corporate law...

TO EXPLORE CORPORATE LITERACY

VOLUME I | ISSUE II | JUNE 2018

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Advisory Council

Hon'ble Justice K.S. Panicker Radhakrishnan

Former Judge of Supreme Court of India

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Hon'ble Justice Pankaj Naqvi

Judge of Allahabad High Court

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Hon'ble Justice Mridula Mishra

Former Judge of Patna High Court &

Vice Chancellor of Chanakya National Law University

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D.R. Mehta

Former Chairman of Securities & Exchange Board of India

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Lalit Bhasin

President of Society of Indian Law Firms & Bar Association of India

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CA Amarjit Chopra

Former President of ICAI

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Mamta Binani

Former President of ICSI

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Prof. Paramjit S. Jaiswal

Vice Chancellor of Rajiv Gandhi National University of Law, Patiala



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Prof. Dr. A Lakshminath

Founding & Former VC of Chanakya National Law University, Patna

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Karan S. Thukral

Founder of Thukral Group

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Hemant K. Batra

Founder of Kaden Boriss Legal

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Expert Forum

Ekta Bahl

Partner @ Samvad Partners

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Rajesh Vellakkat

(Partner @ Fox Mandal & Associates)

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Savitha Kesav Jagadeesan

(Senior Partner @ Kochhar & Co)

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Ajar Rab

(Partner at Rab & Rab Associates LLP)

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Manisha Chaudhary

(Managing Partner of UKCA and Partners)

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Mr. Vikas Sharma

(President @ H2 Life Foundation)

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Dr. Sheetal Vohra

(Founder & Managing Partner @ Vohra & Vohra)

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Payal Parikh

(Managing Partner @ ANB Legal)



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Adv. Yuvraj P. Narvankar

(Managing Partner @ Narvankar Legal Chambers)

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CA Manoj Agrawal

(Senior Manager Finance @ Dabur International Ltd)

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CA Mukesh Bajaj

(Partner @ Tax & Regulatory Services)

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Jyoti Shekhar

(Legal Consultant & Founder Editor of EYRA)

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Mini Gautam

(Legal Consultant @ SREI Group)

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Pallavi Pareek

(Managing Partner at Ungender.in)

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Mohit Singhvi

(Founder @ Singhvi & Co.)

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CA Hemant Chopra

(Finance Director @ CMS Info System Ltd.)

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Adv Pankaj Agarwal

(Founder @ Quad Legal)



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CA Rajeev K. Sharma

(Indirect Tax Practitioner)

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Adv Kanchan Khatana

(Founder & Managing Partner of Kanchan Khatana and Associates)

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CA Kalpesh Semlani

(Founder & Proprietor of Kalpesh G. Semlani & Associates)

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Adv. Naman Mohnot

(Founder @ Aapka Consultant)

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Roopanshi Khatri

(Advocate)

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Bishwa Bandhu

(Adv. at Supreme Court of India)

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CA Padam Semlani

(Founder & Proprietor of Padam G. Semlani & Associates)

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Adv Swati R. Jain

(Advocate)

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Administrative Team

Subham Jain

Founder & Managing Editor

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CA Khushboo

Executive Editor

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CA Raunak Mohnot

Media & Marketing Head

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Shreya Shikha

HR Head

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Amresh Kumar

Public Relation Head

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Vidushi Verma

Communication Head

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Rakshita

Interns Coordinator

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BOARD OF EDITORS

FACULTY EDITORS

Professor Subhash Chandra Roy

Professor of Law

Chanakya National Law University, Patna

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Dr. Ajay Kumar

Professor of Law


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Dr. Pradeep Kumar Das

Assistant Professor of Law

School Of Law and Governance, Central University of South Bihar, Patna

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Aashish Jain


College Of Legal Studies, UPES

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Dr. Father Peter Ladis F





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P. Mohan Chandran

Business Content Writer

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Sarvesh Kumar Shahi

Visiting Faculty

Maharashtra National Law University

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STUDENT EDITORS BOARD (VOL I ISSUE II)

SUBHAM JAIN

(Founder & Managing Editor)

HARSHIT ANAND HIMANSHU AGGARWAL

STUTI LAL RAJ KRISHNA

ATYOMA GUPTA AMIT SINGHAL

SALONI BIRLA SUMIT KUMAR

PIYUSH KAMAL



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FROM THE DESK OF PUBLISHER

Corporate Law Journal proudly announces the publication of its Volume I Issue II. The Journal

demonstrates our commitment to excellence in scholarship and student development. The legal industry

is really about people, which ties in with one of our core beliefs that people make a difference. Our goal is

always to produce a reputable legal journal.

The Journal primarily covers the latest topics of discussion and debate in corporate law around the world

and also the emerging trends in the field of corporate law.

Like any reader, we rate publications that are readable, indeed fun! We hope you enjoy Corporate Law

Journal and we welcome your feedback. We are confident that this edition will be valued by judges,

lawyers, students, researchers and scholars. As you read the topics addressed in this Journal, we are sure

that you will agree that this is an impressive work produced by the authors and editors. It is a pleasure to

work with such fine individuals and students on a daily basis.



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FOUNDER’S WORDS

The Thought Behind……………………

Albert Einstein once said:

“Try Not to Become a Man of Success but rather try to become a man of value”.

I believe that values are not inbuilt rather they are created. The origin of Corporate Law Journal is with

this small question that why the word ‘Corporate’ is symbolic of ‘Money Minded Mentality’. Producing

next generation as value based professionals and with this Vision Corporate Law journal strives to be

recognized globally as a pioneer in the Corporate Community.

Many times faulty environment around us become hindrances to truly fulfill our duties and obligations

towards a Society which provides existence of corporate community. The journal also seeks to bridge the

gap between the Corporate Sector and Society by creating true application of corporate governance and

responsibility. This is a new kind of initiative in corporate arena which emphasizes the significance of

professional ethics, moral values, social responsibility and good governance principles.



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By involving a large research community in an innovative open peer review process, the journal aims to

suggest policy makers and to provide fast access to top- quality articles/papers, research notes, and

comments, current developments, Judgments and Advisory Opinions for and by professionals, educators,

researchers and academicians in the specialized sector of the Corporate Sea.

With this spirit and ambition, we ensure that journal would be very helpful to establish link between

Corporate Sector and Society. The young minds striving towards corporate world and their coming

together To Explore Corporate Literacy will serve the purpose. We, the whole team of Corporate Law

Journal hope great positive impact of our initiative.



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MESSAGE OF HON’BLE ADVISORY COUNCIL FOR ISSUE II

OF CORPORATE LAW JOURNAL

Corporate Law is in flux. The Companies Act 2013 is at a nascent stage as would be evident from the

amendments being carried out in the said enactment. Coupled with that SEBI Regulations are being

changed, varied and modified from time to time. Judicial pronouncements lack clarity - because of the

reason that this is an evolving jurisprudence. National Company Law Tribunal (NCLT) and National

Company Law Appellate Tribunal (NCLAT) have a huge burden cast on them and the arrears have

started accumulating.

Insolvency Banking Code (IBC) is again a new legislation and it would take time before various provisions

pertaining to Operational Debts and Financial Debts get clarified by way of judicial pronouncements.

NCLT and NCLAT have been assigned the responsibility of deciding cases under the IBC as well. These

cases outnumber the cases before NCLT and NCLAT under the Companies Act.

There is no adequate infrastructure in place to deal with such large number of disputes / cases under the

Companies Act and under the IBC. Urgent steps are required to take remedial measures so that no

pendency is created in NCLT and NCLAT.



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The young colleagues have undertaken an admirable and innovative knowledge venture viz., the

publication of the Corporate Law Journal. Obviously for this, they have made strenuous efforts.

Undoubtedly, this will be helpful to large number of professionals.

On the, significant occasion of the release of II issue of the Corporate Law Journal, I congratulate the

young team and wish this effort as great success.



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I am glad to learn that the students of the NLUs along with other esteemed institutions have taken the

initiative of launching a corporate law journal (bi-annual). I wish the group the very best in their

endeavor.



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Thank you very much for inviting me to be the Member of the Advisory Board of Corporate Law Journal

(CLJ) a bi-annual journal. I appreciate the efforts of whole CLJ team in taking out this journal for serving

society with current developments, and judgments. I am confident the journal will be of immense help to

the students and the researchers.



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It will be very apt to mention that compliances & ethics is new normal & the same holds good not only in

the Corporate World but to the non-corporate world too. The corporate world consisting of all sizes, is

always under discussion as this is the axis around which the employment revolves and so does the GDP &

hence it becomes imperative for the regulators to tap & tone the corporate from the scratch.

Gone are the days, when once the law is read & learnt, one could simply claim an authority on it. In

today’s’ time, the law are changing as fast as our society, living the guardians of law perplexed & jittery

too. The web of rules, regulations, circulars, notifications, clarifications, ordinances & amendments put

the corporate sector on its toes, compiling them to be extremely vigilant & conscious about the laws of

land. The pecuniary fines & penalties added with the harder stance of the judiciary & the governance

expectation at its peak, with the media being hyper active & with the sniffers all around, any issue be it as

small as a grain only, emphasis the need to stay vigilant & not have any casual attitude.

Corporate Law Journal by its research & active participation in various forums brings out the different

facets of the burning & emerging issues in the Corporate World through this magazine. I am sure, you

will be enriched on reading it & make it a regular resource for your use.

Happy Reading!!!



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I am pleased to know about the launch of Volume I and II of Corporate Law Journal. Please accept my

heartiest congratulations and compliments for the splendid efforts of your team. Present day's economic

environment is witnessing unprecedented changes in corporate laws. It has increased the responsibilities

of Board Members, Managements, Professional and various Regulators. It is extremely important for the

various pillars of corporate governance i.e. Promoters, Directors, Regulators, Auditors and Shareholders

to be aware of the latest changes in various laws. And I am confident that Corporate Law Journal will

facilitate that awareness.

With best wishes for all your future endeavors



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“It is pleasure to know about the launch of a new initiative in the form of a journal titled as Corporate Law

Journal. I feel honored and privileged in writing a forwarding note to its Issue II. I am sure this venture

will serve as a platform for dissemination of high quality research in the field of Corporate Law.

It will promote and cover with its vastness all fields of Corporate Law and shall advance research through

articles, debates and communications between the legal fraternity, researchers, chartered accountants,

company secretaries and students, I am sure it will outshine other such endeavors in the corporate field.

I wish it overwhelming and tremendous success.”



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MESSAGE OF EXPERT FORUM PANEL FOR ISSUE II OF

CORPORATE LAW JOURNAL

It’s great to know that the team of Corporate Law Journal is launching its 2nd issue of Journal. The

initiative of the launching of Corporate Law Journal is certainly a commendable step in the right direction

for legal awareness not only among the Legal professionals but public at large. I hope and trust that in

this fast growing world of corporate laws, where the litigation is going and growing complex, this Journal

will help in providing the proper assistance and will update with recent updates. I am fully confident that

this edition would be as good like its 1st issue. I again congratulate to the entire team to yet another

milestone in their endeavor of legal revolution.

- ADVOCATE NAMAN MOHNOT

- FOUNDER @ AAPKA CONSULTANT

Even though the journal is relatively young, it has received valuable academic contributions from various

stakeholders in the industry, corporate world, academicians and of course the students. The commitment

and time taken by the editors and committee to painstakingly review the submissions makes this journal

a go-to source for corporate jurisprudence and emerging legal challenges.

“I have no doubt that in the years to come the journal will receive tons of submissions and that it will

greatly contribute in shaping the legal landscape of corporate jurisprudence in the country.”

- AJAR RAB

- PARTNER AT RAB & RAB ASSOCIATES

I am extremely glad to be a part of the Corporate Law Journal, which is proudly presenting its second

issue. I really hope that these youngsters, who have come up with such a fantastic initiative, are able to

steer all minds towards a more compliant and aware business world. It is indeed very good to see young

minds thinking responsibly about how to produce next generation of value-based professionals. Let us all



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come together and support these professionals and would-be professionals in creating a better legal and

compliance framework. Three rousing cheers to the team!

- JYOTI SHEKHAR

- LEGAL CONSULTANT AND FOUNDER EDITOR OF EYRA

Corporate Law Journal has now entered its next phase. From its fledgling beginnings, this neo outlook at

corporate law by young minds has brought out its next edition that seeks to trace out the various concepts

of corporate law, while also tracing its link to society. What makes this journal different is not only a very

young team but their fresh outlook of and a blazing desire to not only provide legal inputs in the area but

also to highlight issues that are troubling the corporate world today. The journal hopes to introduce

concepts of corporate governance, corporate efficacy but more than that evoke in the mind of its reader

“ethical values”.

In the words of Aristotle, “Educating the mind without educating the heart is no education at all.”…and

this is what the corporate law journal hopes to do. Wishing them hearty success and hoping that they

receive able patronage from the corporate world….Happy reading.

- SAVITHA KESAV JAGADEESAN

- SENIOR PARTNER, KOCHHAR & CO.



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CONTENTS

1. BUSINESS ETHICS AND GENDER EQUALITY: A VALUE PROPOSITION

2. ROLE AND FUNCTIONING OF THE INSOLVENCY PROFESSIONALS UNDER

INSOLVENCY AND BANKRUPTCY CODE (IBC), 2016

3. TREATMENT OF MATERIAL ADVERSE CLAUSE IN THE INDIAN MERGER REGIME

4. THE EFFECT OF ANTI-TRUST LAWS ON MERGERS AND ACQUISITIONS

(M&A’S): A CASE STUDY OF THE U.S. AND INDIA

5. CRITICAL UNDERSTANDING OF THE RE-INTRODUCED LONG-TERM CAPITAL

GAINS TAX



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“BUSINESS ETHICS AND GENDER EQUALITY: A VALUE PROPOSITION”

~ Jyoti Shekar, Legal Consultant (B.S.L. LLB and LLM in Commercial Law)

ABSTRACT

Gender equality plays an important role in the economic development of the country. It is

not only a moral obligation of organizations, but also commercially beneficial to them. This

paper discusses UNGC Principle 6 in some detail and highlights the importance of gender

equality, how discrimination affects businesses, what measures can be taken to promote

equality, and puts forth the concept of neutrality at the workplace in certain situations like

negotiation of pay, participation in meeting rooms and discussion on promotion.

INTRODUCTION

The concept of Business Ethics is generally associated with corruption and fraud.

Though that is definitely something that our ethics should govern, there are other ethical

principles that are not to be ignored; one such being gender equality. Equality is a

disputed concept. Does it mean equal rights for all? Does it mean equal opportunities for

all? Does it mean special privileges for some to bring them at par with the others?

Moreover, the debate goes on…

In this paper, let us analyse gender equality at workplace to the limited extent of gender

discrimination and equal opportunity.

There are many laws in India, which protect women from gender discrimination at

workplace. Right from our Constitution to Equal Remuneration Act, 1976, Sexual

Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013

and other legislations, we have endeavoured to ensure that our women are protected

against discrimination. However, this by itself cannot achieve equality in its true sense.

Firstly, because most companies follow the letter of the law, but the spirit of the law,

more often than not, gets lost in translation. Secondly, the laws may very well cover all



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the overt acts of discrimination, but it cannot cover all possible acts of discrimination.

This is where Business Ethics play an important role.

A. The Problem of Discrimination

In 2016, the Supreme Court acknowledged in the case of Richa Mishra v. State of

Chhattisgarh relating to denial of promotion that:

“Women in this world, and particularly in India, face various kinds of gender

disabilities and discrimination. It is notwithstanding the fact that under the

Constitution of India, women enjoy a unique status of equality with men. In reality,

however, they have yet to go a long way to achieve this Constitutional status. It is now

realised that real empowerment would be achieved by women, which would lead to

their well-being facilitating enjoyment of rights guaranteed to them, only if there is an

economic empowerment of women as well.”1

India was ranked one of the lowest in the world (at 121 out of 131 countries) in female

participation in the workforce as per the International Labour Organisation in 2013.2 A World

Bank Study in 2017 found out that 19.6 million women dropped out of workforce in India

between 2004-05 and 2011-12. The study makes it clear that conventional approaches such as

education and skills and legal provisions are insufficient for increasing female labour force

participation, and that policies should centre on promoting the acceptability of female

employment and investing in growing economic sectors that are more attractive for female

employment.3

Though we have an increasing number of women leaders, women are still not well

represented in decision-making roles. Another important problem is the pay gap despite

doing equal work.4 In India, we sometimes tend to justify the gap with the fact that most

men have more “responsibilities” than women do.

1 Richa Mishra v. State of Chattisgarh, (2016) 4 S.C.C. 179. 2 International Labour Organization, “India: Why is women’s labour force participation dropping?” 13 February 2013 http://www.ilo.org/global/about-the-ilo/newsroom/commentanalysis/WCMS_204762/ lang--en/index.htm. 3 Luis A. Andres, Basab Dasgupta, George Joseph, Vinoj Abraham, Maria Correia, “Precarious Drop Reassessing Patterns of Female Labor Force Participation in India” April 2017. 4 UN Global Compact, “Gender Equality” https://www.unglobalcompact.org/what-is-gc/ourwork/social/ gender-equality.

http://www.ilo.org/global/about-the-ilo/newsroom/commentanalysis/WCMS_204762/%20lang--en/index.htm

http://www.ilo.org/global/about-the-ilo/newsroom/commentanalysis/WCMS_204762/%20lang--en/index.htm

https://www.unglobalcompact.org/what-is-gc/ourwork/social/%20gender-equality

https://www.unglobalcompact.org/what-is-gc/ourwork/social/%20gender-equality



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In a society where women are freely objectified, the corporate women frequently

become targets of verbal, physical and sexual abuse. Job opportunities and promotions

are difficult to come by, when you are single – because you cannot handle

responsibilities, when you are married – because you have too many responsibilities and

what if you get pregnant, so on and so forth. One big issue is the economic disadvantage

of women-owned enterprises and lack of equal opportunity to compete for business

opportunities. In fact, many women organizations are given projects under corporate

social responsibility, rather than on merits.

“With all the equality principles addressed in local laws as well as international

agencies, such as Declaration of Human Rights, it seems as if equality between

men and women has been achieved. However when we look at what is actually

happening, we see that inequality still remains because, although moral

principles exist and are specified in declarations of rights, this problem is

structural, and changing structures in a society is hard work. So the

occupational sexism we find in the business world is merely a reflection of the

patriarchal domination features of our society. This statement does not imply

accepting women’s under-representation; indeed the exact opposite is true. This

evidences the need to incorporate this problem into the business ethics

management instruments.5

The Monster Salary Index 2016 reported that the overall gender pay gap in India

amounted to 25% in 2016. The largest gender pay gap in 2016 was found in the

Transport, logistics and communication (42.4%). The lowest was recorded in the

Education and research, where women earned 3.4% more than men did.6 The gender

pay gap in India has been declining over the years. Women earned 44.80% less than

men before 2007. Interestingly, the gender pay gap increases with higher educational

qualifications. Women who attained educational qualification below 10th standard

5 Maria Medine-Vincent, “Business ethics and gender equality: the basis for a new leadership model” October 2014 https://www.researchgate.net/publication/278391271_Business_ethics_and_gender_ equality_the_basis_for_a_new_leadership_model. 6 Monster India, “The Monster Salary Index 2016”, available at http://media.monsterindia.com/logos/ researchreport/MSI_Full_report_2016_July_2017.pdf.

https://www.researchgate.net/publication/278391271_Business_ethics_and_gender_%20equality_the_basis_for_a_new_leadership_model

https://www.researchgate.net/publication/278391271_Business_ethics_and_gender_%20equality_the_basis_for_a_new_leadership_model

http://media.monsterindia.com/logos/%20researchreport/MSI_Full_report_2016_July_2017.pdf

http://media.monsterindia.com/logos/%20researchreport/MSI_Full_report_2016_July_2017.pdf



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earned 9.37% less than men, whereas women with professional qualifications such as

CA/CS/ICWA or equivalent earn 44.25 % less than male.7

B. The Equality Principle

The 6th principle of UN Global Compact talks about the elimination of discrimination in

respect of employment and occupation. The UN Global Compact defines discrimination

in employment and occupation as treating people differently or less favourably because of

characteristics that are not related to their merit or the inherent requirements of the job.

On the other hand, non-discrimination in employment simply means selection of

employees solely on their ability to do the job and that there is no distinction, exclusion or

preference made on other grounds.8

The 6th principle goes on to explain that discrimination can take many forms, both in

terms of gaining access to employment and in the treatment of employees once they are

in work. Such discrimination may be direct, where gender may be cited as a reason

explicitly to deny equal opportunity. But more commonly, discrimination is indirect. It

arises where rules or practices have the appearance of being fair and neutral, but in fact

lead to exclusions. This is mostly seen in attitudes and practices, which if unchallenged

can perpetuate in organizations. Discrimination may also have cultural roots that

demand more approaches that are specific.9

C. Focus Areas – the 3 P’s

This discrimination can be understood and addressed if we can analyse the 3 P’s of

employment – Pay, Participation and Promotion. In all these should be the basic

underlying aspect of women being seen as equal contributor to the business in their

respective capacities and accepted as such. Let us call this aspect as “Workplace

Neutrality”.

7 WageIndicator Foundation, “Gender Pay Gap in the Formal Sector: 2006 – 2013” September 2013 https://wageindicator.org/documents/publicationslist/publications-2013/gender-pay-gap-in-formal sector-in-india-2006-2013. 8 UN Global Compact, “Principle 6: Labour” https://www.unglobalcompact.org/what-is-gc/mission/principles/principle-6. 9 UN Global Compact, “Principle 6: Labour” https://www.unglobalcompact.org/what-is-gc/mission/principles/principle-6.

https://wageindicator.org/documents/publicationslist/publications-2013/gender-pay-gap-in-formal%20sector-in-india-2006-2013

https://wageindicator.org/documents/publicationslist/publications-2013/gender-pay-gap-in-formal%20sector-in-india-2006-2013

https://www.unglobalcompact.org/what-is-gc/mission/principles/principle-6






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Pay: - Typically, at the time of putting in a requisition for new recruit, HR will

question whether the requirement is for a male or for a female. Now there are

various reasons for asking such a question – whether gender diversity is to be

increased in the team, whether the position is in a remote site location etc.

However, this should be considered as special requisitions, and under ordinary

circumstances equal opportunity is to be accorded to all. This is in the

organization’s own interest of placing the right “person” for the right job.

However, once the profile is shortlisted and the salary negotiations begin, the

only aspect to be considered should be pay commensurate with the role,

experience and to some extent, last drawn salary. Although the last drawn salary

is somewhat debatable in today’s market, whether it should be considered or not.

Apart from that, the traditional view sometimes has also been to look at the

person’s gender, background, profile and family responsibility. However,

organizations should draw the line between being charitable and being unfair. In

the first place, the view should obviously be that organizations do not pay

salaries for social causes, they pay for professional contribution. Secondly, having

regard to the finer values as explained above, organizations run the risk of

increasing the gender pay gap, since India has more males who are the

breadwinners of the family, giving rise to the expectation of being paid more,

regardless of qualification and contribution.

Participation: – This is another critical area where equality is jeopardized. Once

the employee is on board and working, efforts should be made to recognize the

chair rather than the gender, and participation should be equally accepted in

conference rooms and board rooms, irrespective of gender. If Workplace

Neutrality can be consciously ingrained and achieved in conference rooms, half

the battle against discrimination would be won.

Promotion: – Glass Ceilings exist in most places even in the current market

scenario. Some glasses are just clearer than the others. Though compulsory

women representation in certain positions has its pros and cons, in an ideal

scenario the “right person for the right job” model should be applied without

regard to gender. Promotions are based on past performance and rightly so. This



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should be kept as the main factor in giving promotions, just as was discussed

above in “Pay”.

The above not only helps in maintaining equality, but it will help develop a work

environment of well-being, appreciation and growth. This obviously benefits the

organization in terms of both profitability and reputation.

D. Enforcement

In India, we do have some legislations to promote equality and prohibit discrimination.

Article 14 of the Constitution guarantees equality before law and Article 15 prohibits

discrimination on the basis of sex. Apart from this, we have Equal Remuneration Act

1976, Maternity Benefit Act 1961, Sexual Harassment of Women at Workplace

(Prevention, Prohibition and Redressal) Act, 2013 etc. to protect the interests and safety

of women.

However, unless we adopt this concept as part of our Business Ethics module and as part

of the organization culture, it will be extremely difficult to enforce the above laws in

their true spirit. Companies are not just businesses; they are complete ecosystems for

employees. For example, enforcement of sexual harassment legislation in its spirit has

its own challenges. Though organizations have formed Internal Complaints Committees

as required under the Act, sensitization of employees is another important aspect of the

Act. This needs to be followed in the true genuine sense, to avoid harassment in the first

place, hence saving the time and effort of the employee’s part of the Internal Complaints

Committee, who can then focus on their core responsibilities in view of the reduced

number of cases.

In India, the Ministry of Corporate Affairs has established National Voluntary Guidelines

on Social, Environmental and Economic Responsibilities of Business. Principals 5 and 8

are very pertinent, though equivocal, in terms of establishing the importance of human

rights, inclusive growth and equitable development. But these guidelines themselves are

an evidence of how our society perceives women. The guidelines define Vulnerable and



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Marginalized Groups to include women and girls.10 To call almost half of the population

as marginalized, is indeed a testimony of how far we need to go to achieve equality.

IMPACT ON BUSINESSES

Discrimination, if not checked at an early stage, can rear its ugly head, causing the

company money and time wastage in court cases too. For example, there was a case in

2017 in Georgia USA wherein a federal district court laid down that an employer

terminating the services of a female employee because of her “excessive menstruation”

did not constitute gender discrimination as per the law.11 In this case, the female

employee suffered from pre-menopausal menstrual leaks. On the occurrence of the first

event, the defendant company issued a disciplinary warning to her and on the second

occasion, terminated her. On appeal, the case was settled between the parties, though

the settlement details are confidential.

The case in point proves that ultimately the company had to pay a price in terms of its

time and money, got a favourable judgment and at the end, had to probably pay some

settlement amount. In the end, it is a lesson in short-term savings vs. long-term loss. A

common principle in compliance is that “the cost of compliance is much cheaper than

the cost of non-compliance.” Same principle applies to Ethics as well. There are a lot of

disadvantages to companies who do not maintain an ethical environment, some of which

will be highlighted in succeeding paragraphs.

Lots of research and data is available on how the moral fibre in companies is important.

However, it should also be highlighted how not having strong ethical values affect a

company and its performance. The following are some of the ramifications that unethical

practices lead to12:

10 Ministry of Corporate Affairs, “National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business” http://www.mca.gov.in/Ministry/latestnews/National_Voluntary_ Guidelines_2011_12jul2011.pdf. 11 Alisha Coleman vs. Bobby Dodd Institute Inc. https://ecf.gamd.uscourts.gov/cgi-bin/show_public_doc? 2017-00029-12-4cv. 12 UN Global Compact, “Principle 6: Labour” https://www.unglobalcompact.org/what-is-gc/mission/principles/principle-6.

http://www.mca.gov.in/Ministry/latestnews/National_Voluntary_%20Guidelines_2011_12jul2011.pdf

http://www.mca.gov.in/Ministry/latestnews/National_Voluntary_%20Guidelines_2011_12jul2011.pdf

https://ecf.gamd.uscourts.gov/cgi-bin/show_public_doc?%202017-00029-12-4cv

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1. It leads to social tensions that are potentially disruptive to the business

environment within the company and in society.

2. A company that uses discriminatory practices in employment and occupation

denies itself access to talents from a wider pool of workers, and thus skills and

competencies.

3. The hurt and resentment generated by discrimination will affect the performance

of individuals and teams in the company.

4. Increasingly, graduates and new employees alike assess companies on the basis

of their social and ethical policies at work.

5. Discriminatory practices result in missed opportunities for development of skills

and infrastructure to strengthen competitiveness in the national and global

economy.

6. Finally, discrimination isolates an employer from the wider community and can

damage a company's reputation, potentially affecting profits and stock value.

Apart from the above, a case for following ethical practices in general is made below:13

1. Companies are able to attract the best talent by being ethical. Also, an ethical

company dedicated to taking care of its employees have a much higher chance of

retaining employees who are equally dedicated in taking care of the organization.

Ethical organizations create an environment that is trustworthy, making

employees willing to rely, take decisions and act on the decisions and actions of

co-employees.

2. Investors are concerned about ethics, social responsibility and reputation of the

company in which they invest. Investors are becoming more and more aware that

an ethical climate provides a foundation for efficiency, productivity and profits.

3. Customer satisfaction is a vital factor in successful business strategy. Repeat

purchases or orders and enduring relationship of mutual respect are essential for

the success of the company. The name of a company should evoke trust and

respect among customers for enduring success. This is achieved by a company

that adopts ethical practices. When a company because of its beliefs in high ethics

13 Renu Nainawat and Ravi Meena, “Corporate Governance and Business Ethics” Global Journal of Management and Business Studies, ISSN 2248-9878 Volume 3, Number 10 (2013), pp. 1085-1090 https://www.ripublication.com/gjmbs_spl/gjmbsv3n10_08.pdf.

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is perceived as such, any crisis or mishaps along the way is tolerated by the

customers as a minor aberration.

On the positive side, diversity and inclusion in the workplace can produce positive

outcomes for business, for individuals and societies. For business, it can improve

productivity, be a source of innovation, facilitate better risk management, enhance

customer and business partner satisfaction, and open the door to or help maintain

business opportunities.14

RECOMMENDATIONS

UNGC recommends certain actions which can be taken by the companies to ensure

gender equality at workplace:15

1. Institute company policies and procedures which make qualifications, skill and

experience the basis for the recruitment, placement, training and advancement of

staff at all levels

2. Assign responsibility for equal employment issues at a high level, issue clear

company-wide policies and procedures to guide equal employment practices, and

link advancement to desired performance in this area.

3. Work on a case by case basis to evaluate whether a distinction is an inherent

requirement of a job, and avoid application of job requirements that would

systematically disadvantage certain groups.

4. Keep up-to-date records on recruitment, training and promotion that provide a

transparent view of opportunities for employees and their progression within the

organization.

5. Conduct unconscious bias training.

14 UN Global Compact, “Principle 6: Labour” https://www.unglobalcompact.org/what-is-gc/mission/principles/principle-6 15 UN Global Compact, “Principle 6: Labour” https://www.unglobalcompact.org/what-is-gc/mission/principles/principle-6







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6. Where discrimination is identified, develop grievance procedures to address

complaints, handle appeals and provide recourse for employees.

7. Be aware of formal structures and informal cultural issues that can prevent

employees from raising concerns and grievances.

8. Provide staff training on non-discrimination policies and practices, including

disability awareness. Reasonably adjust the physical environment to ensure

health and safety for employees, customers and other visitors with disabilities.

9. Establish programs to promote access to skills development training and to

particular occupations.

10. In foreign operations, companies may need to accommodate cultural traditions

and work with representatives of workers and governmental authorities to

ensure equal access to employment by women and minorities.

Company leaders need to consider ethical issues from a strategic perspective, making

special effort to behave in a way that is consistent with their statements of purpose.16

Policies and statements should go hand in hand with actions taken, such as

commitments, resources, and processes. The company should pay particular attention to

any potential contradictions between what it says and what it does.

THE SOLUTION

A good company is built not only by its profitability, but by its reputation. It builds a

corporate community of employees, making its commitment against discrimination all

the more critical. As discussed above, conscious effort should be made to inculcate the

value of Workplace Neutrality amongst employees, with special focus in the areas of Pay,

Participation and Promotion. This can be done only through engagement, training and

sensitization.

16 BSR, “The Future of Business Ethics” October 2017 https://www.bsr.org/reports/BSR_Future_of_ Business_Ethics_BSR.pdf

https://www.bsr.org/reports/BSR_Future_of_%20Business_Ethics_BSR.pdf

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A few days back, a US based company shut down its stores for the day to conduct anti-

bias training of all its employees against racism. While this is an extremely important

and relevant step in the world of Business Ethics, I put forward two observations here:

1. Why wait for a big incident and a giant reputational damage to conduct such

trainings, which should ideally be a part of the company’s ethical practice in the

first place?

2. There is a huge loss of revenue associated with shutting down thousands of

stores for one day to conduct the training. Why not do it in phases?

Both the above points cost the company a lot of financial and reputational damage. It

will be a better idea to look at future benefits rather than current costs, and have

business ethics policies and trainings in a phased and organized manner. To sum up,

companies should curb inequalities and provide a fair and just work environment with

the following:

1. Set the tone at the top;

2. Establish clear policies;

3. Sensitize managers, employees and other staff through relevant training

programs;

4. Have committees to monitor policy implementation and grievance redressal.

Although business ethics are essentially good practices to be implemented across

departments, a few departments like HR, Legal and Compliance take a very important

role in developing, practicing and implementing ethical practices.

On the other hand, it is critical to be aware of cultural diversities and social issues. For

example, women should get equal pay for equal effort; however certain sensitivities are

also required to be kept in mind in terms of late night work, safety of women during

commute etc.



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CONCLUSION

In a country like India, we are more driven by social taboos and acceptance rather than

actual morality and ethics. Moral values not only include the socially acceptable norms,

but it is actually a way of distinguishing between right and wrong. But the definition

itself is very subjective and ultimately depends on a person’s sense of justice and what

he/she believes is right or wrong. In that sense, we are much driven by the so-called

‘morality’, overlooking the actual ethics part. Usually, when we talk to people, we are

very aware of what gender, nationality, religion, caste etc. they are from. So much so that

in case we are unable to classify them as any of the above, our minds get restless.

But to look beyond all that and restrict our thought process to the work they do and the

fact that they are human beings, is what Workplace Neutrality is about. In the end,

accepting discrimination from others is as much a crime against humanity as the act of

discrimination against others. So speak up.



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“ROLE AND FUNCTIONING OF THE INSOLVENCY PROFESSIONALS UNDER

INSOLVENCY AND BANKRUPTCY CODE (IBC), 2016”

~ Anjali Rautela, Law Student, 3rd Year, New Law College,

Bharati Vidhyapeeth Deemed to be University, Pune

ABSTRACT

The present paper entitled ‘Role and Functioning of the Insolvency Professionals under IBC’

is an attempt to understand the role of the Insolvency Professionals (IP’s) under the newly

introduced Insolvency and Bankruptcy Code, 2016. The law, being in its nascent stages of

development, requires much-needed attention and so do the IP’s, who acts as important

pillars of the insolvency resolution process. The recent economic situations in India have

imposed many challenges for companies in dealing with Non-Performing Assets (NPA).

Introduction of Goods & Services Tax (GST) by the government on July 1, 2017, in much

haste, proved to make the task of IP’s even more onerous. This paper tries to understand

the compliance obligations of the IP’s appointed by the NCLT as an interim resolution

professional under the IBC, 2016. The paper is divided into chapters, where the duties are

described under different heads like ‘Duties of Interim Resolution Professional and

Resolution Professional’, ‘Duties of an Insolvency Professional in case of individual

insolvency’, etc. The paper includes the stringent task designated to these professionals to

revive the company from the state of insolvency and for better corporate governance.

INTRODUCTION

The time-bound resolution of insolvency proceedings introduced by the Insolvency and

Bankruptcy Code (IBC) of India was a landmark change in the way the issues of

insolvency, bankruptcy, all debt, defaults and Non-Performing Assets (NPA’s) are being

dealt. In fact, the IBC, 2016, complements various other acts such as SARFAESI Act, etc.

The Code has replaced the century-old obsolete legal framework to deal with the

problem of insolvency. The Code has paved way for a new class of professionals who

need to cater to the management of the concerned entity with utmost sincerity and thus,

lays down the oppressive task to abide by the faith of the company, individuals,



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partners, stakeholders, promoters and partnership firms, to chalk out an exit plan and to

zero in on the underlying issues with dedication; these professionals are called as

‘Insolvency Professionals (IP’s).’ There is a need for speedy resolution of bad debts in

India. With a rank of 130 in World Bank’s index in ease of resolving insolvencies, the

average time taken to resolve is 4.3 years, recovery rates (cents in dollars) is 26.0 c and

average cost as of estate is 9%.17 India needs a revamped model of dealing with these

inefficiencies and so arises the growing demand for IP’s with much-needed managerial

efficiency.18

“Insolvency representative plays a central role in the effective and efficient

implementation of an insolvency law, with certain powers over debtors and

their assets and a duty to protect those assets and their value, as well as the

interests of creditors and employees and to ensure that the law is applied

effectively impartially.”

India needs many more IP’s in the upcoming years to improve the debt market and the

flow of capital to run the business smoothly. There are four major pillars of the IBC: (1)

the Insolvency Professionals Agencies, (2) Insolvency Professionals, (3) Insolvency and

Bankruptcy Board of India (IBBI), and (4) Informational Utilities. Adjudication

Authorities and IP’s will assist in the completion of insolvency resolution, liquidation

and bankruptcy proceedings under the Code.

IP’s, in simpler terms, are the custodians of the company in times of need; when they are

in need, they need to be the master of the affairs of the company. These masters of the

company are still in the embryonic stages. According to Sec. 3(19) of the Insolvency and

Bankruptcy Code of India, hereinafter referred to as the Code or IBC, “Insolvency

Professional (IP) means a person enrolled under section 206 with an IP agency as its

member and registered with the board as an IP under section 207.”19 To become an IP,

one has to pass the test conducted by the IBBI and a limited insolvency examination.

17 World Bank, Doing business: Measuring business regulations, Resolving insolvency, Washington DC: World Bank, http://www.doingbusiness.org/data/exploretopics/resolving-insolvency. 18 United Nations Commission on International Trade Law, UNCITRAL Legislative Guide on Insolvency Law: Part three: Treatment of enterprise groups in insolvency (Vienna: United Nations, 2012), https://www.uncitral.org/pdf/english/texts/insolven/Leg-Guide-Insol-Part3-ebook-E.pdf . 19 Insolvency and Bankruptcy Code, 2016, Section 3(19).

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There are already 826 registered IPs and 27 registered IPE’s as on 16th August 2017,

which clearly shows the immense popularity of the IP.20 Apart from the insolvency laws,

a good IP must possess practical knowledge of the Company Law, Banking Finance, Cash

Flow Management, Stakeholder Management, Negotiation Skills, Taxation, Valuation and

Sale of Assets, Commercial and Business Laws, etc.

CRITICAL ANALYSIS

A. Role of Insolvency Professionals in Corporate Insolvency Resolution

Process:-

Within a few months of the release of the IBC, 2016, RBI had identified companies with a

default of more than Rs. 5,000 crores. Defaulting borrowers, such as Bhushan Power &

Steel, Essar Steel, Lanco, Jaypee Infrastructure, Monnet, Alok Industries Ltd., had

reached a decisive stage when RBI told banks to take the matter to NCLT. Banking

Regulation (Amendment) Act, 2017, enables the Central Government to authorize the

Reserve Bank of India to direct banking companies to initiate insolvency resolution

process in respect of a default under the provisions of the IBC, 2016.21 This action of the

Government will have an impact on the resolution of stressed assets as the RBI is

empowered to intervene in specific cases. These companies, with large and complex

mechanism, need IPs with industry knowledge, who can manage the business with ease.

Part II of the IBC deals with the insolvency resolution and liquidation of corporate

persons.22 Under this, financial creditors23, operational creditors24 and or corporate

debtors (CDs)25 themselves can approach the Adjudicating Authority for initiation of

corporate insolvency resolution process under the sections 7, 8 and 10 respectively.26

To become an IP, Regulation 6 of the Insolvency and Bankruptcy Board of India

(Insolvency Professionals) Regulations 2016, issued vide Gazette Notification

20 CA Abizer Diwanji, “Eligibility, roles, responsibilities, opportunities, risk”. 21 Hindu Net Desk , All you need to know about the Banking Regulation (Amendment) Bill, 2017, The Hindu, August 11, (Jan 10, 2018, 05:30 PM), http://www.thehindu.com/business/all-you-need-to-know-about-the-banking-regulation-amendment-bill-2017/article19475175.ece. 22 Insolvency and Bankruptcy Code of India, 2016, Section 3(7). 23 Id. Sec 7. 24 Id. Sec 20. 25 Id. Sec 3(8). 26 Id. Sec 7, 8 and 10.

http://www.thehindu.com/business/all-you-need-to-know-about-the-banking-regulation-amendment-bill-2017/article19475175.ece

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IBBI/2016-17/GN/REG00327 dated 23rd November, inter-alia, states that an individual

enrolled with an IP agency as a professional member may make an application to the

Board in Form A of the Second Schedule to the said Regulations, along with a non-

refundable application fee of Rs. 10,000 to the Board.28 In CIRP, the major decision-

makers are the creditors, i.e., the committee of creditors. All major steps from the

appointment of the IP to the decision of survival or liquidation are taken by the

creditors. IPs play a different role in Corporate Insolvency Resolution Process; one is of

Interim Resolution Professional, known as IRP, and the other is of Resolution

Professional, known as RP.

1. Duties and Functioning of an Interim Resolution Professional (IRP)

An IRP shall be appointed by the Adjudicating Authority NCLT under section 16 of the

IBC within 14 days from the date of commencement of insolvency by the creditors under

section 9(4) of the Code if no disciplinary proceedings are pending against him. An IRP is

appointed for less than 30 days period in which he has to perform several functions as

stated in section 18 of the Code.29

(i) Management of the affairs of the Corporate Debtor by Interim

Resolution Professional

(a) IP as the supervisor of the Board of Directors:

An IRP has full control over the management of affairs of the debtors and in the actual

scenario, they become the de-facto CEO’s and the board becomes the COS (Chief of Staff).

With the virtue of section 19(1) of the IBC the IRP is entitled to full cooperation and

assistance of the personnel of the CDs, promoters, etc., failing which, he can file an

application to the Adjudicating Authority for necessary directions under section 19(2).30

IRP exercises the powers of the Board of Directors, and all the reporting of the managers

and the officers of the CD is directed to the IRP; hence, the executive machinery has no

27 IBBI (Insolvency Professionals) Regulations, 2016, IBBI/2016-17/GN/REG003, Ministry of Corporate affairs, www.mca.gov.in/Ministry/pdf/IBBIRegulation_25112016.pdf. 28 CMA J K Bhudiraja,, Insolvency Resolution Process, Liquidation and Opportunities for CMAs under IBC, The Management Accountant, Dec. 2016, at 48-58, http://www.ipaicmai.in/IPA/Upload/Article-IRP.pdf. 29 Insolvency and Bankruptcy Code, 2016, Section 18. 30 Id. Sec 19(2).

http://www.mca.gov.in/Ministry/pdf/IBBIRegulation_25112016.pdf

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effect of the suspension of the Board of Directors. The Managing Director (MD) may

typically head the executive machinery. Therefore, the MD, who works under the

supervision of the Board of Directors, will now work under the supervision of the IRP.

Likewise, Executive Directors will cease to have the powers of “directors”, but will

continue their respective functional roles, under the supervision of the IRP. The IRP has

the primary task to assume control in the company.31 The IRP shall have the authority to

act and execute deeds, receipts, take such actions, and access such electronic records on

behalf of the CD.32 IP has the authority to access the books of accounts, records and

other relevant documents of the CD available with the government authorities, statutory

auditors, accountants and such other persons, as may be specified.33

(b) IP needs to manage the Company as a Going Concern

To manage the going concerns of the company, under section 20(2) of the Code, the

management of the entity reports to the IRP and he can hire legal consultants,

professionals, and other professionals as may be necessary on behalf of the

management. He can enter into a contract and raise interim finance, subject to security

interest. He can issue instructions to the personnel of the CDs and enter into contracts

on behalf of the CD, or modify or amend the contracts that were entered into before the

commencement of the CIRP (Corporate Insolvency Resolution Process).34 An IRP must

give instructions to financial institutions, maintaining the accounts of CD, to provide all

the necessary information. For e.g., institutions such as banks that are maintaining

accounts of the CDs.

(ii) Major Task Entrusted to the IRP

Under Section 18 of the Code, the IRP must perform certain duties to manage the

operations of the CD.

To issue public notices of the corporate insolvency within 3 days and provide for

collation of claims received. The contents of public announcement should

31 Vinod Kothari & Sikha Bansal, Role of Insolvency Professionals in Corporate Insolvency Resolution Process, ICSI Institute of Insolvency Professionals, Mar 2017, at 33 http://icsiipa.com/Portals/0/Articles %20%28Sep%2C%202016%29.pdf . 32 BHUDIRAJA, supra, note 12. 33 Insolvency and Bankruptcy Code, 2016, Section 17(d). 34 Id. Sec 20(1).

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conform to Section 15 of the Code, read with Regulation 6 of the Insolvency &

Bankruptcy Board of India (Insolvency Resolution Process for Corporate

Persons) Regulations, 2016.

To determine the financial position of the CD by collecting all therein formation

about the finances, business operations of previous two years, list of assets and

liabilities as on the day of initiation, information on operational payments due,

and any other matter related to insolvency and to take over control over the

assets of the debtor as recorded in the balance sheet or in the information

utilities or any other registry that records the ownership of the assets by the CD.

Constitutes a Committee of Creditors35 -The IRP shall constitute a Committee of

Creditors, after collation of all claims received against the CD and determination

of the financial position of the CD, to file the information collected with

information utilities.

To initiate the corporate insolvency resolution process.

To manage the affairs, assets, and operations of the CD until a resolution

professional is appointed.

He/she is also required to provide all documents related to the CD to the incoming new

resolution professional.36

2. Duties and Functioning of the Resolution Professional (RP)

An IRP can continue to act as a Resolution Professional (RP) or a Committee of Creditors,

subject to conditions, can appoint a new RP.37 The RP has the same power and the duties

to conduct the CIRP as the IRP.38 The CIRP is then handled by the RP.

The Supreme Court in M/s Innoventive Industries Ltd vs. ICICI Bank & Anr. stated

about RP that “The law must appoint a resolution professional as the manager of the

35 Insolvency and Bankruptcy Code of India (Act 31 0f 2016), Section 21. 36 Id. Sec 23(3). 37 Id. Sec 22(2). 38 Id. Sec 23(2).



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resolution period so that the creditors can negotiate the assessment of viability with the

confidence that the debtors will not take any action to erode the value of the enterprise.

The professional will have the power and responsibility to monitor and manage the

operations and assets of the enterprise. The professional will manage the resolution

process of negotiation to ensure a balance of power between the creditors and debtor

and protect the rights of all creditors. The professional will ensure the reduction of

asymmetry of information between creditors and debtor in the resolution process.39

(i) Conducting the Corporate Insolvency Resolution Process

He is in-charge of the affairs of the entire CIRP40 and shall conduct it entirely.41 It shall

be the duty of the RP to preserve and protect the assets of the CD, including the

continued business operations of the CD.42 The duties of an RP are mentioned explicitly

in section 25(2) of the Code.

Take immediate custody and control of all the assets of the CDs, including the

business records of the CD;

Represent and act on behalf of the CD with third-parties, exercise rights for the

benefit of the CD in judicial, quasi-judicial or arbitration proceedings;

Raise interim finances, subject to the approval of the Committee of Creditors

under Section 28;

Appoint accountants, legal or other professionals in the manner as specified by

the Board;

Maintain an updated list of claims;

Convene and attend all meetings of the Committee of Creditors;

Prepare the Information Memorandum in accordance with Section 29;

39 M/s Innoventive Industries Ltd v. ICICI Bank & Anr, 2017 SCC OnLine SC 1025. 40 Corporate Insolvency Resolution Process. 41 Insolvency and Bankruptcy Code, 2016, Section 23. 42 Id. Sec. 25(1).



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Invite prospective lenders, investors, and any other persons to put forward

resolution plans;

Present all resolution plans at the meetings of the Committee of Creditors;

File application for the avoidance of transactions in accordance with Chapter III,

if any; and

Such other actions as may be specified by the Board.

In addition to these, the RP is also required to perform certain other duties:

All costs of the insolvency resolution process to be paid in priority;

Operational creditors to receive no less than they would receive on a liquidation;

The management of the affairs of the debtor; and

Implementation and supervision of the resolution plan.

(ii) Preparation of an Information Memorandum

An Information Memorandum serves as the base for preparing a resolution plan, as it

contains the required information. The IBBI may specify such form and manner in which

the RP shall prepare an Information Memorandum.43 The Committee of Creditors and

other applicants must be provided with the minimum information as laid down in the

IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.

(iii) Preparation of a Resolution Plan

Based on the Information Memorandum, RP is required to submit a resolution plan. The

resolution applicant submits this plan to him and he performs the task of examining the

plan with due diligence and chalking out a plan that serves as an elixir for the CD, thus

acting as a catalyst. He must conform to certain minimum requirements laid down in

section 30 of the Code, read with Regulation 38 of the IBBI (Insolvency Resolution

Process for Corporate Persons) Regulations, 2016. The assessment of the fair values of

43 Id. Sec 29.



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assets and a preparation of the liquidation value assessment is one of the key tasks at

this stage. Resolution is the preferred alternative; liquidation is the ultimate. Therefore,

a resolution plan has to offer to the stakeholders something better than what they would

get in liquidation.44 Preparing a resolution plan serves as an onerous task for the RPs.

The RP must also ensure that no laws are contravened and all other requirements of the

Board have been satisfied. The resolution plan(s) needs the approval of 75% of the

financial creditors by voting share and the approval of the Adjudicating Authority to be

binding on all creditors.45 The creditor instructs him with the job of assembling a

reasonable strategy for the entity, having a keen observance at the capital structure,

looking at the industry, the business, and its upper hands, and assembling the greater

part of that in a bundle that would be worthy and voted.

3. The Task of Handling Complex Companies

There have been concerns whether the IP would be able to run such complex

corporate entities. To run complex companies, specialized knowledge and staff are

required to look after the assignments. To keep up with the demands of such

professional segment that would be required in dealing with complex entities, they

require a lot of efforts with a team of hired consultants. His job is onerous and

challenging as a major part of risk lies on his shoulders, be it legal risk, financial risk,

etc. It will be impractical for the RP or the administrator to start managing the day-

to-day operations of the entity. Neither does the RP have the technical expertise to

do so, nor is the replacement of existing management at all conducive to the idea of

preserving or maximizing the going concern value of the entity. Of course, the RP has

wide powers, but the issue is that the power must be exercised in the interest of the

entity, and not as a matter of power play. In rulings like RAB Capital plc vs. Lehman

Brothers (International) Europe,46 courts have taken a very liberal view on the

powers of the administrator; however, it is a consistent position in the UK that the

44 Kothari, supra note 12. 45 Insolvency and Bankruptcy code, 2016, Section 30(4). 46 RAB Capital Plc v. Lehman Brothers (International) Europe, (2008) EWHC 2335 (Ch).



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administrator does not dismiss the existing management.47 They (IP’s) will have to

hire professional sub-agents, including retired industry professionals, who had

experience in companies.48

On questioning the equation of the IP with the board and management of the insolvent

company, the Board of Directors of the insolvent company remain suspended during the

CIRP. An insolvency resolution professional appointed by the lenders is in charge of the

CD’s day-to-day affairs. In addition, the committee of financial creditors instead of

shareholders must take all key decisions during the corporate insolvency resolution

process. However, the executive management of the debtor can continue to assist the

creditors and the insolvency resolution professional.49 On the commencement of

insolvency proceedings, the IP is handed over the management of the entire company;

the directors and shareholders are not involved in the management of the company with

the IP in the corporate insolvency resolution process. An IP also needs to work closely

with the promoters of the company and take the assistance and guidance of other

experts; so, it is basically teamwork.

4. Communication by the Insolvency Professional

IP’s have to take into account a lot of things. The other stakeholders might be around the

edges, for e.g., the operational debtors, creditors, etc., and if there are employees

involved, they would be very keen to try and make sure that they remain in their

employment, and it may be that there are customers and suppliers who rely on the

corporate entity for products or services that they produce, and so it would be an

important part of that change to keep it going and also to communicate the things. Many

times, the promoters do not understand the title of the Code and take the insolvency

proceedings in the sense of liquidation. In this scenario, the major task of the IP comes to

47 Vinod Kothari & Sikha Bansal, Role of Insolvency Professionals in Corporate Insolvency Resolution Process, ICSI Institute of Insolvency Professionals, Mar. 2017, at 33, http://icsiipa.com/Portals/0/Articles %20%28Sep%2C%202016%29.pdf. 48 Atmadip Ray & Saikat Das, “IBBI does a quality check on insolvency professionals to ensure quality”, The Economic Times, Jun 2017, (12 Jan, 2018), https://economictimes.indiatimes.com/industry/banking/ finance/banking/ibbi-does-a-quality-check-on-insolvency-professionals-to-ensure-quality/articleshow/ 59317508 . 49 Rajeev Vidhani et al., Restructuring & Insolvency in India, Global India Lexology Navigator Q&A, Khaitan & Co. (Jan. 29, 2018, 10:30 AM), https://www.lexology.com/library/detail.aspx?g=c0de32ec-c4ce-4d0e-a567-1d1e29912068.



https://www.lexology.com/library/detail.aspx?g=c0de32ec-c4ce-4d0e-a567-1d1e29912068

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rescue to communicate well about the operations of the company. Also, the suppliers

need to be taken into account by the IP to withhold trust and to communicate the

developments made so that the credit supply is not stopped and the company does not

go into any sort of liquidity crunch and also prepares some contingency plans.

5. Duties and Functioning of the Insolvency Professional as a Liquidator

Liquidation proceedings are initiated when the conditions of the CD cannot be resolved

within the stipulated time and thus mark the end of the CIRP. On commencement of the

liquidation, the RP assumes the role of the liquidator or is replaced by the Adjudicating

Authority. The commencement of liquidation process takes place when:50

Recommendation of the resolution plan happens;

On account of failure to submit the resolution plan within the prescribed period

or contravention of the resolution plan; and

Based on a vote of a majority of the creditors.

Sections 35 to 59 of the IBC deals with the liquidation of the corporate entities. Details of

procedures to be reckoned to start with the issues of liquidation order under Section 33

of the Code till there is a dissolution order under Section 54.51 The rules require the

liquidator to prepare and submit a preliminary report, asset memorandum, sale report,

progress report and final report prior to initiating the liquidation process with the

National Company Law Tribunal (NCLT).52 There is a shift in the supervisory role as it

shifts from the Committee of Creditors to the Adjudicating Authority. To carry out the

liquidation process, the liquidator is given the power of the Board and the management.

The liquidator is under the direction of the adjudicating officer and performs the

functions under Section 35 of the Code. The liquidator, for the purpose of liquidation of

the company, shares the same set of powers as the IRP has under the CIRP such as the

50 Insolvency and Bankruptcy Code, 2016, Section 33(2). 51 Id. Chapter III of Part II. 52 KPS Kohli & Raghav Soni, Creating Inroads in the liquidation under the new IBC Insolvency and Bankruptcy Code, 2016, Mondaq , (Jan 24., 2018, 11.20 AM), (http://www.mondaq.com/india/x/629852/Insolvency+Bankruptcy/Creating+Inroads+in+the+Liquidation+Process+under+the+new+IBC+Insolvency+Bankruptcy+Code+2016.

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power to apply for the avoidance of preferential transactions,53 undervalued

transactions,54 an extortionate credit transaction.55 There is no handing over of the

charge of the assets to the liquidator, he only is responsible for the management of the

company.

Certain special powers have also been vested in the liquidator under the code:

Liquidation estate: The liquidator shall form an estate of the assets mentioned in

sub-section (3), which will be called the ‘liquidation estate’ in relation to the CD.56

Collation of Claim: The liquidator has the same power of collation of claims as of

an RP, but the procedural difference is that he has the special power to either

admit or reject the claims submitted,57 the claims can be withdrawn once made.58

The liquidator, by way of public auction of private contract, sells the movable or

immovable property, or transfers such property to the body corporate or sells it

in parcel in the manner specified in the properties of the CD.

The liquidator shall have the power to access any information system for the

purpose of admission and proof of claims and identification of the liquidation

estate assets relating to the CD.59

B. Other Duties Of Insolvency Professional

1. Duties of an IP in Fast track Corporate Insolvency

Sections 55 to 58 of Chapter IV of Part II of the Code, deals with Fast-Track Corporate

Insolvency. The person or entity seeking fast relief will have the onus on the process at

set-off and that person or entity that sets-off the Fast-track process must support that

the case is fit for the Fast-track. Fast track Corporate Insolvency process must be

completed in 90 days. The RP plays the role of the liquidator. He shall file an application

53 Insolvency and Bankruptcy Code, 2016, Section 43. 54 Id. Sec 45. 55 Id. Sec 50. 56 Id. Sec 36. 57 Id. Sec 40. 58 Id. Sec 38. 59 Id. Sec 37(1).



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to the Adjudicating Authority to extend the period of the fast track corporate insolvency

resolution process beyond 90 days, if instructed to do so by a resolution passed at a

meeting of the Committee of Creditors and supported by a vote of 75% of the voting

share.60

2. Duties in Case of Voluntary Liquidation of Companies

Voluntary Liquidation of corporate persons is covered under Section 59 of Chapter V of

Part II of the Code, read with the Insolvency and Bankruptcy Board of India61 (Voluntary

Liquidation Process) Regulations, 2017.62 The Code provides for voluntary liquidation

proceedings by a corporate person, who intends to liquidate and has not committed any

default and can pay off its debts fully from the proceeds of liquidation of its assets.63 A

resolution of the members of the company in a general meeting requiring the company

to be liquidated voluntarily as a result of expiry of the period of its duration, if any, fixed

by its articles or on the occurrence of any event in respect of which the articles provide

that the company shall be dissolved, as the case may be and appointing an IP to act as

the liquidator.64 The major task of the liquidator in case of voluntary liquidation is to

make an application to the Adjudicating Authority for the dissolution of such corporate

person in case its assets have been liquidated and the affairs are being completely

wound up.65 Thus, the CD is dissolved after an order passed by the Adjudicating

Authority.

C. Role of Insolvency Professionals in Individual Bankruptcy

Part II Chapter I, II and III deals with the resolution process of individuals under the

Code.

1. Fresh Start Process

Chapter II of Part III deals with the fresh start process of the individual bankruptcy. A RP

can make an application for a fresh start on behalf of the debtor provided that the

60 Id. Sec 56(2). 61 Insolvency and Bankruptcy Board of India. 62 CS Sandeep Kumar Jain, Corporate Insolvency Resolution Process under the Bankruptcy Code and its impact on the companies, The Companies Act 2013 (Jan.30, 2018, 02:10 PM), https://www.thecompaniesact2013.com/uploads/1481524464_ibc%20Article%201.pdf. 63 Id., at 7. 64 Insolvency and Bankruptcy Code 2016, Section 59(3)(c)(ii). 65 Id. Sec 59(7).

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eligibility provisions mentioned in the Code in this regard are fulfilled.66 IP shall also

provide a copy of the report to the debtor.67 The RP shall examine the application made

under Section 80 within 10 days of his appointment, and submit a report to the

Adjudicating Authority, either recommending acceptance or rejection of the

application.68 He shall examine the acceptance, rejections or the objections made under

the respective sections. The report shall contain details of qualifying debts and liabilities

eligible for discharge.69 The RP may call for additional information in connection with

the application from the debtor.70

2. Insolvency Resolution Process

Insolvency Resolution process dealing with individual bankruptcy is covered under

Chapter III of Part II of the Code. The RP shall examine the application made under this

process within 10 days of his appointment and submit a report to the Adjudicating

Authority recommending acceptance or rejection of the application.71 The resolution

professional shall examine the application and ascertain that the application satisfies the

requirements set out in the Code and that the applicant has provided information and

given explanations sought by the RP. Once the application is admitted, the RP shall invite

claims from the creditors in respect of which he shall prepare the list of creditors. He

shall hold the meeting of the creditors and get the repayment plan approved by more

than three-fourths in value of the creditors present in person or by proxy. He shall also

submit the repayment plan along with his report on such plan to the Adjudicating

Authority.72

66 Id. Sec 82(1). 67 Id. Sec 82(6). 68 Id. Sec 83(1). 69 Id. Sec 83(2). 70 Id. Sec 83(3). 71 Id. Sec 99(1). 72 Alka kapoor & Lakshmi Arun ,Insolvency Professionals – An International Perspective, ICSI Institute of Insolvency Professionals, 27, 27-31 (2016), http://icsiipa.com/Portals/0/Articles%20%28Sep%2C%202016%29.pdf.

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D. Code Of Conduct To Be Abided By The Insolvency Professionals73

While acting as an IRP, a RP, or a Liquidator for a corporate person under the Code, an IP

shall exercise reasonable care and diligence and take all necessary steps to ensure that

the corporate person undergoing any process under the Code complies with the

applicable laws.74

Apart from these obligations, the IPs are also under obligation to perform such task as

laid down in Sec 208(2) and Regulation 7(2)(g).

To take reasonable care and diligence while performing his duties;

To comply with all requirements and terms and conditions specified in the bye-

laws of the IP agency, of which he is a member;

To allow the IP agency to inspect his records;

To submit a copy of the records of every proceeding before the Adjudicating

Authority to the Board as well as to the IP agency, of which he is a member, and

to perform his functions in such manner and subject to such conditions, as may

be specified.

CONCLUSION

The role of the IP’s tends to evolve during the journey of the entire resolution process.

IP’s act as persons who rescue, recover, rehabilitate the business, where they do have a

future. The Code was envisaged with the motive of sustaining the business and reviving

them before giving into liquidation. The stringent procedures under the Code make the

task of the IP’s more rigid. As the Code is in the nascent stage, the professionals as well

as the adjudicating authorities, the regulators all are in the learning stage. The

professional requirement of these professionals’ calls for expertise in understanding the

business, the sector, and what it is trying to do, having skills in finance, business

73 Insolvency and Bankruptcy Code, 2016, Section 208(2). 74 Insolvency and Bankruptcy Board of India circular No. IP/002/2018 dated 3rd Jan 2018.



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dynamics and to be able to manage the cash flow. These professionals have to be within

the strict abidance of all the laws and the regulatory frameworks, while performing the

duties. He/she can take the assistance of the desired experts and also the creditors’

committees and the management are bound to provide very required assistance to the

IP’s. The mammoth task of chalking out a resolution plan, taking all the stakeholders into

confidence, abidance of all the statutory provisions, looking at the industry and its

capital structure requires superhuman capabilities. As the management and the

operations of the company are in the hands of these professionals, they have to keep

every step forward with great safeguards and responsibilities. The future of the Code

lays on the shoulders of these professionals, who, with the proper implementation of the

provisions of the Code, set a path for recovery of gains, sick entities, the problem of

NPAs, etc. So far, about 700 Odd Individuals and 7 Corporate Entities such as Deloitte,

KPMG have registered with them as IP’s, marking the regime of good insolvency in India

with the unification of all insolvency related laws under one roof in the form of IBC,

2016.



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“TREATMENT OF MATERIAL ADVERSE CLAUSE IN THE INDIAN

MERGER REGIME”

~ Aratrika Deb, L.L.M. Student, National Law University Jodhpur

INTRODUCTION

The global economic environment in which business houses operate is extremely

volatile due to severe credit crisis, unpredictable equity markets, shortfalls in corporate

profits and a sharp rise of commercial and investment disputes. Following economic

crisis in 2007, 2008 and 2009, the global business environment was hugely impacted,

which made situations worse for corporate houses to enter into financial deals and

business transfers including Mergers & Acquisition (M&A) transactions. The risks

associated with operations, financial conditions and expected performance of the

acquisition targets led business enterprises and industry participants to devise a way in

which they could walk out of a deal without facing any contractual liability for such

drawback. M&A transactions are nothing but mere contracts entered for transfer of

business and assets between two entities. The most favourable way to walk out of such

an arrangement without incurring a breach is to have a clause in the contract that can

serve, to either of the parties, as a resort against unforeseen, unpredictable material

changes that have a negative impact on the overall intended transaction and by virtue of

such clause, one can close the deal without being liable for contractual breach. These

clauses, which are very commonly found in contractual and financial commitments, are

popularly called ‘Material Adverse Effect’ (MAE) Clauses or ‘Material Adverse Change’

(MAC) Clauses. MAC Clauses are particularly enforced in the time between signing and

closing of the deal, with a view to allocating interim risk of adverse changes that might

affect either of the parties. In the absence of the same, a party to such a transaction has

warranties and certain representations that he has to fulfil to consummate the deal. The

main challenge in this regard that makes the nature of these MAC Clauses unambiguous

is to determine as to what would constitute a ‘material change’. In other words, it needs

to be established beyond doubt that the conditions or the circumstances in which the

buyer wants to withdraw before closing a deal amount to ‘material adverse changes’



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negatively impacts the buyer if he continues any further. Although in a typical MAC

Clause, the definition of ‘material adverse changes’ includes description of general and

specific events that provide excuses in some form to either party to terminate the

transaction, the ambit of such clauses are kept as broad and wide as possible to protect

either parties against unforeseeable and unexpected material changes, and drastic

market fluctuations and because of this wide ambit, these clauses are often subject to

multiple interpretations giving rise to disputes.75

ANTICIPATING ISSUES ASSOCIATED WITH THE ‘MAC’ CLAUSES

A. Interpretation of the Term ‘Materiality’

One of the structural features of a typical MAC Clauses is the provision for allocation of

risk between the buyer and the seller in the period between signing and closing of the

deal. Even though these clauses are drafted in a manner whereby a general description

of certain circumstances are provided – whereby the MAC provision can be enforced,

along with mention of certain specific events that are expressly excluded from the ambit

of the same – the main point of negotiation that is raised in a dispute is what constitutes

‘material’ to the deal or its parties. It is because of the interpretation of this term that

makes these clauses so heavily negotiable in merger agreements. If we consider

‘material’ to be largely a quantifiable concept, then it becomes very difficult for courts to

decide whether the particular incident in the event of which the MAC is alleged to be

enforced is material or not. Even after being aware of this ambiguity, parties primarily

shy away from defining what is material in the merger agreement for two reasons:

firstly, if material is considered and defined as a quantifiable unit or number, then an

objectively low threshold, which brings out the same impact on the transaction, is

outside the ambit of the clause, and there is always an inhibition that either party might

hide something below the proposed threshold. Secondly, consequently to the above, the

absence of such a definition gives more advantage to both parties at the time of

75 See Lee C. Buchheit, How to Negotiate the Material Adverse Change Clause, INT'L FIN. L. REV., Vol. 13, No. 31 (1994) available at http://heinonline.org/HOL/Page?handle=hein.journals/intfinr13&div=62&start_ page=31&collection=journals&set_as_cursor=0&men_tab=srchresults, Accessed February 6, 2018.

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negotiating the same.76 While the seller in a merger agreement would prefer a narrow

interpretation of the term to limit the scope of the buyer to walk out of the deal, the

buyer on the other hand seeks just the opposite. The broader the ambit of a MAC Clause,

the more chances it gets to terminate the transaction by showing any adverse effect that

he or the deal might face.

A certain corollary of this interpretation suggests that MAC Clauses can somewhat be

equated with Force Majeure Clauses in a contract; however, the most notable difference

between the two is that while the MAC clauses are vaguer – not specifying the triggering

event for enforcing the same – the Force Majeure Clause specifies certain circumstances

that will excuse performance of the contract. This, in many ways, makes the

interpretation of the latter easier. To an extent, this is based on the contractual doctrines

of impossibility or frustration of purpose, where a party to a contract is excused from

discharging its obligations if the performance of the transaction is practically

impossible.77 In the absence of a definite threshold for quantifying materiality, the

courts – through the years of judicial pronouncements – have tried their best to remove

the uncertainty so as to make enforcement of this clause easier. It is pertinent to note

here that materiality tests are not just the subject matter of MAC clauses only in a

merger agreement, but also find its legitimacy in other contexts such as material

standards in respect of disclosure requirements in a public takeover, misstatement

under general accounting principles, and, most importantly, while determining ‘material

breach’ of contractual obligations under general contract principles. Another

interpretive hurdle before the court is to determine in what context or meaning the

‘materiality’ is used in the MAC Clause; in other words, whether the materiality is to be

76 See Chestor Franklin, Delaware Chancery Court Addresses Default Interpretation of Broadly Written Material Adverse Effect Clauses. In re IBP, Inc. Shareholders Litigation vs. Tyson Foods, HARVARD LAW

REVIEW, Vol. 115, No. 6 (Apr., 2002), pp. 1737-1744, available at http://www.jstor.org/stable/1342566, Accessed February 6, 2018. 77 See Andrew A. Schwartz, A Standard Clause Analysis of the Frustration Doctrine and the Material Adverse Change Clause, UCLA L. REV., Vol 57, No. 789 (2010), available at http://scholar.law.colorado.edu/articles/451/, Accessed February 6, 2018.

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decided in respect of its understanding to a reasonable buyer, or in respect of the person

who has invoked the provision.78

B. Is the Ambiguity in a MAC Clause Intentional?

The ambiguity existing in interpreting a MAC is, without doubt, the most common

downside of it, as any vague contract provision invites conflicting and self-interest

driven interpretations and serves as an unfair incentive to the party who is in a better

position, either financially or otherwise, to negotiate. Due to this uncertainty, these MAC

Clauses are often considered unethical to effective business decision-making. Although a

vague MAC Clause prima facie creates a burden and undue expense on parties and

courts, it is imperative to note that by keeping the ambit of a MAC Clause ambiguous, it

gives a major advantage to the buyer when he wants to not finish his part of the

obligation even with a slight change in circumstances in which the deal was first entered

into.79 Since the term ‘material’ is not defined, it gives both parties a wider range of

opportunities to contest if the pertinent event triggering its enforcement has occurred

or not. Further, it can be said that the litigation that arises from vague provisions

functions as an ex-post signalling device that promotes efficient re-negotiation and

augments the bargaining power of the buyer. When a greater scope of negotiation lies in

respect of a particular provision, it encourages parties to execute a business deal in

contrast to a situation where a MAC provision is so strictly constructed that either party

cannot terminate the deal except in the specifically mentioned instances and there is no

opportunity of deliberating on the same.80

Since a MAC Clause gives the buyer – in an acquisition or business combination

agreement – an option to exit the deal, it, in a way, encourages the seller that the value of

the target or the representations and warranties associated with it do not fall or reduce

between the signing and closing date. However, low value realization is not always

78 See Ronald J. Gilson and Alan Schwartz, Understanding MACs: Moral Hazard in Acquisitions, JOURNAL OF

LAW, ECONOMICS, & ORGANIZATION, Vol. 21, No. 2 (Oct., 2005), pp. 330-358 available at http://www.jstor.org/stable/3554959, Accessed February 6, 2018. 79 See Kenneth A. Adams, A Legal-Usage Analysis of Material Adverse Change Provisions, FORDHAM J. CORP. & FIN.LAW., Vol 10, No. 9 (2004) available at https://ir.lawnet.fordham.edu/cgi/viewcontent.cgi?referer= https://www.google.co.in/&httpsredir=1&article=1184&context=jcfl, Accessed February 6, 2018. 80 See Fredric D. Tannenbaum & Marilyn S. Spracker, It's time to talk turkey: Seller strategies to prevent a buyer from wriggling away, BUSINESS LAW TODAY, Vol. 10, No. 3 (January/February 2001), pp. 18-19, 21-25, available at http://www.jstor.org/stable/23292809, Accessed February 6, 2018.

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subject to a seller’s actions or inability to adhere to the requisite representations in the

contract. The intended outcome of a merger is also exposed to exogenous risks that have

not been controlled by the seller. This can be change in policy considerations of the

State, change in the economy, legal framework validating such merger and many more of

such instances that will have an equally adverse effect on the business transaction.

Therefore, it is important to have the clear distinction between the above situations due

to an external risk, which is out of parties’ control or it will get difficult to enforce a MAC

Clause.81

C. Theories Explaining the Purpose of a MAC Clause

1. Symmetry Theory

This theory is used to explain the purpose of a MAC in a merger agreement. In a

traditionally drafted merger agreement, if the seller’s value in the interim period

between signing and closing the deal increases, then it can accept higher bids or better

offers. Even the shareholders of the target company may refuse to close the deal on the

face of a better buyer. However, if the seller’s value decreases, the buyer may still be

bound by agreement to complete the transaction. Thus, in the absence of a MAC, the

buyer assumes the risk that is allocated to him if the seller’s value decreases, but the

seller does not have to bear the risk if his value increases during that time span. Thus,

the risk of failure of a business deal is not allocated symmetrically between both parties

in the absence of a MAC. Thus, a MAC Clause is understood as a contractual re-

adjustment of this asymmetric risk allocation. In order to rectify this imbalance of risk

allocation that works as a disincentive to acquirers, a well-drafted MAC Clause needs to

be incorporated in the merger agreement.82

2. Investment Theory

This theory purports another possible explanation behind the existence of a MAC clause.

It suggests that in the absence of a MAC, the seller is not incentivized enough to make

81 See Kari K. Hall, How Big Is the Mac: Material Adverse Change Clauses in Today's Acquisition Environment, U. CIN. LAW. REVIEW. Vol 71, No. 1061 (2003) available at https://digitalcommons.law.villanova.edu/cgi/ viewcontent.cgi?article=1136&context=wps, Accessed February 6, 2018. 82 See David J. Denis and Antonio J. Macias, Material Adverse Change Clauses and Acquisition Dynamics, THE JOURNAL OF FINANCIAL AND QUANTITATIVE ANALYSIS, Vol. 48, No. 3 (JUNE 2013), pp.819-847, available at http://www.jstor.org/stable/43303823, Accessed February 6, 2018.

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synergistic investments, which might reduce the stand-alone value of the seller in the

interim period. Thus, an efficient MAC Clause encourages a seller to undertake

investments that would prevent a decrease in its value in the interim period. It is

questionable that if the purchaser seeks to encourage the seller to make such

investments in the interim period between signing and closing, then it is unlikely that

they would use the MAC clause to accomplish that purpose. Indeed, the MAC clause

would be a circuitous method of encouraging the seller to make investments, especially

considering that M&A agreements often include direct and explicit covenants regarding

the operation of the business in the interim period.83

D. Judicial Approach to Interpreting ‘Material Adverse Change’ by USA Courts

The standard or threshold for ‘materiality’ in MAC Clauses of business combination

agreements has always been high, which has rendered enforcement of these provisions

very limited and raised questions regarding the time and expense in the negotiation and

drafting of these provisions. Through decades, the MAC Clause has been a very focal

point of interpretation by the US Courts. This section will discuss in detail some

important cases that bring into highlight the major issues associated with MAC Clauses.

1. IBP, Inc. vs. Tyson Foods, Inc.84

This case was related to the acquisition of IBP, the U.S.’s largest beef and pork producer

by Tyson, the country’s largest chicken producer, with an aim to becoming an enterprise

that would be the largest producer of meat in the world. Both the acquirer and the target

entities were incorporated according to the laws of Delaware, yet the merger agreement

stated their choice of law in the matter of any dispute would be that of New York and

there was no contest in that regard. Tyson contended that IBP’s revised projections

deviated materially from performance in past years in the interim period between

signing and closing the deal and as such, a ‘material adverse change’ has occurred that

has affected the intended outcome of the deal, and by virtue of the MAC provision in the

merger agreement, Tyson chose not to carry forward with the transaction. The Court –

while interpreting the ‘materiality’ of a MAC Clause and the legitimacy of Tyson’s claim –

83 Ibid. 84 In re IBP, Inc. Shareholders Litigation vs. Tyson Foods, Inc., No. 18373, 2001 Del. Ch. LEXIS 81 (June 15,2001).



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stated that “A short-term hiccup in earnings should not suffice [to invoke a Material

Adverse Effect exception to its obligation to close]; rather the Material Adverse Effect

should be material when viewed from the longer-term perspective of a reasonable

acquirer.” The Court further contended that the decline in projections was due to the

cyclical nature of the beef industry that the target has historically faced before and

overcome and such projections were not indications of any potential future failure of

business. Interpreting ‘materiality’, the court concluded that a change could be deemed

to be adverse and material if it “substantially threatens the target’s earning potential in a

durationally significant manner.”85

2. Frontier Oil Corp. vs. Holly Corp.86

The Court in this case refused to accept the acquirer’s contention that a toxic tort lawsuit

filed against the target company imposed serious threats to the deal and could prove to

be financially catastrophic, triggering the enforcement of a MAC Clause. The Court,

following the rationale of IBP, Inc. vs. Tyson Foods, Inc., concluded that unless a

litigation is so certain to have negative consequences, that to a prudent observer the

likely outcome would be material and adverse, it would not be right to allow the

acquirer to use the protection of a MAC provision.87

3. Hexion Specialty Chemicals, Inc. vs. Huntsman Corp.88

This case too, like the above two, poses a classic example where the Court upheld high

standards of materiality when it refused permission to Hexion to walk out of its deal

with Huntsman. The latter’s poor performance of several business lines and increase in

debt was not sufficiently material and was too narrow a change to be called adverse in

the opinion of the Court. The Court concluded its reasoning by asserting that “several

poor quarters of performance are an insufficient MAC trigger”.89

85 Supra note 1. 86 Frontier Oil Corp. vs. Holly Corp., No. Civ. A. 20502, 2005 WL 1039027, (Del. Ch. April, 29, 2005). 87 See Adam B. Chertok, Rethinking the U.S. Approach to Material Adverse Change Clauses in Merger Agreements, U. MIAMI INT'L & COMP. L. REV., Vol 19, No. 99 (2011), available at https://repository.law.miami.edu/umiclr/vol19/iss1/5/, Accessed February 6, 2018. 88 Hexion Specialty Chems., Inc. vs. Huntsman Corp., 965 A.2d 715, 738 (Del. Ch.2008). 89 Supra note 9.

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4. Osram Sylvania Inc. vs. Townsend Ventures, LLC90 – Change in the

Judicial Position

Before this case, the Courts have always showed a tendency to not allow enforcement of

a MAC Clause by relying on strict and high threshold for the same. This was one of the

first cases before the Court where the acquirer was successful in enforcing a MAC

provision and walk out of the deal by reason of the target’s non-disclosure of pertinent

financial information prior to signing of the agreement. Considering such action on the

part of the target to be fraudulent and sufficient to trigger MAC, the Court stated that

“Osmania (OSI) had pled the elements of fraud with sufficient particularity to satisfy the

heightened pleading standards applicable to common law fraud claims and also pleaded a

claim for negligent misrepresentation based on the sellers’ alleged manipulation and

concealment of financial information before the closing. As to OSI’s equitable fraud claim,

however, the Court determined that OSI did not make the necessary allegations of any

special relationship of trust or confidence between OSI and the sellers, and, therefore,

granted sellers’ motion to dismiss as to OSI’s equitable fraud claim”.91

MAC CLAUSES IN THE INDIAN MERGER REGIME

The Indian merger regime is quite different from that of the U.S. and the U.K. While in

most foreign jurisdictions in the world, contractual mergers are commonly in practice, in

India, till date, M&A’s are mostly governed by elaborate court (tribunal) processes under

Section 230 to 240 of the Companies Act, 201392 and applicable rules, and prominent

guidelines of the sectoral regulator of the nation, the Securities and Exchange Board of

India (SEBI). Even though some forms of business and asset transfer, including slump

sales and joint venture, can be executed by virtue of a contract between the two parties

to a deal – most M&A transaction schemes requiring tribunal approval – there is little

scope of a MAC provision in the same. Irrespective of that uncertainty clouding the scope

of MAC in India, it has found its place, of late, in share purchase agreements, and

90 Osram Sylvania Inc. vs. Townsend Ventures, LLC, C.A. No. 8123-VCP (Del. Ch. Nov. 19, 2013). 91 See Y. Carson Zhou, Material Adverse Effects as Buyer-friendly Standard, NYU LAW REVIEW available at http://www.nyulawreview.org/sites/default/files/NYULawReviewOnline-91-Zhou.pdf, Accessed February 6, 2018. 92 Chapter XV Of Companies Act, 2013 – Compromises, Arrangements and Amalgamations.

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disputes have arisen regarding its enforcement and interpretation. In this section, the

author has attempted to capture the attitude of the Indian judiciary towards MAC

Clauses in terms of its statutory legitimacy and important judicial pronouncements.

It was first attempted to statutorily recognize a MAC Clause in the SEBI (Substantial

Acquisition of Shares and Takeovers) Regulations, 1997 wherein Regulation

27(1)93allowed an acquirer to withdraw his takeover offer on satisfying the three

conditions – refusal of statutory approval, death of sole acquirer, and circumstances

convincing SEBI that withdrawal can be made. As regards the first two conditions, they

are very specific to a situation that can render an offer and its associated obligations

impossible. Thus, owing to impossibility of performance, an acquirer is given an

opportunity of withdrawing his offer. As regards the last condition, it is incumbent upon

SEBI to decide that the circumstances are such that a withdrawal of a takeover offer can

be merited. Further, it is to be noted that the rationale behind laying down these

exceptions when an offer can be withdrawn can be explained with the help of the ‘Basic

Assumption Test’. The test implies that at the time of entering into a business

acquisition or merger agreement, the party considers certain events, the non-occurrence

of which is a basic assumption on which the contract is entered into. If any of these

assumptions turn out to be incorrect without any fault of his, then the Court needs to

discharge the party of his performance obligation and fill in the gap by determining

which party was allocated the risk of the assumption’s failure.94 This provision became a

ground for interpretation in the case of Nirma Industries Ltd. and Anr vs. Securities &

Exchange Board of India.95 The Supreme Court, while rejecting Nirma’s application to

withdraw its offer on the ground of financial non-disclosure relating to poor

performance of the target, discussed the three conditions in Regulation 27(1) in detail.

The Court suggested that the first two conditions refer to legal impossibility and natural

93 Securities And Exchange Board Of India (Substantial Acquisition Of Shares And Takeovers) Regulations, 1997, Regulation 27(1) - Withdrawal of offer - No public offer, once made, shall be withdrawn except under the following circumstances:- (a) 1 [***] (b) the statutory approval(s) required have been refused; (c) the sole acquirer, being a natural person, has died; (d) such circumstances as in the opinion of the Board merit withdrawal. 94 See Nathan Somogie, Failure of a "Basic Assumption": The Emerging Standard for Excuse under MAE Provisions, MICHIGAN LAW REVIEW, Vol. 108, No. 1 (Oct., 2009), pp. 81-111 available at http://www.jstor.org/stable/40379864, Accessed February 6, 2018. 95 Nirma Industries Ltd. and Anr vs. Securities & Exchange Board of India [2013] 121 SCL 149 (SC).




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impossibility respectively, and since both the exemptions are within the same genus of

impossibility, the third exception has to be read Ejusdem Generis and would have to be

naturally construed in terms of the other two exemptions. Again, in another case, SEBI

vs. Akshya Infrastructure Pvt. Ltd.96, the Supreme Court was faced with the question,

“an offer voluntarily made through a Public Announcement for purchase of shares of the

target company can be permitted to be withdrawn at a time when the voluntary open offer

has become uneconomical to be performed under Regulation 27(1)”. Answering the same

in negative, the Court applied the narrow interpretation in Nirma’s judgment and stated

that economic difficulty to conclude an offer did not amount to an exception under

Regulation 27(1); hence, the offer or cannot be permitted to leave the takeover. The

same rationale was again followed in the case of Pramod Jain & Ors. vs. SEBI,97wherein

the Supreme Court held that inordinate delay of two years by SEBI to approve the draft

offer and the target company becoming a sick company in those two years – frustrating

the object with which the offer was made– were not sufficiently material to allow the

acquirer to withdraw the offer.

If we analyze the above three cases, it is explicitly clear that the judiciary is not in

support of detracting any business combination or takeover offer once undertaken. They

are hence showing a sharp tendency towards a very narrow interpretation of Regulation

27(1) of 1997 Takeover Code and there is little scope for enforcing any MAC Clause in

such an acquisition agreement. While we have previously seen in the case of Osram

Sylvania Inc, fraudulent non-disclosures became a ground for enforcing a MAC Clause,

the same reason was not considered ‘material’ enough in Nirma Industries’ case to

withdraw the offer under Regulation 27(1) on the ground that fraud was not within the

genus of impossibility. Hence, it is observed that there is clear distinction in

interpretation and in the approach of the court towards a MAC Clause. The Supreme

Court of India has adopted an extremely narrow interpretation and attitude towards the

same and given little or almost no scope to an offeror to withdraw his offer.98

96 SEBI vs. Akshya Infrastructure Pvt. Ltd (2015) 1 WBLR (SC) 638. 97 Pramod Jain & Ors. vs. SEBI (2017) 1 CompLJ 184 (SAT). 98 See Tushit Mishra, Analysis of the Material Adverse Change Clause in the Indian Context, available at https://indiacorplaw.in/2017/08/analysis-material-adverse-change-clause-indian-context.html.

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In 2011, SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 was

replaced by SEBI (Substantial Acquisition of Shares and Takeovers) Regulations,

2011, whereby in place of Regulation 27, Regulation 23(1)99 incorporated another

ground in addition to the grounds mentioned in Regulation 27(1) for allowing

withdrawal of offer in clause (c). It states that an offer made can be withdrawn if a

condition mentioned in the acquisition agreement, which trigger the offer obligations, is

not satisfied for reasons beyond the control of the offeror. A plain reading of the said

provision raises a very basic question in our mind as to whether the legislature has

intended, by the addition of such clause, to broaden the ambit of withdrawal and

somewhere encourage the enforcement of MAC in that regard. This came up in the

matter of Jyoti Private Limited,100 where the acquirer wanted to withdraw its offer to

take over the target company due to the latter’s involvement in a BIFR proceeding and

no change in control and management of the same was allowed until the pendency of the

proceeding. The acquirer was of the view that due to this delay, the object of the offer

was frustrated and they should be allowed to withdraw it under Regulation 23(1). The

Court gave a very uncertain interpretation to the Regulation 23(1), whereby it

completely ignored the intention behind the incorporation of clause (c) and held that it

is similar in toto to Regulation 27(1) of the Takeover Code, 1997, and hence the

decisions in respect of that still hold good. Thus, the Court applied the rationale in

Nirma Industries and concluded that for withdrawal under Regulation 23(1), the

reason has to qualify the threshold of impossibility previously well settled by law.

99 Securities And Exchange Board Of India (Substantial Acquisition Of Shares And Takeovers) Regulations, 2011, Regulation 23.(1) - Withdrawal of open offer- An open offer for acquiring shares once made shall not be withdrawn except under any of the following circumstances- (a) statutory approvals required for the open offer or for effecting the acquisitions attracting the obligation to make an open offer under these regulations having been finally refused, subject to such requirements for approval having been specifically disclosed in the detailed public statement and the letter of offer; (b) the acquirer, being a natural person, has died; (c) any condition stipulated in the agreement for acquisition attracting the obligation to make the open offer is not met for reasons outside the reasonable control of the acquirer, and such agreement is rescinded, subject to such conditions having been specifically disclosed in the detailed public statement and the letter of offer; or (d) such circumstances as in the opinion of the Board, merit withdrawal. 100 In the matter of Jyoti Private Limited before Securities And Exchange Board Of India (WTM/SR/CFD/39/08/2016), available at https://www.sebi.gov.in/sebi_data/attachdocs/1470054168949.pdf.

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In another 2011 case, namely, Atul Chopra & Ors vs. Tecnotree Corporation & Ors,101

there was a dispute as to whether there was Material Adverse Effect on business

transfer between the parties by virtue of the MAC Clause incorporated in the share

purchase agreement. The Court held that the defendants committed fraud by not

informing the plaintiff about the decrease in the financial health of the defendant’s

company, which was one of the prerequisite conditions for closure of the deal. The Court

finally concluded that such non-disclosure on their part would not amount to invoking

the MAC Clause and refused to issue an interim injunction against the defendant.

MAC Clauses are a part of the M&A’s agreements consisting of representations and

conditions that are essential for closing the transaction. A distinction has to be drawn

between a pre-closing condition and a pre-closing covenant. While the former, if

unfulfilled, allows an aggrieved buyer to walk out of the transaction without closing the

deal, the breach of the latter only allows him to claim monetary damages. Since these

transactions are nothing but legally enforceable contracts at the end of the day, it is

subject to the ambit of the Indian Contract Act, 1857. Section 73102 and 74103 of the

101 Atul Chopra & Ors vs. Tecnotree Corporation & Ors 2012(3) ArbLR275 (Delhi). 102 The Indian Contract Act, 1872 (Act No. 9 of 1872), Sec 73- Compensation for loss or damage caused by breach of contract- When a contract has been broken, the party who suffers by such breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage caused to him thereby, which naturally arose in the usual course of things from such breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it. Such compensation is not to be given for any remote and indirect loss or damage sustained by reason of the breach. Compensation for failure to discharge obligation resembling those created by contract- When an obligation resembling those created by contract has been incurred and has not been discharged, any person injured by the failure to discharge it is entitled to receive the same compensation from the party in default, as if such person had contracted to discharge it and had broken his contract. Explanation- In estimating the loss or damage arising from a breach of contract, the means which existed of remedying the inconvenience caused by the non-performance of the contract must be taken into account. 103 The Indian Contract Act, 1872 (Act No. 9 of 1872), Sec 74- Compensation for breach of contract where penalty stipulated for- 1 [When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named or, as the case may be, the penalty stipulated for. Explanation- A stipulation for increased interest from the date of default may be a stipulation by way of penalty.] Exception- When any person enters into any bail-bond, recognizance or other instrument of the same nature, or, under the provisions of any law, or under the orders of the 2 [Central Government] or of any 3 [State Government], gives any bond for the performance of any public duty or act in which the public are interested, he shall be liable, upon breach of the condition of any such instrument, to pay the whole sum mentioned therein. Explanation- A person who enters into a contract with Government does not necessarily thereby undertake any public duty, or promise to do an act in which the public are interested.



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Act states that the person aggrieved from the breach of a contract is entitled to

compensation and damages arising from direct loss and not from any indirect or remote

cause. MAC Clauses can be somewhat said to have been developed on these principles.

Here, a party to a merger/ acquisition agreement is discharged of his duty to carry

forward with the transaction if the opposite party fails to discharge the contractual

obligations, resulting in a material adverse effect on the entire deal or on the purpose

sought to be achieved through the same.

Another point of determination that needs attention is whether Courts can award

specific performance on parties who choose to walk out of a business transaction by

taking the help of a MAC Clause. In Genesco, Inc. vs. The Finish Line, Inc,104 the acquirer

was not allowed to invoke the MAC Clause due to decline in the overall sales of the target

because it was not found to be materially significant enough to cause any adverse

change and was due to an exogenous risk of deterioration of economic conditions, which

was one of the ‘carve-outs’ of the MAC Clause. At the same time, the court awarded

specific performance in favour of the target and compelled the acquirer, Finish Line, to

complete the transaction. However, the same relief could not have been granted had the

situation arisen in India. Section 14(1)(c) of the Specific Relief Act, 1863105states that

specific performance cannot be enforced in contracts that are, by nature, determinable.

While interpreting and explaining the meaning of the term ‘determinable,’ the Court, in

Rajasthan Breweries vs. Stroh Brewery Co.,106held that if a contract contains a

termination clause, then it is by nature determinable and not subject to injunction or

specific performance. By virtue of that rationale, we can conclude that MAC Clauses, part

of merger/acquisition agreements, are basically mechanisms by which either party can

terminate the agreement in the event of any material adverse change taking place and,

104 Genesco, Inc. v. The Finish Line, Inc., Dec. 27, 2007 Memorandum and Order, Case No. 07-2137-II(III) (Tenn. Ch. 2007). 105 The Specific Relief Act, 1963 (Act No. 47 of 1963), Sec 14- Contracts not specifically enforceable- (1) The following contracts cannot be specifically enforced, namely:- (a) a contract for the non-performance of which compensation in money is an adequate relief; (b) a contract which runs into such minute or numerous details or which is so dependent on the personal qualification or volition of the parties, or otherwise from its nature is such, that the court cannot enforce specific performance of its material terms; (c) a contract which is in its nature determinable; (d) a contract the performance of which involves the performance of a continuous duty which the court cannot supervise. 106 Rajasthan Breweries Ltd. vs. Stroh Brewery Company, A.I.R. 2000 Delhi 450.



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hence, by nature, these are determinable contracts, outside the scope of Section 14.

Thus, specific performance cannot be induced in respect of the same.

We also need to remember that the court does not have a standing on the legal validity

of a MAC Clause in acquisition agreements under the Takeover Code, 2011, or general

contract principles only, but since most M&A’s in our country are a part of a scheme of

arrangement that is subject to approval by National Company Law Tribunal (NCLT)

under Section 230 to 240 of the Companies Act, 2013, any MAC Clause forming part of

the scheme can be taken up suo moto for adjudging its validity, and dispute with regard

to it can be decided by the NCLT by virtue of its inherent powers under Rule 11 of the

National Company Law Tribunal Rules, 2016.107

MAC Clause further found its mention in an RBI notification, dated January 13, 2000,

whereby the Basel Committee discussed the ‘Framework for Measuring and Managing

Liquidity’108 and the trend followed by international banks worldwide to manage their

liquidity on a day-to-day basis. It has been suggested in this report that banks need to

enter into funding arrangements that are of such commercial commitments in the

absence of a MAC Clause, whereby the bank may not be legally able to turn their face

away from the funded client even if the latter’s financial health deteriorated. Although

there is little significance of this report in merger/acquisition agreements taking place

under the Companies Act and SEBI Takeover Code, it is often seen that major corporate

M&A’s take place with the help of funds taken by the acquirer from these commercial

banks. Hence, the RBI’s take on a MAC clause in an agreement between the acquirer and

his financing bank might be of some importance.

CONCLUSION

The author in this paper has attempted to bring into focus the limited scope of a

‘Material Adverse Change’ clause in the Indian merger regime with regard to its legal

validity and enforceability. The author has mentioned the judicial attitude towards MAC

107 National Company Law Tribunal Rules, 2016, Rule 11. Inherent Powers:- Nothing in these rules shall be deemed to limit or otherwise affect the inherent powers of the Tribunal to make such orders as may be necessary for meeting the ends of justice or to prevent abuse of the process of the Tribunal. 108 RBI Notification dated January 13, 2000 on ‘Framework for Measuring and Managing Liquidity’ available at http://www.scconline.com/DocumentLink/wb4Ot4l5, Accessed February 6, 2018.



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in a country like the U.S. and hereby suggests that the recognition of a MAC Clause would

encourage businesses to undertake more and more M&A activities because they would

not have inhibitions about closing a deal, which might turn out to be a loss post signing

of the same. It is not right to comment that Indian law does not have scope for validating

MAC on a wide scale, but it is the judicial pronouncements over the recent years that

have not shown a very friendly response towards enforcing such provisions. There is a

sharp tendency to not let acquirers terminate a deal or discharge him of the obligations

to consummate the same, even if circumstances make the transactions a total loss for the

party for reasons beyond his control. Additionally, the absence of contractual mergers,

unlike in foreign countries, still allow Court intervention for a step-by-step approval,

thus, making the M&A deals in the country more in the nature of a public transaction.

Even if amendments are brought in the new Takeover Code of 2011 and MAC Clause

finds a place in most share purchase agreements, the enforcement and implementation

of the same lacks the force of law, and the entire purpose of it becomes pointless. It is

thus suggested time and again that in the light of keeping up with the global M&A

practice to attract more and more investors, it is the need of the hour that these MAC

Clauses are given due importance. Recently, India’s largest tire (tyre) manufacturer,

Apollo, was able to walk out of a deal with Cooper Tyres using a MAC Clause because the

latter could not arrange financing that it initially promised for the execution of the deal,

and the delay had a negative impact on the shares of Apollo, both at the domestic and

international market. The Court at Delaware gave Apollo the chance to terminate a deal

that would have otherwise proved to be a financial loss for it.109 The one lesson that we

ought to learn from this is that if an Indian company is given such ease and flexibility of

doing business in a U.S. market, the same ease should be afforded to foreign investors

who wish to pursue an acquisition with an Indian company, or have a joint-venture with

the same, whatever be the case.

109 See Cooper Tire & Rubber Co. vs. Apollo (Mauritius) Holdings Pvt. Ltd., No. CV 8980-VCG, 2013 WL 5977140, (Del. Ch. Nov. 9, 2013) and Aradhana Aravindan & Rafael Nam, Cooper Tire terminates $2.5 billion sale to India's Apollo, Thomson Reuters, available at https://www.reuters.com/article/us-apollo-cooper/cooper-tire-terminates-2-5-billion-sale-to-indias-apollo-idUSBRE9BT0EX20131230, Accessed February 6, 2018.



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“THE EFFECT OF ANTI-TRUST LAWS ON MERGERS AND ACQUISITIONS (M&A’S): A

CASE STUDY OF THE U.S. AND INDIA”

~ Malvikka Arya, 4th Year B.B.A. L.L.B. (Hons.) Student and Rishabh Manocha,

4th Year B.B.A. L.L.B. (Hons.) Student, University School of Law and

Legal studies, GGSIPU, New Delhi

ABSTRACT

Mergers, Amalgamations and Acquisitions are a reflection of the progressiveness of

India and have alternative dimensions. They can be either harmonious and cooperative,

or rancorous. Growth of the economy often results in several anti-competitive practices,

rupturing markets, and undermining and extinguishing the consumer’s interest. With

the introduction of Anti-Trust laws in India, its implications and results are difficult to

analyze instantly. Thus, this paper tries to focus on the significance and mandates of

introducing Anti-Trust laws in India over Mergers, Amalgamations and Acquisitions. The

paper attempts to shed light on whether Anti-Trust laws bring positive changes to the

output of companies and the economy, as well as to private interests under Mergers and

Acquisitions (M&A’s).

These legislations eradicate practices that had adverse impact and effect on competition,

thereby safeguarding public interests, encouraging and sustaining competition, and

accommodating freedom of trade in India. Hence, it becomes the responsibility of the

State to check that the schemes of Mergers, Amalgamations, and Acquisitions are not

exploitative in nature. This paper tries to explore whether the laws made by the State

are sufficient for the efficient functioning of the company and if such laws are applicable

only for a particular segment of the economy or are beneficial to the entire economy.

Research shall also bring out the comparison between the U.S. and Indian laws and what

we can learn from the mass an economy. Indian companies have often transcended their

foreign counterparts in corporate re-establishment, both internally and outside the

national limits. This paper also tends to focus on the effect of Anti-Trust laws on M&A’s

within the territory of India and compare them with their developed counterparts.



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INTRODUCTION

“It is clear that one cannot stay in the top league if one only grows internally. You cannot

catch up just by internal growth. To continue to stay up in top league one must

combine.”110

Over the past several years, schemes of M&A’s have become more frequent in the

modern world for more profitable future. M&A’s are not new to India, but have played a

significant part in reformation and transformation of industrial sector since the

beginning. For the longevity and growth of any company, M&A is one of the best

alternatives for continuous survival. Most of the M&A’s take place by transparent

identifiable life-cycle. Similarly, the success as well as the failure of an M&A lies in the

nuts-and-bolts of integration.111 It has been witnessed that a number of M&A’s fall short

of expectations either due to mismatch of companies or because of opting for deals that

are better for current operation rather than those that can drastically alter the

company’s growth. The question that arises is, ‘whether success rate is higher than the

rate of failure when schemes of M&A occur’.

Competition prevails in every economy that needs to be governed by certain Statutes to

promote fair and healthy competition. Each company identifies itself with certain

business objectives and strives hard to attain it with maximum level of output and gain.

Usually, while attaining such objectives, anti-competitive practices take place for short-

term gains, quashing merits of the competition. Anti-Trust laws are required by the

States to prevent consumers from depriving them of competition benefits,

discriminatory competitive behaviour amongst companies, and international pressures.

These laws ensure fair competition so as to secure market and its buyers from price-

fixing and monopolies. States enforcing Anti-Trust laws require institutional

competency, sufficient economic resources and mechanical proficiency – basic abilities

to promote impartial competition – that also reflects the economic development of a

country. In the times of rapid technological innovations, global competition and

110 Daniel Vasella, Chief Executive Officer, Novartis, July 2002. 111 Clayton M. Christensen, Richard Alton, Curtis Rising, Andrew Waldeck, The Big Idea: The New M&A Playbook, HARV. BUS. REV., March 2011.



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international trade, etc., corporate restructuring has been a global corporate theme

leading to remarkable enhancement in corporate behaviour and performance. Indian

industries were compelled to adopt preferable strategies such as corporate

restructuring by detaching non-core activities and schemes of M&A’s. These schemes

not only promote the growth of a company, but also provide the best route to achieve a

size that is comparable with other global firms in providing powerful competition. In

international markets, successful competitions are marked by the abilities gained in a

timely and efficient manner in the form of M&A’s.

In India, the objective of Competition law is to promote consumer protection and

welfare, protect consumer interest, along with creating an active competitive

environment with improvised investment and technological abilities. The impact of Anti-

Trust laws are not only felt upon a firm in their long-term, but also felt upon daily

operational issues, safeguarding companies’ as well as consumers’ interest. The Anti-

Trust legislation limits the ability to acquire and merge with other firms to refrain from

monopolies and unlawful trade.112 M&A’s have become a significant trait for

development in India, where such M&A’s take place not only within the country but

extend beyond the territory. Competition Commission of India (CCI) is responsible for

the Anti–Trust laws in India laying the Competition Act, 2002, which got amended to

improvise competition mechanism and harmonize Indian markets. The pace of

development in the field of M&A’s was not witnessed at a high rate, but a positive

growth was witnessed in the economy. Firms prefer to multiply and broaden within

their established fields of operation or diversify into new ones by acquiring other firms,

rather than investing in new Greenfield projects.113

The U.S. is amongst the oldest States which provides for Anti–Trust laws and stands as a

role model for the rest. Domination by monopolies has also been a part of the U.S.

economy and in order to safeguard and combat such anti-competitive practices, the

State took various steps. Broadly considering, the Department of Justice of the United

States lay down three major Anti-Trust laws, which are the Sherman Act, the Clayton

112 Patrick A. Gaughan, Mergers, Acquisitions and Corporate Restructuring, (3rd ed., New York: John Wiley & Sons Inc., 2002). 113 P.L. Beena, Mergers and Acquisitions: India under Globalisation, (Kerala: Routledge, 2014).



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Act, and the Federal Trade Commission (FTC) Act.114 Bars are created by law to regulate

mergers so as to substantially reduce competition and forming of monopolies. The

jurisprudence of the U.S. initially denied the concept of extra territoriality and laid that

Anti-Trust laws extend only to acts done within the territory, though, at present, this

concept has been commutated.115 Since 1890, the Sherman Anti-Trust Act has been

enforcing practices to achieve national goals to a free-market economy, promoting free

competition from government and private restraints in the interests of consumers. The

Clayton Act is a civil Statute that was passed in 1914 and prohibits M&A’s that are likely

to reduce healthy competition. Under the Clayton Act, those mergers are challenged that

may lead to high prices to consumers after analyzing the economic aspects. The FTC Act

restricts methods that are unfair in nature in interstate commerce, but carries no

criminal liability. Acceleration in the number of M&A’s has been witnessed with

changing times. Hart-Scott-Rodino Anti-Trust Improvements Act requires the parties to

acquisition of assets– regulating interest of non-corporative entities – to meet certain

dollar threshold for submitting pre-merger notification to the U.S.FTC and

the Department of Justice. There are three kinds of mergers: Horizontal Merger, which

involves two competitors; Vertical Merger, which involves firms in buyer-seller

relationship; and Potential Merger, which is in the form of becoming a potential

competitor of a seller or vice-versa.

EMERGENCE OF ANTI-TRUST LAWS IN THE U.S.

Oliver Williamson raised an extremely crucial and indispensable concern: “What will be

a merger that yields economies, but at the same instantly increases market power?”116

In the past, for the first time, the U.S. Supreme Court for the suit of a Merger addressed a

case.117 Moreover, after five years of passing of the Sherman Act, the Court was asked to

pass for the validity of series of Mergers in sugar refining industry. Factually speaking,

114 Antitrust Enforcement and the Consumer, U.S. Department of Justice Washington, DC 20530, (Aug. 20, 2016, 8:25 AM), https://www.justice.gov/atr/antitrust-enforcement-and-consumer. 115 EINER ELHAUGE, RESEARCH HANDBOOK ON THE ECONOMICS OF ANTITRUST LAW, 344 (New York: Edward Elgar Publishing, 2012). 116 Oliver Williamson, Economies as an Antitrust Defense: The Welfare Tradeoffs, AM. ECON. REV. 1968 at 18, 21. 117 United States v. E.C. Knight Co., 156 U.S. 1, 15 (1895).



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these were not Mergers, but were actually stock acquisitions. As a result, it prompted

concentration of power and prices were immediately jacked up. In another leading case

of Northern Securities118, it was laid down by the U.S. Supreme Court that the effect and

purpose of the formation of the holding company was to suppress competition and it

further ordered for the dissolution of the combination.119 The Sherman Act not only

forbids monopoly but also the attempts to monopolize120. In case of a criminal attempt,

wrongful intent was required to commit an offense. However, it can be argued whether

intent was a vital element for the offense of monopoly? It is said that intent is

conclusively presumed, which is a euphemism for saying that intent is not required.

In the U.S., the actualization of Anti-Trust laws was to safeguard small producers from

Eastern dominated trusts. In context to history, of late, the U.S. policy of Mergers does

not give a lot of significance to the regional dislocations created by Mergers and

Consolidations. In the U.S., during the time of the civil war, public opposition was

witnessed due to concentration of economic power in larger corporations and

businesses like trusts. Sherman Act was the outcome of the intense opposition faced by

the U.S. during that period. Trust was an arrangement in which stockholders transferred

their shares to a single set of trustees and in return, stockholders received specified

shares of consolidated earnings of companies, and trusts dominated a number of

companies. Standard Oil Trust121 was formed in 1882, where they set-up a Board of

Trustees and the overall control of Standard Oil Properties was allotted to it. The overall

profits were sent to nine trustees, which led to monopoly. Later, in 1914, additional

support Statutes for the Sherman Act were provided in the form of Clayton Act, which

elaborated and emphasized on the provisions of the Sherman Act; another was FTC to

control unfair competitive practices. Further, in addition to these acts, Hart-Scott-

Rodino Improvement Act, 1976, was established. It laid that larger companies were

supposed to register a report under the Department of Justice and FTC before

118 Northern Securities Company v. United States, 193 U.S. 197, 24 (1904). These decisions are reviewed in MCLAUGHLIN, JAMES ANGELL, CASES ON THE FEDERAL ANTI-TRUST LAWS OF THE UNITED STATES 24-28 (New York: The Ad Press Ltd., 1933). 119 Canfield, The Northern Securities Decisions and the Sherman Anti-Trust Act, COLUMBIA LAW REV., 1904, at 315; Bikle, The Northern Securities Decision, AM. L. REV., 1904, At 358. 120 The Sherman Act, 15 U.S.C. Sec 2 (1890). 121 Standard Oil Co. of New Jersey v. United States, 221 U.S. 1 (1910).



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accomplishing the process of Merger, Acquisition, or Tender, so as to keep a check

whether such action is violating the Anti-Trust laws. The law of Mergers in relation to

Competition law was discussed in the case of United States vs. Philadelphia National

Bank122 and it further laid down that acts which are anti-competitive in nature are void.

STATUTES GOVERNING ANTI-TRUST LAW IN THE U.S.

The Sherman Act was made to protect trade and commerce, which it did, by prohibiting

every contract in restraint of trade, where lower court interpreted it wrong, making it

illegal per se for contracts to restrain trade. This was overruled in the case of Board of

Trade of City of Chicago vs. United States123 stating that “Whether the restrain

suppress the competition or it promotes a healthy competition the restrain still will be

illegal”.124 An amendment to the Sherman Act took place by enforcing Foreign Trade

Anti-Trust Improvement Act, 1982, enhancing the general framework of the Sherman

Act with the involvement of foreign trade. Foreign Trade Anti-Trust Improvement Act

was the essence of the act and it laid that the act shall not apply to the conduct involving

trade and commerce with foreign nations other than import trade unless it has

‘substantial and reasonably foreseeable effect.’125 Oppositions to Sherman Act was

witnessed thinking collusions as mandatory for achieving ‘Fair Price’, but the majority

considered it as a safeguard to local producers from the abuse of bigger national

counterparts. There were a few number of non-trust producers and, hence, regional

Anti-Trust was bound to protect them.

Sherman Act is referred to as the ‘Father of Competition Policy in the U.S., but at the

same time, Clayton Act is considered important for regulating the principle for

controlling and governing Mergers.126 It regulates those M&A’s where it reduces the

competition by any activity of commerce. Later, to make the provisions of the Sherman

122 374 U.S. 321 (1963). 123 Board of Trade of City of Chicago v. United States, 246 U.S. 231, 238 (1918). 124 Sheldon Kimmel, How Merger Regulation Became Unreasonable and How to Fix It, 22 Supreme Court Economic Reviews, 181-205, (January 2014). 125 ROBERT S. SCHLOSSBERG, MERGERS AND ACQUISITIONS: UNDERSTANDING ANTITRUST ISSUES, (3rd ed., Chicago: American Bar Association, 2008). 126 Aditi Bagchi, The Political Economy of Merger Regulation, 53 The American Journal of Corporate Law, 121-126 (2005).



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Act broader, the Clayton Act was passed particularly for price discrimination, corporate

expansion and tying contracts. Section 7 of the Clayton Act was made to supplement

anti-monopoly provision of the Sherman Act by restraining those combinations that

were likely to result in violation of the Sherman Act and subvert competitive market

forces127. A majority of the cases of Horizontal Mergers were filed and most resulted in

divestiture and cancelation of such Mergers. The reason behind such cancelations was

that such Mergers could lead to accumulation of market powers.

It has been witnessed that increase in net cash flows for combining firms and rivals are

generated by collusive Mergers. Seeing efficient stock market, the present value of

increments to expected future cash flows will be emulated in an affirmative aberrant

stock returns for industry members in case of collusive Mergers, which was challenging

Section 7 of the Clayton Act. The Hart-Scott-Rodino Act was introduced to issue civil

investigation demands to Mergers by the Department of Justice and to the parties

indirectly involved. It also lay that it was significant to notify Federal Trade Commission

and Department of Justice before planning larger Mergers and completing the

transaction.

The States that did not host national monopolies were the reason behind the starting of

the populist movements of the Sherman Act and the Clayton Act. State level economic

management was more relevant than federal fiscal policy at that point of time.

Regulators in the U.S. are interested in the expected effect of a merger on price. The

Department of Justice and Federal Trade Commission assess proposed Mergers

according to the U.S. Horizontal Merger guidelines. Not much of concern is reflected for

regional dislocations by the U.S. Merger policy done by Mergers and Consolidations.

Such development was in picture due to the dominance by the Executives and Judiciary,

where there was not much scope for regional politics. The policies of the U.S. were based

on consumers’ interest where consumers could benefit the maximum.

Merger regulations and free-market ideology is a two-way process. On one hand,

competition is desired, but at the same instance, the government is expected to ensure

that no domination from one player and no foul play takes up in the market. The U.S. has

127 The Clayton Act, 15 U.S.C. § 18 (1914).



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been a highly politically-integrated State and also a highly economically-integrated State

on supply as well demand side, leading to high production. Within the State, mobile

workforce follows production. Due to these circumstances, the interest of Merger policy

shifts from the producer’s side to the consumer’s side. The concept of Anti-Trust laws of

the U.S. is highly based on this logic.

COMPETITION LAWS GOVERNING INDIA

In the growing world of globalization, the Indian economy is intensifying and

multiplying at a rapid rate by adopting the concept of liberalization. It is said that each

economy should bear competition from within the territory as well as beyond it, so as to

face competition that will improvise international market, helping economies to grow. In

India, though M&A’s are promoted, at the same time, significance is given to sustaining

healthy competition in the market.

The United States and the European Union call it as Anti-Trust laws, whereas in India,

they are referred to as Competition laws. Western countries such as the United States,

the European Union and Canada have had Regulatory framework of Anti-Trust laws

since the 19th century, whereas in India, such regulatory framework are new. In order to

control combinations such as Mergers, Acquisitions, Amalgamations and De-Mergers,

the principal legislation of Competition Act came in India in 2002, which was enacted by

the Parliament after the MRTP Act, 1969128.

To access and analyze combinations, a statutory authority in the name of “The

Competition Commission of India (CCI)” reviews combinations affecting or likely to

affect an adverse, unfavourable impact on market competition in India. Responsibilities

of the Commission are: to prohibit acts and practices that restrict free-trade and healthy

competition; to ban abuse of market powers; to prevent the formation of monopolies;

and to balance international relations. The primary aim of the Commission is to sustain

competition that protects and benefits the consumers at large. The Competition Act,

with the context of M&A’s, lays that if certain combinations exceed the threshold limits

as mentioned in the Act – as for assets and turnover leading to adverse effect on market

128 Monopolies and Restrictive Trade Practices Act, 1969, No. 54, Acts of Parliament, 1969 (India).



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– may be challenged.129 In India, the SEBI Act, under Substantial Acquisition of Shares

and Takeover Regulations of 2011, also regulates mergers.

One of the famous lines by Sir Adam Smith is: “wretched spirit of monopoly, mean

rapacity, the monopolising spirit in which the subjection of the poor must authorize the

monopoly of rich”.130 Monopoly is a ‘conspiracy’ which is used against the public to hike

price as well as heavy cost for society. It limits efficiency and at the same time

discourages innovation. If competition is healthy, it enhances consumer’s choice and

promotes competitive prices, where society benefits with alternative allocation of

resources. In India, during the days of the License Raj, license was required for starting

up and expanding an industry, which restricted entry and exits, which often led to

concentration of power in limited hands. Therefore, to overcome the MRTP Act, where

Central Government has the power to approve Mergers, Amalgamations, Acquisitions,

Takeovers etc., the Competition Act came into force in India. It was laid down by the

Supreme Court of India that sufficient Statutes are required to regulate Mergers,

Acquisitions and Takeovers, and also to provide the best price to consumers for their

interest. The motive of mergers should not be to cause anti-competitive effects, which

may reduce competitors, or accelerate market dominance; it should rather be to

promote healthy M&A’s for fair, competitive markets.131

In India, Horizontal Mergers are considered to cause greater damage to markets, which

reduces the number of market players and increases the market share of the merged

entity. Horizontal Mergers lead to restricted outputs, price rise and reduced innovations.

This type of Merger creates extensive adverse effect to a market unlike a Vertical

Merger, where merging enterprises getting benefits also benefit the consumers. Such

Mergers are restricted, where the effects of such Mergers may cause greater depression

in the economy.

With advancement in times and expansion in global transaction, coupled with an

increase in the level of interaction within and beyond the borders, Indian competition

129 The Competition Act, 2002, No. 12, Acts of Parliament, 2002, Sec. 5 (India). 130 BENJAMIN A. ROGGE, THE WISDOM OF ADAM SMITH, (Indianapolis: Liberty Press, 1976). 131 Competition Commission of India v. Steel Authority of India Ltd., (2010) 10 S.C.C. 744 (India).



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has witnessed a paradigm shift. With the emergence of Anti-Trust laws in India, positive

changes have been brought up that impact the output of the economy, companies and

private interests. The regulations governing Anti-Trust laws have been made with an

aim to promote healthy output in the economy and ensure best interests for the

consumer. In India, while the Competition Act aims at protecting the markets from the

ex-ante of competition in the Indian markets as a whole, the Takeover Code focuses on

safeguarding private individuals. Later, an amendment was made to the Competition Act

in Brahm Dutt vs. Union of India132 in 2007 further emphasizing on the loopholes of the

previous Act. The CCI regulates, by its order, combinations of M&A’s, and at the same

time, the Act restricts dominance per se and anti-competitive agreements. Combinations

in total cannot be neglected as they hold significant scope for economic growth, new

opportunities beyond seas as well as for the benefit of consumer.

Combinations are an important part of our economy, where an economically healthy

Merger can increase the output, result in an effective economy, and stand for the best

interests of consumers. Such mergers may be advantageous to the economy by

accelerating growth, opening up business, increased profits and gains, tax benefits, etc.

The earlier concept was to ‘curb monopolies’, which has now shifted to ‘promoting

competition’, leading to progress in the domestic as well as international markets.

Practice has been adopted from the U.S. and the EU to make the Indian Competition law

a progressive law.

COMPARISON OF THE U.S. AND INDIA

India has a single legislation for competition laws in the form of Competition Act, 2002,

along with single agency – CCI – to govern the domestic and international markets.

Whereas in U.S., there are multiple legislations such as the Sherman Act, the Clayton Act,

the Hart-Scott-Rodino Improvement Act, along with multiple agencies such as Federal

Agencies, Anti-trust division of the U.S. Department of Justice (DoJ), and Federal Trade

Commission(FTC). In India, the CCI is an independent administrative department that

analyzes the combinations of Mergers, Acquisitions, and Amalgamations, which effects

132 A.I.R. 2005 S.C. 730 (India).



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or is likely to affect the Indian market. Similarly, in the U.S., FTC is an independent

administrative agency, whose main function is to prevent fraudulent and deceptive

business acts. Therefore, in the U.S., there are various agencies and Acts to eradicate

monopolies and unjust market practices and also to govern and control various

combinations in an economy. A well-defined and proper Statute helps an economy to

work more elaborately and efficiently with clearly laid-down laws, as its application and

interpretation becomes easier. It covers in more detail, eradicating loopholes of the

previous Acts and amending it in a timely manner. Therefore, the U.S. Anti-Trust laws set

up a role model to the Indian economy. Legal framework of the European Union comes

from a Treaty on the functioning of the European Union, when the European

Commission was vested with the responsibility to draw and govern their community’s

law and policies. India has taken its framework ideas from the European Union, where

CCI’s functions and powers are similar to Treaty and power of the European

Commission. There is not much difference between the U.S. and the European Union,

except in quality of enforcement.

In the U.S., business combinations have been much more frequent than any other

country due to free economy and unrestricted economic systems and sub-systems.

Priority has always been given to the interest of common investors and the basic stress

of laws is for unrestrained interactions of competitive forces, which usually results in

best allocation of economic resources, lowering of prices and production of high quality

goods133. The Security Exchange Act, 1934,134 deals with insider-trading under certain

rule, which is another important aspect. All combinations and re-organizations are made

with anti-monopoly concept and reducing concentration of power in one hand. The

government on private sector corporate enterprises to regulate them, though the

government has now been taking steps to liberalize certain restrictions, has imposed

restrictions.

The U.S. and the European Union laws require prior approval for Mergers above certain

threshold; they also impose time line pre-requisites on the pertinent authority, with

133 DR J.C. VERMA, CORPORATE MERGERS, AMALGAMATIONS AND TAKEOVERS, 90 (3rd ed., New Delhi: Bharat Law House Pvt. Ltd., 2008). 134 Security Exchange Act, 15 U.S.C. Sec 78 (1934).



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delays being subject to limitation. In India, the legitimate means by which a company

can grow is through M&A’s, which is further a part of the industrial revolution and

restricting in as a new entity. It can be done if the provisions of the Competition Act are

kept in mind, where it does not impair competition nor causes abuse of dominant

position.

All Mergers do not result in positive outputs and many M&A’s fail. Therefore, Mergers

are regulated to maintain economic interests as well as public interest. In India, the

individual or community interest of parties, viz., shareholders, employees and

consumers, are involved in any form of Takeover, Acquisitions, Mergers, or

Amalgamations in business combinations. Various provisions are given in Statutes so as

to protect them from jeopardizing the public interest. In India, laws have been borrowed

from the U.S. and the U.K. Business combinations are frequent in number in the U.K., and

mere existence of Competition Act was not sufficient. Thus, a City Code was evolved to

discipline the corporate enterprises. M&A’s are governed by Fair Trading Act, 1973135 to

watch public interest. Whereas in Europe, there is European Community Merger Control

accounting procedures in the case of M&A’s. Different cultures show variance in

Mergers, Acquisitions, and Amalgamations and also in their governing bodies and

effects. Practices, values, assumptions, and cultural performances make each country’s

pattern of M&A’s differ from one another. India has adopted various designs of

framework from other States, but the passage, which the U.S. follows, stands ideal to

India.

CONCLUSION AND SUGGESTIONS

Competition regime in India is highly based on the jurisprudence of the U.S. and the

European Union. In a growing and robust economy, M&A’s stand as powerful elements.

India is growing globally in the fields of Mergers, Acquisitions, and Amalgamations. It

becomes the responsibility of the State to ensure the Competition laws are not

exploitative in nature, nor do they favour any particular segment of the society. In India,

though the focus is on public welfare and the interests of consumers, at the same time,

135 Fair Trading Act, c 41, Acts of Parliament of the United Kingdom, 1973 (U.K.).



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schemes are made for M&A’s so as to produce maximum output to the economy. CCI has

taken steps to develop laws as well to create awareness amongst various market players

by imposing penalties over those sustaining and practicing anti-competitive practices.

Combinations can be harmonious or rancorous; this depends on the type and nature of

Merger and the output it may produce for the economy. The question which props up is

whether combinations are beneficial to the economy of a State. M&A’s encourage

companies to expand and improve, which increases their output, production, and

results. However, at the same time, there are a number of combinations that takes place

in India which fails. The question that arises is whether it is the success or the failure

rate of such combinations that is higher!

The U.S. and the European Union stand as an ideal for developing nations, but the socio-

economic scenario of India differs from other States. Laws are made and implemented in

India, but the vision and applicability of the U.S. Anti-Trust laws are encouraging such

socio-economic scenario that India has. There is a need for CCI to have appropriate

professional work force to understand and then implement the provisions of the law

effectively. Unfortunately, wide variations have been witnessed in the implementation of

Anti-Trust legislation in several States, which was based on economic activities and

political aspects. Hence, immense difficulties are faced by the government while taking

action against even the highly abusive monopolies due to political manipulations,

resulting in adverse effect on the public.



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“CRITICAL UNDERSTANDING OF THE RE-INTRODUCED LONG-TERM CAPITAL GAINS

TAX”

~ Rishika Agarwal, Student of Campus Law Centre,

Faculty of Law, University of Delhi

ABSTRACT

The Union Budget of 2018-19 has re-introduced the tax on long-term capital gains,

arising from transfer of listed equity share, a unit of an equity-oriented fund or unit of a

business trust, which was scrapped in 2004-05. This has led to a lot of debate in the

market, where some people are supporting the move, while others are questioning it.

Here, we will understand the amendment in detail, the two additional factors that are

raising concerns of investors– imposition of Securities Transaction Tax (STT) and no

provision for indexation benefit, the grandfathering clause– to ease taxability for the

existing investors, etc. We will table down the tax treatment of long-term capital gains in

various other countries. In addition, we will refer to the status of tax treatment on this

aspect in India until now, and discuss critical points with respect to the present

paradigm.

Every Union Budget brings with it both appreciations as well as criticism from different

sets of people. This year’s was no different. Out of the many reforms that the Union

Budget of 2018-19136 sought to bring, the one we will be discussing here is the most

debated change brought by making long-term capital gains on equity shares or a unit of

equity-oriented fund taxable through Finance Bill, 2018137.

Before delving into this change and its implications, let us first understand this concept

in brief. Capital gains are those gains arising from transfer of capital assets. These are of

two types: short-term capital gain (STCG) and long-term capital gain. They are taxed

under the Income Tax Act138, 1961.

136 Budget 2018-19, Feb. 1, 2018. 137 Bill No. 4 of 2018, introduced in Lok Sabha, http://www.indiabudget.gov.in/ub2018-19/fb/bill.pdf. 138 Income Tax Act, 1961, No. 43, Act of Parliament, 1961 (India).

http://www.indiabudget.gov.in/ub2018-19/fb/bill.pdf



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Definition of Long-term capital gains (hereinafter referred to as LTCG) is found in

Section 2(29A) of the Income Tax Act, 1961 which states:

“Long-term capital gain” means capital gain arising from the transfer of a long-

term capital asset”

Here ‘long-term capital asset’ refers to those capital assets held by the assessee for more

than thirty-six months immediately preceding the date of its transfer, although there are

some assets like shares, units of equity-oriented mutual funds, listed securities,

etc., for which the holding period is considered to be 12 months instead of the

above-mentioned 36 months.139

Generally, STCG is charged at 12% tax (plus surcharge and cess as applicable), while

LTCG is charged at 20% (plus surcharge and cess as applicable). But, Section 10(38) of

the Act provides some exception by exempting certain LTCG from the tax net. Section 10

forms part of Chapter III of the Act that lists those incomes, which do not form part of

total income for taxation purpose. Section 10(38) provides as follows:

“10. In computing the total income of a previous year of any person, any income

falling within any of the following clauses shall not be included—

(38) any income arising from the transfer of a long-term capital asset, being an

equity share in a company or a unit of an equity-oriented fund where—

(a) the transaction of sale of such equity share or unit is entered into on or after

the date on which Chapter VII of the Finance (No. 2) Act, 2004 comes into force;

and

(b) such transaction is chargeable to securities transaction tax under that

Chapter”

Thus, this section exempts those capital gains from taxability, the investment of which is

on equity share or unit of an equity-oriented fund that was held for a period of more than

139 See id., Sec 2(29A), 2(42A).



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one year, with a condition that the transaction was chargeable to Securities Transaction

Tax (STT).

LTCG in respect of the above-mentioned transaction was scrapped through this Section

in 2004-05 by the then Finance Minister, P. Chidambaram, in lieu of which STT was

introduced.140

But soon, a lot of issues started emerging with the provision of such exemption and

many people started misusing it, thereby affecting India’s revenue generation.

Finally, to do away with such malpractices and to increase government’s revenue, an

amendment is brought through the Finance Bill, 2018, which seeks to impose 10% tax

on such transactions.

AMENDMENT

The Union Budget of 2018-19 re-introduced the tax on LTCG on equity share or a unit of

an equity-oriented fund, which was scrapped through the Finance Act, 2004, based on

the reports of the Kelkar Committee. Following are the important points with regard to

the new amendment:

It is proposed to withdraw Section 10(38)141 of the Income Tax Act, 1961 and

introduce a new Section 112A142 in the Act.

Through the amendment, the LTCG arising from transfer of long-term capital

assets, being equity shares of a company or a unit of equity-oriented fund or

a unit of business trusts, is made taxable.

The assets should be held for a minimum period of 12months from the date of

acquisition.

A concessional rate of 10% tax on LTCG on above-mentioned transaction is kept

for the beginning.

Tax will be applicable on gain, exceeding Rs. 1,00,000.

140 Budget 2004-05, July 8, 2004, http://www.indiabudget.gov.in/ub2004-05/bh/bh1.pdf. 141 Finance Bill, 2018, Clause 5(b)(iii). 142 Finance Bill, 2018, Clause 31.

http://www.indiabudget.gov.in/ub2004-05/bh/bh1.pdf



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The transaction is still chargeable to Securities Transaction Tax (STT) as in

the earlier regime (not applicable if the transfer is undertaken on a stock

exchange located in IFSC and the consideration of such transfer is receivable in

foreign currency.).

Benefit of inflation indexation in respect of cost of acquisitions and cost of

improvement and computation of capital gains in foreign currency in the case

of non-resident will not be available.

The provisions of this section will apply from Financial Year 2018-19 i.e.,

Assessment Year 2019-20. Thus, any transfer carried out after 1stApril, 2018,

meeting above criteria, will attract a tax of 10% on gains.

ILLUSTRATION

If an investor buys stock for Rs. 5,00,000, keeps it for more than a year, and sells it for,

say, Rs. 6,80,000, then the capital gains value would be Rs. 1,80,000 (6,80,000 – 5,00,000

= 1,80,000). Since, the exemption limit is set at Rs. 1,00,000, so the taxable value of

capital gains would be Rs. 80,000 (1,80,000 – 1,00,000 = 80,000). Now, this Rs. 80,000

will be taxed at the rate of 10%, i.e., Rs. 8,000.

What is Securities Transaction Tax (STT)?

Chapter VII of the Finance (No. 2) Act, 2004143 provides for the provisions of STT.

Section 97(13) of the Act states that STT will be levied for the following transactions:

Purchase or sale of an equity share in a company, or a derivative, or a unit of an

equity-oriented fund, entered into in a recognized stock exchange.

Sale of a unit of an equity-oriented fund to the Mutual Fund.

This is a tax that an investor has to pay on the total consideration paid or received in a

share transaction. It was introduced in the Budget of 2004, which provided that if the

investors pay STT on their transactions, they will be exempted from LTCG tax. It is

applicable only when transaction is made through a recognized stock exchange and is a

type of direct tax.

143 The Finance (No.2) Act , 2004, No. 23, Acts of Parliament, 2004 (India)



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What is meant by inflation indexation benefit?

Cost Inflation Index (CII) is used as a means to measure inflation so as to calculate LTCG.

The value of rupee changes with time and, therefore, the value of price an investor paid

about 8-10 years ago to purchase a security will not be the same today. Therefore,

Section 48 of the Income Tax Act, 1961, provides that the cost of acquisition and the cost

of improvement need to be indexed as per the CII. The formula for computing indexed

cost is:

Indexed cost = (CII for the year of sale/ CII for the year of purchase) *

(Cost of purchase)

Till 31st March 2017, the base year was taken as 1981, which has been

shifted to 2001-02 with effect from 1st April 2017, as notified by

CBDT144.

ILLUSTRATION

Suppose X purchased an asset in 2001-02 (CII- 100) for Rs. 10,00,000, and sold it in

2017-18 (CII- 272) for Rs, 40,00,000.

Applying the above formula, the cost of acquisition will be calculated as follows:

Indexed Cost of Acquisition = (Cost of Acquisition) * (Cost of Inflation Index (CII)

for the year in which the asset was sold or transferred / The cost of Inflation

Index (CII) for the year in which the asset was first held by the assessee or FY

2001-02, whichever is later)

Indexed Cost of Acquisition = 10,00,000 * 272/100

= 27,20,000

The LTCG would now be Rs. 12,80,000 (Rs. 40,00,000 – Rs. 27,20,000).

144 “Section 48 of the Income-Tax Act, 1961 - Capital Gains- computation of - Notified Cost Inflation Index Under Section 48, Explanation (V) - Financial Year 2017-18”, Notification No. So 1790(E)[No. 44/2017 (F. No. 370142/11/2017-Tpl)], dated 5-6-2017.



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If the gain was to be calculated without taking the benefit of indexation, the LTCG would

have been Rs. 30,00,000 (Rs. 40,00,000 – Rs. 10,00,000), and the applicable tax on LTCG

would then have to be paid on Rs. 30,00,000 rather than on Rs. 12,80,000 making a

difference of Rs. 17,20,000 on the taxable value.

With the recent amendment, where a tax on LTCG has been introduced at the rate of

10%, this indexation benefit is not provided for transaction of shares or equity-oriented

fund.

GRANDFATHERING CLAUSE

As proposed in the budget, all gains up to 31st January 2018 will be grandfathered. This

grandfathering clause means exempting that portion of capital gain that accrued for the

period before 31st January 2018, since until then the new rule was not announced and

investors keeping in mind the existing beneficial exemption clause made investments.

To understand this better, let us first note these two points:

The new rule is applicable from 1st April 2018, which means whoever sells his

stocks and makes gain before this date (be it Jan., Feb., March of 2018), will be

wholly exempted from tax as he will be governed by the earlier rule of section

10(38) in this case.

The problem arises when the asset is purchased before 31st January 2018, is held

for more than a year, and then sold in the regime when the tax rule of 10% is

imposed. The grandfathering clause will come into play now and will exclude any

gain accrued for the period before 31st January 2018.

For this purpose, the following formula is provided in the new section 112 A (6):

Cost of acquisition to compute LTCG should be higher of:

Actual cost of acquisition; and

Lower of:

Fair Market Value as on 31 January, 2018; and

Value of consideration received or accruing as a result of the transfer.



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Here, ‘Fair Market Value’ will be calculated as follows (Explanation (b) of Section

112A): In case of a listed equity share or unit, the fair market value means the highest

price of such share or unit quoted on a recognized stock exchange on 31st of January

2018. In the case of unlisted unit, the net asset value of such unit on 31st of January

2018 will be the fair market value.

ILLUSTRATION:

Suppose, an equity share is acquired on 1st of January, 2017 at Rs. 100, and

Its fair market value is Rs. 200 on 31st of January, 2018 and

It is sold on 1st of April, 2018 at Rs. 250.

Going by the above formula, the following steps needs to be taken:

The lower of Rs. 200 (fair market value) and Rs. 250 (Value of consideration) will

be taken, i.e., Rs. 200

Next, the higher of Rs. 100 (actual cost of acquisition) and Rs. 200 (as computed

in the first step) will be taken, i.e., Rs. 200

So, the cost of acquisition will be considered as Rs. 200.

Now, to calculate LTCG, we will deduct value of consideration received on 1st

April 2018 with the cost of acquisition as calculated above, i.e., Rs. 250 – Rs. 200 =

Rs. 50

Thus, the final taxable value comes to Rs. 50.

This value is computed when we calculate according to the formula of grandfathering

clause. Let’s see what would have been the taxable value if such clause was not provided.

The value of LTCG would be the value of consideration received (Rs. 250) less the value

of actual cost of acquisition (Rs. 100). So the taxable value would then be Rs. 150, much

higher than Rs. 50 when calculated by applying the grandfathering clause.



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TAX TREATMENT ON OUTSIDERS:

A. Non-Resident Tax Payers:

Tax at the rate of 10% on LTCG exceeding Rs. 1,00,000 for non-resident tax payers will

be deducted at source from payment of the total amount in accordance with Section 195

of the Act. This is applicable to both non-resident individual as well a foreign company.

B. Foreign Institutional Investors:

Pursuant to the amendment, the LTCG from securities earned by Foreign Institutional

Buyers will be liable for taxation in the same manner as the domestic investor as per

section 112A (vide insertion of a clause in section 115AD). Also, the deduction for the

same will not be made at source, unlike no-resident tax payer, as provided in section

196D of the Act.

HISTORY

Taxing LTCG has always been an area of concern for policy-makers. This is not the first

time that LTCG on stocks will be taxed in our country. Even before 2004, LTCG was taxed

when it was first abolished with the introduction of STT. But, there is vast difference

between now and then because of the following provisions:

A. Before 2004-05

LTCG was taxed

No STT was imposed

Benefit of indexation was available

Tax rate: 20%

B. 2004-05 to 2017-18

No tax on LTCG

STT was introduced and was to be levied on the buyer at the rate of 0.15% of

the value of the security.

C. After Budget 2018-

LTCG will be taxed

STT will continue to be charged



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No indexation benefit will be available

Tax Rate: 10%

Thus, the two benefits that were available before 2004-05, which is not provided for in

the present amendment are: Indexation and no STT charge. These two factors, along

with 10% tax rate, will add up to make such investment relatively costlier.

NEED FOR THE AMENDMENT

As mentioned in Budget, there are various reasons due to which there was a dire need to

re-introduce this tax liability, which can be listed as follows:

The current tax regime has led to a bias against the manufacturing sector, as

more business surpluses are invested in financial assets.

It will be a means to save economic distortions of our country, as according to the

return filed for the assessment year 2017-18, the total amount of exempted

capital gains from listed shares and units is around Rs. 3,67,000 crores and a

major part of this gain has accrued to Corporates and LLP’s.

The return on investment in equity is quite attractive even without tax

exemption, as provided by section 10(38) of the Act.

People misuse this exemption as a means to evade taxes by routing their

investments to some other countries with easier tax regimes and by declaring

their unaccounted income as exempt under this section by entering into sham

transactions. Such erosion of tax-base leads to loss of government revenue.

TAX TREATMENT OF LTCG IN VARIOUS JURISDICTIONS

At this stage, we should also refer to the tax implications on LTCG in other countries145

to get a picture of India’s stand on the matter:

Some countries where tax on LTCG is exempt:

China (temporarily exempt)

Singapore (taxable only in case of trade)

145 2017-18 Worldwide Personal Tax and Immigration Guide, EY, http://www.ey.com/gl/en/services/ tax/worldwide-personal-tax-and-immigration-guide-country-list.

http://www.ey.com/gl/en/services/



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Thailand (exempt when securities listed on the Stock Exchange of Thailand)

Some countries where tax on LTCG is levied:

A. United Kingdom (UK):

Tax rate: 10% (for basic rate tax payers)

20% (for higher rate tax payers)

Annual Exemption amount is £11,300

The indexation allowance no longer applies to individuals.

B. Australia:

Tax rate:

Taxable Income (AUD) Tax Rate

0– 18,220 0%

18,220– 37,000 19%

37,000– 87,000 32.5%

87,000– 180,000 37%

180,000 & above 45%

50% deduction on capital gains net of losses (applicable for assets held for

at least 12 months)

C. USA:

Maximum rates for long-term gains:

0% for individuals in the bracket of 10%-15%

20% for individuals in the bracket of 39.6%

15% for rest of the individuals

Long-term refers to assets held longer than 12 months.

Capital losses are fully deductible against capital gains.

D. Canada:

Tax rate: 15% –3% (federate tax)



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22%– 27% (province tax)

50% of the year’s capital gains are included in taxable income, to the extent

that the amount exceeds 50% of capital losses for the year.

CRITICS

The main issue arising with the said amendment is regarding the fact that the

application of STT is kept untouched. STT was introduced as a substitute for

LTCG, when it was scrapped in 2004-05. Now that the LTCG is introduced again,

it is believed that there remains no logic to continue with the STT clause.

With two types of tax liability now, i.e., LTCG and STT, investing in securities in

India will become less attractive to not only domestic players but also foreign

investors, as investing here may prove to be costlier, compared with other

countries.

The other factor proving to be less advantageous for investors is no benefit of

indexation (as already discussed). This may discourage people from investing in

securities for a longer term. If compared with debt funds, they do provide

indexation benefit.

Also, as now there remains quite less difference between investing in short-term

or long-term securities, being 15% tax on short-term and 10% tax on long-term,

there are chances that long-term securities market will be affected.

CONCLUSION

The amendment brought about in LTCG’s taxation by this year’s budget, though was

anticipated but was not in the way it came out. Though, on the one hand, it will help

increase revenue for the government and minimize misuse of the exemption clause by

taxpayers, the possibility that the 10% tax on LTCG, along with STT and no indexation

benefits may make investment in these stocks less favourable, cannot be ruled out

altogether. As the amendment provides for grandfathering clause and for its

applicability on transaction from 1st April 2018, the true effect of the change will be seen

in the times to come.



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