution procedure (CIRP) and transferring them as going concerned to Resolution Applicants prepared to take over their management and assets and pay their obligations.

The CIRP is seen as a more beneficial alternative to liquidation, as a going concern is likely to fetch a higher value for the creditors than a simpliciter sale of its assets.

The market will determine the remedy. Interested resolution applicants can join the CIRP and submit “resolution plans,” which are mechanisms for taking over a corporate debtor, settling its creditors’ debts, and reviving and turning it around. The Adjudicating Authority/National Company Law Tribunal (“NCLT”) then reviews and approves the authorized plan, bringing the CIRP to a close.

While analyzing an authorized plan, the NCLT has limited powers and cannot intervene in a commercial decision made by the Committee of Creditors. When it comes to the Resolution plan’s approval, an adjudicating body must make a judgment in accordance with Section 31 of the Code.

It must go through the reasons to accept or reject one or more suggestions or objections, and it has the option of expressing its own judgment. As a matter of fact, now, the Committee of Creditors ought to record their reason when approving or rejecting one or another Resolution plans.

The Supreme Court has declared in Antanium Holdings Pte. Ltd. Vs. M/s. Sujana Universal Industries Limited, that the adjudicating authority is to record analytical subjective satisfaction which is a precondition before according approval to the Resolution Plan. In other words, the ‘Approval’ of ‘The Resolution Plan’ is to be judged with the utmost care, caution, circumspection, and diligence.

The threadbare examination of the scheme is to be studied astutely before arriving at a subjective satisfaction by the ‘Adjudicating Authority’.

The expression “subjective satisfaction” means the satisfaction of a reasonable man and it can be arrived at based on some material that satisfies a rational mind. It’s worth noting that a Resolution applicant can’t appeal the judgment of the Committee of Creditors (COC).

Given the legislative constraints of Section 30 of the Code, it is the COC that will approve or disapprove a resolution plan. An ‘Adjudicating Authority’ functions in a ‘Quasi-Judicial’ capacity and has the power to set the ‘Resolution Plan.’

 

Tags: adjudicating authority under ibc, adjudicating authority approval, adjudicating authority, approval of resolution plan, resolution plan approval, adjudicating authority under insolvency and bankruptcy code

Feb 26
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stay orders

Lapse of Stay Orders and Judicial Delays: A Constitutional Conundrum

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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 stay 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: criminal procedure code, the code of criminal procedure, stay orders, criminal procedure code act, judicial delays, constitutional conundrum

Feb 17
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insider trading laws

India Strengthening Insider Trading Laws at Last

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Strengthening Insider Trading Laws at Last

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 Arthur Levitt, Chairman of the US Securities Exchange Commission (SEC), viewed it as one with no place in any 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, the legal regime, including the enforcement mechanism relating to its prevention, remains in a nascent stage.

The Securities and Exchange Board of India (SEBI), Prohibition of Insider Trading Regulations, 2015 (PIT Regulations) prohibit insider trading while in possession of Unpublished Price Sensitive Information (UPSI) subject to certain exceptions.

Rule four of the PIT Regulations contains provisions apropos trading when in possession of UPSI. Trades carried out by a person who has UPSI would be presumed to have been motivated by the knowledge and awareness of such information and they 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 committed on public shareholders, who expect unbiased management of the company’s operations in their interest.

The 2020 amendments to the PIT Regulations aim at bolstering the level of compliance and mitigating the defects plaguing them. Prior to the amendment, there was considerable confusion with respect to the handling of UPSI by intermediaries. Notwithstanding the FAQs released by the 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 not amenable to additions. This prohibited reasonable expansion of the same to include transactions of a like nature. Lastly, there was also the issue of 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, the SEBI had mandated every listed entity, intermediary, and fiduciary to maintain a structured digital database, which would have the name and PAN details of a person with whom the UPSI was shared. This was done to ensure that there was a trail of information whenever the SEBI needed to investigate the sharing of UPSI.

Now, through an amendment in July, the SEBI has mandated that the nature of the UPSI and the details of the person sharing it must also be recorded in the database. Moreover, 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 relatives as it can be reasonably expected that they possess UPSI.

However, through another notification in July, the SEBI allowed the selling of promoters’ holding by way of OFS and exercising RE during the period of closure of the trading window.

The 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 bourses and any amount recovered from the defaulter shall be deposited in the Investor Protection and Education Fund.

Analysis and impact: The primary benefit of the amendment that mandated a structured digital database is reduced information asymmetry while the SEBI investigates matters of insider trading. In cases relating to it, 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 data trail.

This was one of the pertinent issues in the ongoing “WhatsApp spill” case wherein after extensive investigations, the SEBI had punished certain people for spilling data identified to be price-sensitive. However, since WhatsApp messages are typically ensured through end-to-end encryption, the SEBI could not efficiently recognize the entities involved in the trade, thus setting an alarmingly low standard of proof in such cases.

It is hoped that the new, organized, and structured digital database may help and forestall such cases. The second amendment that cuts a special exception to the trading window is in the light of the ongoing endeavors by the SEBI to facilitate easy routes of raising capital. This is much needed and will give more chances to listed entities to raise fast capital. Lastly, the mandatory announcing of infringement of the code of conduct would make a more strong system of compliance.

 Regulatory solutions: With each of these amendments, while the SEBI has chalked out additional responsibilities for intermediaries and fiduciaries, as well as streamlined its regulatory powers with bourses, 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.

The requirement of maintaining an enhanced digital database is in line with the SEBI’s probe and surveillance procedure. However, it may lead to particular operational challenges and issues for the listed firm, 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.

Market conduct regulation is poised at a critical threshold in India, where a combination of nuanced laws and efficient enforcement can indeed be transformative. 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.

 

Tags: nse insider trading, insider buying, bse insider trading, insider trading laws, insider buying stocks, insider selling, insider trading laws in india, insider trading, rights of shareholders

Dec 28
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the hospitality industry

The Sinking Hospitality Industry

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The Hospitality Industry

With international borders sealed, suspension of movement across the country, and the declaration of the nationwide lockdown, the hospitality industry witnessed an unprecedented truncated phase in history. Adding to the persisting nemesis comes panic and dread for travel amongst people.

The hospitality industry feels the heat as travel becomes a long-forgotten phenomenon in this Covid world. The occupancy level of hotels and resorts has hit a major low since the beginning of March as the nervousness and anxiety about the spread of the virus started unfurling throughout the world.

Adding to the tumult, the situation for businesses working on a lease for commercial space has been grim. With bleak chances of revival of business soon, payment of rentals has been one of the most worrisome aspects for many of the business owners in the hospitality sector.

Small to the world is huge to the Hospitality Industry

The hospitality industry has been one of the worst-hit by the pandemic with a shortfall in business and a lack of government stimulus. Closure of food outlets and downsizing operations have been routine since the spread of the virus. The industry has come down to zero revenue in the past three months.

This would customarily lead to the loss of jobs for many in the industry. Food joints have been forced to connect with online food delivery businesses with the hope of some respite. Metropolitan cities, which witnessed business visitors plenty before the pandemic, are anticipated to be ready for tough times ahead.

Revival of Hospitality Sector: Bleak chances in the near future

The hospitality industry despite being the worst hit by the pandemic has received the least stimulus from the government. It is not very soon, that businesses in this sector can be expected to be flourishing afresh. Even with the go from government reopening the industry in June, it would be wrong to expect the situation to get back to normal before November 2020.

The average reset for the entire industry is contemplated to be 12 months, with the major ramp-up of operations that can be expected to arrive by February 2021. The revival period coincides with the off-season period of six months, which is set to commence shortly; and the industry can be expected to only see cash flows improving by the beginning of the next year.

Change of business model for the hotel industry

Post the pandemic, the hotel industry awaits a transformation in operations as well as the setting up of business. Instead of huge properties, developers would be looking forward to small but multiple properties to make the process cost-effective and incur less debt on the balance sheet. Domestic leisure travel facilities could see a boom in business as most people will avoid international vacations for quite some time now.

Drivable destinations would be the go-to place as the hassle of stay could be avoided. Luxury business hotels shall remain in a worrisome position with minimal international travel their operations are not expected to pick until a few months from now.

Hospitality 2.0: The Post Covid Era

The hospitality industry is looking for a way out to kick start business soon after the lockdown. There is a multitude of considerations from operational changes, repurposing property, and maintaining strict hygiene measures before the onset. With many hotels and businesses in the industry being forced to shut down due to the implications of the revenue loss, the industry is hunting for new operational solutions to commence business.

The post-Covid era would expect the industry to enhance its hygiene and sanitization process by opting for more contactless delivery and services. The succeeding times could also witness a revamp of the hotel business model to ensure a safe stay for the customers.

Dec 24
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financial literacy

Financial Literacy a Must for The Right Decision-Making

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Financial Literacy a Must for The Right Decision

Indian financial markets have turned increasingly complex for the common man, and a necessity has arisen to increase financial literacy to enable people to make informed decisions. Financial literacy consists of knowledge of financial concepts such as spending, saving, borrowing, investing, etc., and using it to manage personal resources efficiently.

Individuals faced with having to make complex financial decisions because of the complicated financial environment find that imprudent financial decisions like excessive spending, living on borrowed money, and deferred debt payments made earlier in life can prove to be costly.

Financial education can be seen as the best strategy to help individuals to manage their limited financial resources wisely, ultimately resulting in a decrease in the number of individuals being declared bankrupt.

The Organisation for Economic Cooperation and Development (OECD) has defined financial education as, “the process by which financial consumers/investors improve their understanding of financial products and concepts and risks, and through information, instruction and/or objective advice, develop the skills and confidence to become aware of (financial) risks and opportunities, to make informed choices, to know where to go for help, and to take other effective actions to improve their financial well-being and protection.”

Financial literacy has assumed a significant role in the present era due to factors including the development of new financial products, the complexity of financial markets, information asymmetry, and changes in other economic factors. It results in the intersection of financial inclusion, financial development, and financial stability.

Financial inclusion The Indian government has tried to provide financial products and services to all sections of society concentrating particularly on the weaker sections and the low-income groups to enable their inclusion in the market.

People are getting literate enough to understand banking and financial concepts and terminology. Reserve Bank of India (RBI) has aggressively looked into it by joining hands with non-governmental organizations (NGOs), self-help groups (SHGs), and commercial banks.

Financial literacy and credit counseling centers have inculcated saving habits among people, to make them aware of the financial products and the credit schemes, and counsel them to prevent unmanageable debt levels. Increased financial literacy supports social inclusion and enhances the well-being of the community.

The Securities and Exchange Board of India (SEBI) has undertaken measures through stock exchanges, depositories, mutual funds associations, associations of merchant bankers, etc. by organizing seminars wherein study material is disseminated to educate investors. Another material related to financial education is available on the official website of SEBI.

Furthermore, the advancements in the information and communications technology (ICT) sector, the advent of mobile phones, the internet, and ATMs have also changed the way financial business is conducted. Financial development Financial illiteracy has been a barrier as per as delivering services is concerned. If individuals are not familiar or comfortable with products, they will not go for them.

In recent years, the knowledge about interest rates, exchange rates, etc. has been influencing the decision-making of individuals and they face financial risks despite informed decisions. It leads them to devise risk management strategies.

Businesses sometimes try to control financial risks with private insurance coverage and sometimes through various financial products. Financial literacy programs have played an important role in reducing economic inequalities as well as empowering citizens and decreasing information asymmetries between financial intermediaries and their customers.

Innovations such as electronic payments are helping those who have been excluded from the system. Financial development is widely recognized as an important determinant of economic growth.

Financial stability is also an integral component of customer protection. Customers are often penalized for minor violations in repayments, although they have limited redressal mechanisms to rectify deficiencies in service by banks, rendering the banker-customer relationship unequal.

Literacy has empowered the common person and thus reduced the burden of protecting him/her from the elements of market failure from a regulatory perspective. They understand the details of the regulations and avoid any kind of mistake that can have adverse effects.

Financial literacy has improved the integrity and quality of markets. It has provided individuals with basic tools for budgeting and helped them to acquire the discipline to save. It has ensured that they can enjoy a dignified life after retirement. It relates to personal finance, which enables individuals to take effective action to improve overall well-being and avoid distress in financial matters.

Hence increased financial knowledge has enabled people to participate in financial markets. Numerous households have improved money-related proficiency and individuals, as well as households, have been observed to be inclined to possess a retirement plan and savings.

Financial literacy plays a vital role in the efficient allocation of household savings and the ability of individuals to meet their financial goals. It has resulted in instability in the market and individuals’ financial conditions have improved. Conclusion Knowledge is crucial for financial decision-making.

This conclusion may be drawn on the basis that a strong correlation exists between the extent of an individual’s education and that individual’s investment acumen, the propensity to save, and management of personal credit. A positive correlation between greater education and increased investment in higher-yielding assets and higher investment-related income and a lower incidence of personal credit mismanagement like bankruptcies can be achieved.

RBI and SEBI’s initiatives are strides taken in the right direction for achieving its objectives of financial inclusion and financial literacy. Various NGOs and SHGs are also contributing to improving the financial education of the people.

However, more capital infusion towards financial literacy workshops and seminars at schools, colleges, workplaces, and residential areas is required so as to boost its effectiveness and spread. Early financial education and increased financial literacy are imperative and should be a first-order concern for public policy and educators alike.

 

Tags: financial literacy, financial education, financial awareness, financial knowledge, financial literacy for students, personal financial literacy, basic financial literacy

Oct 14
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An Analysis Of Anti-Competitive Agreements & Heavy Discounting By Ecommerce Players

By Corporate Law No Comments

An Analysis Of Anti Competitive Agreements & Heavy Discounts

In 2017, Reliance’s Jio gifted a country of 1.3 Bn people free voice calls and high-speed internet at rock-bottom prices.  Consequently, it generated a gargantuan shift in the consumer base making it India’s largest mobile network operator with over 350 Mn subscribers today.

Naturally, this revolutionary step attracted complaints from major telecom players like Bharti Airtel, citing concerns like – “Predatory Pricing,” and “Abuse of Dominance.”

The Competition Commission of India (CCI) held that Reliance Jio did not enjoy a dominant position in India with less than 7% market share in India. Further, CCI stated that incentivizing customers through attractive schemes in order to establish its identity in a hyper-competitive market cannot be considered as a contravention of Section 4(2)(a)(ii) and 4(2)(e) of the Competition Act, 2002 and accordingly dismissed Airtel’s complaint.

Jio’s move may have resulted in industry-wide losses for its competitors, but consumers welcomed the new entrant and the competition with open hands which further makes it difficult for others to form a basis of competition.

Prohibitions Under Competition Act, 2002

The current trajectory of India’s economic development requires a competition law that focuses on promoting efficiencies and allowing firms to freely innovate, strategize, and reap profits. At the same time, it is also important to continuously check for any kind of exploitation as the economy grows and new market structures emerge.

Realizing this, the Competition Act, 2002 outlaws anti-competitive practices like “Predatory Pricing” – the practice of pricing of goods or services at low levels with a view to reduce or eliminate competition – treating it as an abuse of dominant position and thus prohibited under Section 4 of the Act and “Anti-Competitive Agreements” which cause or are likely to cause Appreciable Adverse Effect On Competition (AAEC).

Section 3(1) of the Act provides a general prohibition on the following to enter into agreements and the CCI has been given the authority to direct any enterprise or person to modify, discontinue and not re-enter into an anti-competitive agreement and impose a penalty, which can be 10% of the average of the turnover for the last three years.

Section 4(2) (a) of the Competition Act, 2002 states that:

There shall be an abuse of a dominant position under Sub-section (1) if an enterprise:

(a) Directly or indirectly, imposes unfair or discriminatory-

(i) Condition in the purchase or sale of goods or service; or

(ii) Price in purchase or sale (including predatory price) of goods or service.

Denial of market access briefly referred to in this section, if read conjunctively, is expressly prohibited under Section 4 (2) (c) of the Competition Act, 2002.

Exclusive Agreements & Heavy Discounts

OYO-Make My Trip

In a market with no clear standards to determine what price is excessive or fair or what agreement is preventive rather than restrictive, adopting such a practice may be at the disposal of the manufacture with a view to contacting a more extensive group of onlookers in a savvy way.

However, concerns with respect to the dispossession of other market players, especially offline ones keep surfacing now and again as observed in the OYO and Make My Trip case.

In a recent case, the CCI ordered an investigation into an online travel booking company Make My Trip (MMT) and hospitality provider OYO based on complaints by members of the Federation of Hotel and Restaurant Associations of India (FHRAI) alleging preferential treatment, deep-discounting, and cheating by these firms.

First, it was alleged that MMT and OYO have entered into confidential commercial agreements wherein MMT has agreed to give preferential, exclusive treatment to OYO on its platform, further leading to a denial of market access to Treebo and Fab Hotels.

Second, FHRAI alleged that OYO and MMT are hurting competition by offering deep discounts and charging exorbitant fees from hotels. Further, FHRAI stated that OYO’s prices in small Indian markets are about 30% lower than average industry prices, which helps it attract more customers at the cost of smaller, independent hotels which are then forced to join OYO’s network or lose out on potential revenues.

Past Judicial Approach

A similar issue of the exclusive agreement had emerged before the CCI in the case of  Mohit Manglani v.  Flipkart India Pvt. Ltd. & Ors. in relation to the sale of the book titled “Half Girlfriend” written by Chetan Bhagat, which was available for sale exclusively at Flipkart. It was alleged that such as arrangement was destroying players in the physical market, controlling the creation and supply, and consequently bending the reasonable rivalry in the commercial centre.

However, such allegations were rejected by the CCI which opined that a selective plan between a maker and an e-gateway would not make any entry obstructions since products sold via online portals face competitive constraints. Thus, in the opinion of the CCI:

  • Mobile phones, tablets, books, cameras etc., are not to be trodden by imposing business model or predominance.
  • There was a lack of concrete evidence to show that it was by reason of the exclusive agreements that any of the existing players were getting adversely affected.

But in the Flipkart case, the CCI at the prima facie level rejected the claim since none of the players enjoyed dominance in the retail market and in order to prove predatory pricing it is fundamental to show that the enterprise has a dominant position in the market. The determination of dominance is connected to the refusal made by the CCI to designate e-market as a different space of goods/services.

Further, in the case of Snapdeal v. Kaff Appliances, where a suit was instituted by Snapdeal against a manufacturer which had placed restrictions on its dealers in their dealings with e-retailers. It was alleged by Snapdeal that Kaff Appliances, had imposed a blanket ban on providing after-sale warranties with regards to products purchased online from unauthorised sellers. In this case, it was held by the CCI that:

  • The conduct of the Kaff Appliances was by its very nature a unilateral policy and involved coercion
  • The ban lacked reasonable justification and led to total deprivation of consumer choice thereby violating Section 3(4) (d) of the Act.

Way Forward

In the light of the audacious and laudable stance taken by CCI in the Snapdeal case, the CCI is likely to mirror the bold mindset in determining the alleged anti-competitive practices of the OYO and Make My Trip. In doing so, the CCI shall continue its endeavor in doing justice to the three-prong focus of the Competition Act, 2002 namely –

  • Encourage competition,
  • Protect consumer interests, and
  • Ensure freedom of trade in markets.

The Indian Competition law can be said to have created enough space so as to allow the novel and creative organizations to enter the market and offer more options to the customers and organizations. It seeks to promote the equality between the ecommerce enterprises and the traditional bricks and mortar companies and dealers.

However, it is suggestive that the CCI should take into account the unique features of the e-commerce sector such as rapid technological advancement, increasing returns, network effects, data collected from the users while analyzing the position of dominance and abuse.

 

Tags: pure players ecommerce, anti competitive agreements under competition act, types of anti competitive agreements, anti competitive agreements in competition law, major players in telecom industry, anti competitive agreements, ecommerce players, telecom players