new cam magazine without grid copy...masala bonds are the latest o˛ering which have hit the indian...

Foreword

Recent Legal Developments in India 1

Dear Friends,

It gives me immense pleasure to present “Recent Legal Developments in India”, a Cyril Amarchand Mangaldas �ought Leadership Initiative. India is at a turning point where not only economic development is foreseeable but the Government has initiated numerous policy changes for the ease of doing business in India. In the backdrop of the interplay of complex economic and political forces, India has, over the past few months witnessed a slew of legislative and policy changes. �ese range from liberalisations in the policy governing foreign direct investment to a new insolvency and bankruptcy code. Many more are in the pipeline, awaiting �nal touches and clearance. Global economic and business players have to adapt and cope with ever changing goal posts and rules of the game.

�is book is a compilation of essays that cover the recent changes in policy such as the recent liberalization of the FDI policy in India as well as the ECB framework. As you will notice, most of the amendments correlate to the Indian government’s resolution to simplify business in India and to welcome foreign investors in India. �e book also discusses the recent trends in arbitra-tion and the tax regime in India. We have also highlighted the changing nuances in the enforcement regime of competition law in India. Masala Bonds are the latest o�ering which have hit the Indian markets. �is book explains the nuances of Masala Bonds and explains how it di�ers from other o�shore debt raised by Indian companies. SEBI is one of the leading market regulators in the world and SEBI’s recent amendments to the Insider Trading Regulations is a path-breaking step.

As your partners and trusted advisors in the goal to e�ciently and gainfully engage with India, whether in �nancial or strategic alliances, we believe it is our responsibility to guide you through relatively complex and dynamic legal and regulatory matrix. In this endeavour, we have the bene�t of several years of experience across practice areas, outstanding technical expertise, research and thought leadership initiatives such as this book.

In the production of this book, I must appreciate the e�orts of all the contrib-utors, who have all worked very hard to produce this work. I hope you will �nd it an enjoyable and helpful read. All feedback is more than welcome.

Regards,

Cyril Shro� Managing PartnerCyril Amarchand Mangaldascyril.shro�@cyrilshro�.com

January 2016

Contents

Foreign Direct Investment – Recent Legal and Regulatory Developments 4

Indian Banking Industry – What to expect? 9

Masala Bonds – Spicy or not? 18

Recent changes in the ECB Policy in India 23

Recent Trends in Arbitration and Analysis of the New Arbitration Act 28

Recent Trends in Abuse of Dominance 34

Recent Trends in the Tax regime in India 42

The New Bankruptcy Code – A New Horizon in Bankruptcy Laws in India 47

The New Indian Insider Trading Regulations – A Step in the Right Direction? 53

About Cyril Amarchand Mangaldas 58

Recent Legal Developments in India

*Disclaimer: These articles are not intended to serve as legal advice and the position of law expressed in these articles are only valid as on the date of publication of such article.

2 c 2016 Cyril Amarchand Mangaldas

4 Recent Legal Developments in India

Foreign Direct Investment - Recent Legal and Regulatory DevelopmentsForeign Direct Investment (“FDI”) is an integral part of an open and effective international economic system and a major catalyst to development. However, the benefits of FDI do notaccrue automatically and evenly across countries, sectors and even local communities. National policies and the international investment architecture matter for attracting FDI to a larger number of developing countries and for reaping the full benefits of FDI for development.1 Apart from being a critical driver of economic growth, FDI is a major source of non – debt financial resource for economic development of a country. Foreign companies invest in developing economies such as India, to take advantage of relatively lower wages, special investment privileges such as tax exemptions, etc. The benefit for the developing / emerging economy in turn lies in achieving technical know-how through technology transfer and generating employment.

The Indian economy has emerged as an attractive investment destination despite the recent economic upheavals in other emerging markets. This is largely due to the efforts of the Government of India to bring about a favourable policy regime and build a robust business environment in order to give an impetus to its “Make in India” campaign. It views foreign investment and private enterprise as a key driver of economic growth in India, and the policy measures and changes have been tailored in keeping with this objective. According to the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, Government of India (“DIPP”), the total FDI inflow into the economy recorded a growth of 27% with the inflow increasing from USD 24.30 billion in 2013-14 to USD 30.93 in 2014-15.2 Data for the period between April 2015 to September 2015 indicates that the increase in the FDI inflows was

primarily driven by investments in the services sector,3 computer software and hardware, automobile industry and trading.4 Foreign Direct Investment Policy (“FDI Policy”) in India has seen significant developments in the last year, which are aimed at creating an enabling environment for private

investment and providing critical infrastructure to encourage investment. In this paper we discuss these changes and the impact that they are expected to have on the Indian economy.

Regulation of Foreign Investment in India

Foreign investment in India is primarily regulated by: (i) Foreign Exchange Management Act, 1999 (“FEMA”) and the rules, regulations and notifications issued thereunder by the Reserve Bank of India (“RBI”); and (ii) the FDI Policy issued by the DIPP, which is reviewed and revised at least once every year. The Foreign Investment Promotion Board (“FIPB”) which falls within the domain of the Department of Economic Affairs, Ministry of Finance is the key inter-ministerial body charged with the mandate of according prior approval to such of the foreign investors mandated to seek it under the FDI Policy.

Regulation of FDI in India is essentially sector or activity centric. The Indian economy is open to foreign investment in most areas. There are certain sectors / activities in which FDI is completely prohibited; other sectors that allow 100% foreign investment and still others that have “sectoral caps” i.e. a maximum percentage of equity investment in the Indian company. Some areas of investment require a prior Government approval for the foreign investment. Each sector / activity is further subject to applicable laws / regulations, security conditions and other

1See Foreign Direct Investment for Development – Maximising Benefits, Minimising Costs, Organisation for Economic Co-operation and Development, 2002, available at www.oecd.org/investment/investmentfordevelopment/1959815.pdf (last visited: December 29, 2015).2See e-Book of the Department of Industrial Policy and Promotion on Good Governance 2014-15, available at http://dipp.nic.in/English/Publications/ebook/E_Book_2014-15_new.pdf (last visited: December 29, 2015).3Services sector includes financial, banking, insurance, non – financial / business, outsourcing, R&D, courier, tech testing and analysis.4See Fact Sheet on Foreign Direct Investment (updated up to September 2015), available at http://dipp.nic.in/English/Publications/FDI_Statistics/2015/FDI_FactSheet_JulyAugustSeptember2015.pdf (last visited: December 29, 2015).

c 2016 Cyril Amarchand Mangaldas

5Recent Legal Developments in India

conditions as may be prescribed by the FDI Policy and / or the sector regulator.

Foreign investment under specified sectors is under the following routes:(i) Automatic Route: No prior permission for foreign investment is required. Only a post investment intimation procedure needs to be followed.(ii) Government of India Approval Route: For certain business activities, companies require a prior foreign investment approval from the FIPB. These areas may or may not be subject to sectoral caps and conditions.

Key Legal and Regulatory Developments

Over the last one year, the Government of India has been driving key policy reforms, especially to attract foreign investments. These reforms inter alia include liberalization and simplification of the FDI Policy as a whole, and easing of norms across various sectors, in order to facilitate foreign investment and ensure inflow of foreign capital into the country. The role of the Government is gradually changing from a regulator to that of a facilitator of private investment, and the crux of the recent reforms is to enable easier flow of FDI through the automatic route and minimise the cases which require prior approval of the Government.

Composite Foreign Investment Caps: Under the FDI Policy, there are investment caps or ceilings in specific industry sectors beyond which foreign investors are not permitted to invest. For example,there is a 74% cap on investment in private banks, a 49% investment cap in sectors such as insurance, defence, up-linking of news and current affairs TV channels etc. Within these overall caps, there were further sub-ceilings for various categories of foreign investor (such as a foreign portfolio investor). The FDI Policy has now been amended to eliminate the sub-ceilings for various forms of foreign investments / investors within the overall sectoral caps. This has been done to simplify the rules and give more flexibility to create investment opportunities to attract investment in Indian companies from all categories of foreign investors. This move will benefit fund raising plans of various companies, particularly private sector banks, where the existing foreign portfolio limit of 49% was creating a hurdle in attracting further foreign investment.

Sectoral Changes in the FDI Regime

Defence: The defence sector has been liberalized to

allow foreign investment (including portfolio investment and foreign venture capital) up to 49% under the automatic route. FDI above 49% is permitted under the Government approval route on a case to case basis, wherever it is likely to result in access to modern and ‘state of art’ technology in the country. However, it is pertinent to note that infusion of foreign investment within the permitted automatic route level, in a company not seeking industrial license but resulting in a change in ownership, will require prior Government approval. Defence remains one of the focal areas in the Governments’ “Make in India” initiative. Recently, Boeing and Tata Advanced Systems announced their joint venture “to make aerostructures for the AH64 Apache helicopters and to compete for additional manufacturing work across Boeing platforms, commercial and defence”. It is expected that the recent policy liberalization will result in more such joint ventures in the defence sector.

Construction Development Sector: The changes in the construction development sector have been particularly radical, with the minimum capitalization norms and minimum area requirements being removed. Foreign investors are permitted to exit the projects and repatriate their investment under automatic route, prior to completion of the project, provided they have completed a lock-in period of 3 (three) years from the date of each tranche of investment. The scope of “real estate business” has been further clarified, as has the definition of “transfer”. It is expected that the struggling construction sector will be a major beneficiary of the aforementioned liberalized policy as the same has been brought in to boost demand for steel, cement and spur economic activity, ultimately with an aim to help build 50 million affordable houses for the poor.5

Single Brand Retail Trading: In order to motivate foreign investors to “Make in India”, the Government has introduced several reforms in the area of single brand retail trading. Sourcing norms (that 30% of value of goods will have to be purchased from India) can be relaxed subject to Government approval, provided that state of art and cutting edge technology is being introduced. It is anticipated that this move will benefit companies such as IKEA and Apple Inc. and motivate them to open manufacturing entities in India. The Government also permitted entities that have been granted permission to undertake single brand retail trade to do e-commerce. A single entity is now permitted to undertake both single brand retail trading

5Press Release, Government of India, dated November 10, 2015 available at http://pib.nic.in/newsite/PrintRelease.aspx?relid=130371 (last visited December 30, 2015).



100% FDI is now permitted under the automatic route in non-bank entities that operate white label ATMs, subject to certain conditions, inter alia including guidelines issued by the RBI vide Circular No. DPSS.CO.PD. No. 2298/02.10.002/2011-2012, as amended from time to time.

In a significant move, which is expected to improve infrastructure facilities within the country, 100% FDI is permitted in the construction, operation and maintenance of railway infrastructure.

The aforementioned reforms across sectors are aimed at encouraging continued inflow of foreign investment in the country with as much ease as possible.

Other Liberalizing measures under the FDI Policy

Foreign Investment through Partly – Paid Shares and Warrants: Foreign investment through partly – paid shares and warrants can now be made under the automatic route in sectors eligible to receive FDI under the automatic route. This enables foreign investors to acquire an interest in an Indian company with the ability to fund the company fully at a later stage. Issuance of partly paid shares and warrants remain subject to such conditions as have been imposed by the RBI vide A.P. (DIR Series) Circular No. 3, dated July 14, 2014, as amended from time to time.

Foreign investment through Swap of Shares: In order to reduce involvement of the Government in private investments, the FDI Policy now permits investment by way of swap of shares in sectors operating under the automatic route. However, irrespective of the amount, valuation of the shares will have to be made by a merchant banker registered with the Securities and Exchange Board of India (“SEBI”) or an investment banker outside India registered with the appropriate authority in the host country.

FDI in LLPs: The hitherto strict regime of foreign investment for registered Limited Liability Partnerships (“LLPs”) has been eased considerably. Now for such of the sectors which are on the

6

6A non – bank entity with foreign investment that operates white label ATMs should have a net worth of at least INR 1,000,000,000 (approximately USD 14.97 million). In the event such entity is engaged in any NBFC activity, then it will need to comply with the minimum capitalization norms applicable to FDI in NBFCs. 7Key conditions that investors must comply with at the time of subscribing to partly – paid shares or warrants are: (a) the total price for these instruments has to be determined upfront at the time of their subscription, (b) at least 25% of the total consideration has to be received upfront, and (c) the balance consideration has to be received within 12 months for partly – paid shares and within 18 months for warrants

and wholesale trading with the condition that the sector specific conditionalities must be complied by both business arms separately by way of adopting interalia divisional accounting. In a move that has clarified the ambiguity surrounding foreign investment in duty free shops, the Government has now permitted 100% FDI under the automatic route in duty free shops, i.e. shops set up in custom bonded area at international airports / international seaports and land custom stations where there is a transit of international passengers, subject to compliance with the relevant customs regulations.

Foreign Investment in Manufacturing Activities: The Government has permitted a manufacturer to sell its products manufactured in India through wholesale and / or retail, including through e-commerce, without Government approval. The FDI Policy now defines the term “manufacture” so as to avoid any ambiguity in the interpretation of the provision. It is evident that the liberalization has been allowed to give a thrust to the Government’s “Make in India” policy, which is believed to bring about state of art technology to India together with generating employment for scores of Indians.

Other Sectors: The Government has liberalized a number of other sectors such as broadcasting carriage services, broadcasting content services, air transport services, establishment and operation of satellites, credit information companies etc. by either raising the permissible cap for FDI or bringing in more sectors under the automatic route.

FDI up to 100% under the automatic route in the plantation sector has been expanded to include coffee, rubber, cardamom, palm oil tree and olive oil tree plantations, apart from the previously permitted tea plantations.

100% FDI under the automatic route is now permitted for manufacturing of medical devices, without any distinction between greenfield and brownfield projects in this industry, thereby creating a carve out under the pharmaceutical sector.

FDI up to 49% has been permitted in the pension sector in compliance with the Pension Fund Regulatory and Development Authority Act, 2013. FDI up to 26% is permitted under the automatic route and beyond 26% and up to 49% under theGovernment approval route. This is in tandem with the FDI Policy caps and conditions laid down in the insurance sector statute and rules.

The crux of the recent reforms is to enable easier flow of FDI through the

automatic route and minimise the cases which require prior approval of

the Government

6



automatic route and where there are no FDI-linked performance conditions, the treatment of LLPs andcompanies for the purpose of FDI is the same viz., it is allowed on the automatic route. Earlier, FDI in LLPs required prior approval of the Government. This is a very significant step, as the advantages of easier reporting, compliances, audit requirements, etc make LLP an attractive vehicle of investment, and the recent policy changes should see a flurry of activities through this route.

Threshold Limit of Approval by FIPB: In order to facilitate faster approvals on cases approaching the Government, the threshold limit of approval by FIPB was raised from the earlier INR 3,000 Crores to INR 5,000 Crores. Any proposals above INR 5,000 Crores shall be considered by the Cabinet Committee on Economic Affairs.

Recent Developments in e-Commerce

The legal validity of the e-commerce industry in India, dominated by leading players such as Amazon, Flipkart, Snapdeal etc., being operated vide a “marketplace mode” wherein the aforesaid companies provide the platform that links the buyers and the sellers, has been recently challenged. All India Footwear Manufacturers & Retailers Association & Ors. have filed a petition before the Delhi High Court in May 2015 questioning the validity of the receipt of FDI by companies such as Amazon, Flipkart, Snapdeal etc. It has been argued that these entities are engaged in retail trade which is a restricted sector without seeking any approval of the regulator.

The Delhi High has held that there appears to be a “prima facie” violation by such companies, and sought the opinion of the DIPP in this regard. In its response, the DIPP has stated that the marketplace model used by the e-commerce companies is “not recognized” in the country’s FDI Policy. The DIPP further stated that it is mandated only with formulation of the policy, and not its implementation which is the responsibility of other government departments.

The department’s position assumes significance as the country’s biggest e-commerce companies operate under the marketplace model. The pending Delhi High Court decision and the final jurisprudence on the issue is expected to provide the much needed clarity and pave the way forward.

Conclusion

There are a number of other reforms that have been introduced over the last one year period. Thesereforms are a big step forward in the Government’s

endeavour to liberalize and simplify the current policies, improve the ease of doing business in India and encourage foreign investment in the Indian market. However, it is pertinent to note that a liberalized FDI Policy by itself cannot alone encourage foreign investment. The Government needs to take significant step towards an improved infrastructure, labour reforms, easier land acquisition process and a proper coordination between centre and states to achieve a sustained growth from any foreign investment inflow. It is expected that the reform oriented Government will prioritize these actions to boost investor confidence, encourage the “Make in India” initiative and tap the potential of India’s manufacturing sector.8

About Author

Niti’s practice covers diverse areas of General Corporate- Commercial Advisory, Mergers & Acquisitions in various sectors She also handles regulatory matters pertaining to foreign exchange laws. She has represented various multinational corporations and domestic enterprises on matters ranging from structuring of inbound and outbound investments, advising on entry strategies for foreign entities as start-ups, on acquisition, takeover of companies and business including advice on foreign equity restrictions and caps, options and vehicles, compliances, and regulatory approvals. She has also handled several financing transactions like ECB Facilities, Export Credits, Clean Facilities etc.

Niti started her career in 1999 with Rolls-Royce Energy System India Ltd. Prior to joining the Firm, she worked with several reputed Indian Law Firm including erstwhile Amarchand & Mangaldas & Suresh A. Shroff & Co.

8See Pravakar Sahoo, Making India an Attractive Investment Destination: Analyzing FDI Policy and Challenges, The National Bureau of Asian Research, December 2014, available at www.nbr.org/downloads/pdfs/ETA/IIP_Sahoo_paper_121014.pdf (last visited: December 30, 2015).

“The author would like to acknowledge effort and assistance of Ms. Medha Srivastava a Principal Associate Designate at Cyril Amarchand Mangaldas”


Ms. Niti PaulPartner


The Financial System in India, like in many countries, is dominated by banks. The banking space in turn is dominated by the Public Sector Banks (PSBs) which account for 72.3 percent of banking system assets. The Indian banking system has made rapid strides after the liberalisation of the economy and financial sector reforms in the wake of the severe balance of crisis faced by the country in 1991. The financial sector reforms focussed on implementing prudential regulations based on the best international practices; reducing statutory pre-emption of banks' resources; improving corporate governance; increasing competition by allowing banks to be set up in the private sector and increasing the presence of foreign banks; and providing more functional freedom to PSBs so as to facilitate more commercial orientation to their functioning etc. These measures laid the foundation for the banking sector's resilience.

The period saw the emergence of technologically savvy banks in the private sector which together with the foreign banks provided stiff competition to the PSBs. The reforms resulted in a comprehensive transformation of the banking system and had a major impact on the financial strength, overall efficiency and stability of the banking system including that of PSBs. The balance sheets and overall banking business grew in size. The financial performance and efficiency of Indian banks improved with increased competition, as reflected in their profitability, net interest margins, RoA and RoE. The capital position improved significantly, and banks were able to bring down their non-performing assets sharply. The reforms also witnessed increasing regulatory emphasis on financial inclusion. Banks were facilitated in this through regulatory measures in increasing their outreach by using business correspondents. As financial inclusion is a low ticket business use of technology is necessary to provide easy access to the excluded and reduce the transaction cost so as to make the financial inclusion business commercially more viable. The business correspondents use hand held devices such as

Indian Banking - What to Expect

There has been increased use of technology in general, which in turn, has helped improve customer service.

The Indian financial system was able to withstand the trauma of the global crisis of 2008 and come out relatively unscathed due to its resilience and prudent and prescient regulatory policies followed by the Reserve Bank of India. While financial stability is not an explicitly stated objective under the Reserve Bank’s statute (RBI Act, 1934), various measures were undertaken from time to time to strengthen financial stability in the system. The approach has evolved from past experiences and a constant interaction between the micro level supervisory processes and macroeconomic assessments. In the Indian context, the multiple indicator approach to monetary policy (which is now set to change) as well as prudent financial sector management together with a synergetic approach through close coordination between RBI and other financial sector regulators ensured financial stability. Some of the other policy measures include Capital Account management, management of systemic interconnectedness, strengthening prudential framework to deal with procyclicality, and initiatives for improving the financial market infrastructure, etc. Systemic issues arising out of interconnectedness among banks and between banks and Non Banking Financial Companies (NBFCs - our shadow banks) and from common exposures were addressed by, among other measures, putting prudential limits on aggregate interbank liabilities as a proportion of banks’ Net Worth, restricting access to uncollateralized funding market to banks and Primary Dealers with caps on both borrowing and lending, increasingly subjecting NBFCs to more stringent prudential regulations as also restricting banks’ exposure to NBFCs to contain regulatory arbitrage. The other noticeable aspect regarding policy measures was the innovative use of countercyclical policies to address the procyclicality issues. Countercyclical policies were introduced as early as 2004 by using time varying sectoral risk weights and provisioning, though



RBI had used them sporadically even earlier. These unconventional measures taken in response to emerging risks are now widely acknowledged to have played a significant role in protecting the Indian financial system from key vulnerabilities.

There is, thus, much to be satisfied about, as the banking sector has come a long way since the 1991 reforms. However since the onset of the crisis and more particularly since 2011-12 a number of fault lines and vulnerabilities in the banking sector and more particularly in the functioning of PSBs have emerged which earlier got masked due to the rapid GDP growth (average 8.8% in the period 2003-2008). The asset quality of the PSBs has significantly deteriorated resulting in deterioration in their profitability measures (NIM, RoA and RoE), and steady decline in Capital adequacy (though still well above the minimum under the phased requirement of Basel III). Quick reforms are needed to bring the banking sector back to robust health. In fact several measures are already on the anvil including proposals for governance related reforms largely focussed on PSBs (P J Nayak Committee Report) and for complete overhaul of the financial sector legislation and regulatory architecture (Report of the Financial Sector Legislative Reforms Commission). At the same time 23 new banks- 2 Universal banks which have started operating and 21 specialised banks (11 Payment Banks and 10 Small Finance Banks) which are set to debut - will push the competition to much higher levels. Added to this the increased digitisation of the consumer interface due to changing consumer preferences and increased use of technology to catch up the data analytics capabilities of banks, both for risk management and customer acquisition provide very interesting possibilities.

Indian Banking – The Road Ahead

Future is always uncertain but coming times look more uncertain than ever. One is reminded of a quip “The trouble with our times is that the future is not what it used to be”. There are plenty of ‘Known Unknowns and Unknown Unknowns’. The future holds a lot of opportunities as well as challenges for all of us. So it is important to analyse the underlying factors which have caused the vulnerabilities and take determined and decisive actions.

The current policy actions for the banking sector to deal with vulnerabilities are predicated on the following broad objectives as laid down by Governor Rajan when he assumed office in September,2013:

(i) Improving the system's ability to deal with corporate distress and financial institution distress by strengthening real and financial restructuring as well as debt recovery.

(ii) Strengthening banking structure through new entry, branch expansion, encouraging new varieties of banks, and moving foreign banks into better regulated organisational forms

(iii) Expanding access to finance for small and medium enterprises, the unorganised sector, the poor, and remote and underserved areas of the country through technology, new business practices, and new organisational structures; that is, we need financial inclusion.

Asset quality and measures to Improve system's ability to deal with stressed assets:

After the financial sector were reforms initiated in 1991, the NPAs in the Indian banking system reduced sharply from 15.7% in 1996-97 to 2.4% in 2007-08 on the back of robust growth particularly in the 2003-08 period, and several measures, notably improvement in credit management and internal controls, setting up of Credit Information Bureaus and strengthening of legal infrastructure [setting up of Debt Recovery Tribunals, promulgation of Securities and Reconstruction of Financial Assets and Enforcement of Security Interest Act,2002 (SARFAESI)]. What was more notable was the fact that even the stock of NPAs consistently declined from March,2003 to March,2008. However considerable deficiencies remained which came to the fore on the onset of the crisis.

The seeds of stress on asset quality were sown during the boom period when, as is almost a universal phenomenon, banks indulged in exuberant lending in retail and PSBs additionally in infrastructure sector. While banks could cope up with the stress in retail portfolio and quickly came out of it, the stress in the infrastructure sector and in other corporate lending has been very hard to deal with. The Gross NPAs of banks jumped to 5.1% at end September,2015 from 4.6% at end March,2015 while the stressed asset ratio increased from 11.1% to 11.3% during the same period. The PSBs have been the worst performers among the banking groups as their Gross NPAs as at end March,2015 stood at 5.17% while the stressed asset ratio stood at 13.2% which is nearly 230 basis points more than that of the system.



The specific reasons are information asymmetry among lenders, inadequate credit appraisal abilities to deal with large infrastructure projects combined with exuberance leading to lax underwriting standards, Government departments' sluggishness in giving various clearances in time, unsustainable leverage build up (which has come for adverse observation by IMF in its Global Financial Stability Report) and creation of excess capacity due to exuberant optimism of the corporate sector, banks not confronting the weaknesses head-on and not taking appropriate remedial action, undue advantage enjoyed by big borrowers prompted perhaps by banks' fear of losing blue chip borrowers as well as fears about rising NPAs, undue delays in the legal process and the absence of bankruptcy laws. There have also been concerns about unhedged forex exposures of corporates. To add to all this even though there are 15 Asset Reconstruction Companies (“ARCs”), the banking system has not been able to use them for managing their stressed assets primarily because of the inability/unwillingness of banks and ARCs to reach a deal on discounts offered by ARCs. The ARCs too have faced constraints on account of various factors.

The RBI has devised a set of guidelines for banks to revitalise distressed assets with a view to bring in more urgency and discipline to deal with stressed assets. The regulatory dispensation which allowed the restructured assets subject to meeting stringent norms to be classified as standard assets has been withdrawn (except in the case of infrastructure loans during the execution period subject to conditionalities in recognition of several uncertainties in project execution in India). The approach is to create a central data base in RBI for large loans to end information asymmetry and enable speedy coordinated action by lenders through formation of Joint Lenders' Forum (“JLF”) which has to formulate Corrective Action Plan (“CAP”), all within defined time lines, provide flexibility and incentives for those who recognise and deal with stressed assets early, havea more equitable sharing of burden by promoters, impose higher cost on wilful defaulters and uncooperative borrowers, permit flexible structuring and refinancing of long term project loans to infrastructure and core Industries (5/25 scheme) so that banks could fix a realistic repayment schedule based on expected cash flows and enable banks to have under the Strategic Debt Conversion (“SDR”) Scheme the right to convert their outstanding loans into a majority equity stake if the borrower fails to meet conditions stipulated under the restructuring package. These steps should result in considerable

improvement in early detection of distress and speedy corrective action as RBI is very keen that banks grapple with their stressed assets in an effective and speedy way and is therefore monitoring this process very closely. In fact the RBI has set a deadline of March 2017 for banks to clean up their balance sheets.

However for effectively dealing with stressed assets a bankruptcy legislation would be required. A "Bankruptcy Code” based on a critical review of the existing laws and practical aspects of bankruptcy and insolvency in India has been formulated. The absence of a unified mechanism sometimes leads to multiple processes of debt recovery being initiated against one debtor. The draft Bankruptcy Code shifts from a recovery regime to resolution based framework and time bound resolution process and contemplates having professional agencies to manage insolvency process. It contemplates setting up of the Insolvency and Bankruptcy Board of India consisting members appointed by the central government and representation from the Ministry of Finance, Ministry of Corporate Affairs and the Reserve Bank of India. The mandate of this Board would be to register and monitor performance of insolvency professional agencies, insolvency professionals and information utilities and collection, maintenance and dispensation of records relating to insolvency and bankruptcy cases. However the legislation would need to be backed by speedy functioning of the agencies involved to be able to fulfil the intent behind the legislation. Long drawnjudicial processes have frustrated many well intentioned legislations in the past.

In a bid to facilitate banks cleaning up their balance sheets RBI has decided to permit FPIs to acquire NCDs/bonds, which are under default, either fully or partly, in the repayment of principal on maturity or principal installment in the case of amortising bonds subject to certain conditions. The revised maturity period of such NCDs/bonds, restructured based on negotiations with the issuing Indian company, should be three years or more.

RBI has recently taken various steps to improve the operations of Securitisation Companies (“SC”s) / Reconstruction Companies (“RC”s) as also to make transactions between them and banks more transparent. The guidelines were further strengthened with floors on transaction prices and prevention of collusions with promoters in buy back deals. The modified guidelines mandate SCs / RCs to have an increased skin in the game by making it compulsory for them to invest and hold minimum 15% (as against 5% hitherto) of the security receipts issued


12


by them. Some of the other measures to revitalise the SCs/RCs are increase in FDI limits from 49% to 74% under the automatic route and facilitating debt consolidation by these entities.

Capital Requirement of PSBs

There are several estimates of capital requirements for the PSBs under Basel III. The variations are on account of differing assumptions regarding credit growth, increase in NPAs, internal accrual to capital etc. As per RBI's estimate PSBs will require Rs 4.15 trillion of capital out of which common equity would be to the tune of Rs 1.4 to Rs 1.5 trillion. Government's reported estimate of common equity is to the tune of Rs 2.4 trillion. P J Nayak Committee's estimate (Report of The Committee to Review Governance of Boards of Banks in India) is in the range of Rs 2.10 trillion of Tier I capital (Government's share at Rs 1.26 trillion) to Rs 5.87 trillion of Tier I capital (Government's share at Rs 3.50 trillion) depending on the level of NPAs. These estimates however do not factor in the add-on on account of the risk based supervision framework, the fact that banks voluntarily operate at a higher capital level due to peer/market pressure, significant increase in credit intensity on shift to manufacturing due to "Make in India" initiative of the Government of India and the designation of SBI as Domestic Systemically Important bank (“D-SIB”).

The additional capital requirements would be large even after Government's commitment to infuse Rs 700 billions between 2015-16 to 2018-19. Raising capital would present several challenges on account of the following:

(i) Due to asset quality woes, profitability of banks, particularly that of PSBs, as reflected in NIM, RoA and RoE has been steadily coming down (RoA and RoE declined to 0.7% and 8.5% respectively as of September,2015 from 0.8% and 9.3% as of March,2015) due to lower growth in earnings and higher provisions and write offs. This is reflected in the Capital Adequacy Ratio steadily coming down (The ratio declined to 12.7% from 13% between March and September,2015 though the ratio is still well above the minimum required as per the implementation schedule of Basel III). The declining profitability has resulted in lower internal accrual to capital and hence greater reliance on external sources. Due to low valuation of PSBs' equity, capital raising isgoing to be a costly affair.

(ii) There are regulatory constraints on Life Insurance

and Pension funds to invest in the Basel III compliant capital instruments because of higher risk. This would mean reliance on markets for Additional Tier I and Tier II bonds for which investors may lack appetite due to unfamiliarity with such instruments having conversion/write down features related to certain triggers. This may result in common equity requirement going up.

(iii) Government will find it hard to meet its obligations for infusing equity in PSBs which would be large in view of the 51% floor for its share holding in PSBs, due to budgetary constraints and the need for fiscal consolidation

For managing the capitalisation of PSBs smoothly which is very vital as the economy picks up momentum, it is important not to have a "as we go along" approach. It would be desirable that an estimate for capital requirements is made based on a stringent stressed scenario on the style of US stress tests (which are used by US regulators to determine the capital requirements) and a realistic estimate is made as to how much can the Government contribute and strategies devised for raising additional capital. There are possible solutions for easing the burden on Government in the medium term. One is to lower the floor of its holding in PSBs (in fact a proposal to lower the floor to 33% made a few years back did not progress) and have legislative protection to keep the banks in the public sector. This is however a political economy question and Government may be unwilling/unable to go this route. The second alternative is to go for a Holding Company structure as proposed in the P J Nayak Committee Report. While their recommendation is from a limited perspective of creating a buffer between Government and the PSBs, this recommendation is in sync with the recommendations of a RBI Committee on financial stability considerations. It may be noted that such a structure already exists in the system as it was a requirement under the New Bank Guidelines of 2013. From the perspective of capital raising Holding Company structure helps Government in as much as Government's contribution can be leveraged by multiples depending upon the structure. In fact a two tier Holding Company structure could be considered-one for each PSB where the bank and all its subsidiaries/ affiliates are held directly by the Holding Company and one an overall Holding Company which will hold all the Bank Holding Companies. This has an advantage of preserving the identity and value of the individual PSB groups while de-risking the banks in the groups to a considerable extent from the Group risks and allowing greater leverage of Government’s



capital contribution thus reducing the burden on the Government significantly. An ideal mix would be to have both the features- floor for Government holdingwell below 51% and a two tier Holding Company structure.

Reforming the Public Sector Banks and Developing Human Resources

The PSBs have contributed significantly in expanding the outreach of banking geographically and sectorally. They have also been instrumental in providing credit support to the infrastructure sector, which is a very vital need of the country in its quest for economic growth. However the PSBs' financials have deteriorated significantly in recent years confronted as they are with elevated levels of stressed assets and declining profitability. This has as much to do with their portfolio choice (substantial exposure to infrastructure sector) as with governance issues.

The "Report of The Committee to Review Governance of Boards of Banks in India" (P J Nayak Committee Report) has made several suggestions for change in governance, management, and operational and compensation flexibility for the PSBs.The recommendations are for the Government to eventually, through a transition process, transfer its stake to a Holding Company (Bank Investment Company-BIC),turn into a financial investor with the responsibility on the BIC to manage returns on Government's share holding and completely transfer the regulatory powers to the RBI and governance to the empowered Boards of banks. In this context it needs to be noted that RBI is indeed the sole regulator of banks but the reality is that Government being the owner has had the inclination to step into the regulatory shoes. This goes against the basic tenet of the regulatory philosophy in India that prudential regulations have to be ownership neutral. This also puts the PSBs in a corner because the burden of carrying out the largely well meaning agendas of the Government falls on PSBs which may carry undue risks but without any compensation from the Government. Large exposure to infrastructure sector is a case in point as Government could not support these exposures by granting various approvals in time. The other recommendations relate to increasing the length of PSB CEO's tenures, breaking up the position of Chairman and CEO, bringing in more independent professionals on bank boards and empowering the boards with the task of selecting the CEO, becoming more selective in cases that have vigilance angle etc. One of the key recommendations is that Government should bring down its holding to

below 50% so that PSBs will be freed from external vigilance emanating from the Central Vigilance Commission, Right to Information Act (RTI) and from Government constraints on employee compensation.

In response the Government has formulated a seven point action plan named "Indradhanush" . The salient reforms under this package involved a restructuring of the appointment process of whole-time directors and non-executive chairmen of the PSBs while the bifurcation of the post of Chairman and Managing Director of PSBs into Managing Director and Non-Executive Chairman was done in December 2014. A fresh plan for capitalisation of PSBs, following a performance and a need based approach, to the tune of Rs 700 billion till 2019 was introduced. Further a framework for accountability for PSBs was also introduced based on Key Performance Indicator (KPI) that would measure the performance of PSBs using quantitative and qualitative indicators. Thus while substantial reform measures have been introduced, they fall short of the Committee's recommendation of (a) Government bringing its equity holding to below 50% for creating a level playing field with private sector banks in the matter of external vigilance, RTI and employee compensation and (b) Government turning into a financial investor and distancing itself from governance completely as no such intent is indicated.

Developing human resources in PSBs is another major challenge. There is a lack of adequate skills in some major areas such as in project appraisal (the stress in infrastructure exposure is a manifestation of the fact that most PSBs do not have adequate skills in this area and yet have taken exposures in large projects),risk management and technology. So while the in- house talent needs to be groomed with intense and focussed training and secondments, there is also a need to supplement this with lateral induction of specialists from the market. The PSBs are also facing a vacuum of experienced and skilled hands at middle and senior levels due to retirements-this is a direct fall out of the squeeze on recruitment earlier. This situation again requires a very measured response. Banks should undertake skilling of personnel through intense efforts in training. Another major challenge PSBs will face is of their skilled and core officers moving in substantial numbers to greener pastures with new banks coming up given the very large differential in compensation and also perhaps attracted by less rigid bureaucracy in the private sector banks and other financial institutions. All these require a review of HR policies and crafting an action plan.



Banking Structure For increasing competition in the banking system as a part of financial sector reforms initiated in 1991, 10 universal banks in private sector were licensed in 1993and again 2 in 2003 followed by 2 more in 2013. Till recently the norm was universal banks. RBI did experiment with small banks (Regional Rural Banks and Local Area Banks) for a while for pushing the financial inclusion agenda. However as the experience with small banks was not satisfactory, there was no policy push to license more small banks. As the financial inclusion agenda gained more importance, the need for small banks was again felt notwithstanding the past experience. In a paper on "Banking Structure in India-The Way Forward" issued in August ,2013 RBI had, among other things, advocated (a) allowing banks for niche segments for taking care of specialised banking needs through differentiated licensing (b) that for encouraging inclusion to reach out to the excluded and under banked regions, Small Banks may be the preferred vehicle and (c) block licensing to be replaced by on tap licensing to enhance competition and bring in new ideas and variety into the system. These recommendations together with the recommendations of another committee appointed by RBI [ "Committee on Comprehensive Financial Services for Small Businesses and Low Income Households"] have led to the licensing of two categories of specialised banks (11 Payment Banks and 10 Small Finance Banks) to push the agenda of financial inclusion. While the Small Banks are likely to complement the universal banks in pushing the financial inclusion agenda in the near future, Payment Banks which are designed to offer deposit accounts and remittance facilities (these cannot lend) may give stiff competition to universal banks over a period of time as these would be highly digitised, would be enabled with technology and have lower operational costs and promoters with deep pockets in quite a few cases. Moreover these banks will not have any legacy issues, would come with agile systems and delivery models and would not be held hostage to industry wide Agreements and wage limits. While the universal banks have also gone for pre-paid instruments and mobile wallets in view of proliferation of smart phones, changing consumer preferences and competition from wallet providers, they will have to beagile to not let the Payment Banks snatch sizeable lead over them. Some banks have therefore tied up with payment banks and are working on tablet and mobile applications. So the banking system is in for larger numbers and a variety of banks entering the scene as RBI is likely to put bank licensing on tap in near future. Therefore there would be more intense competition

than in the past. This should be beneficial for the system and consumers and the financial inclusion agenda.

As regards foreign banks, RBI's preferred position is the Wholly Owned Subsidiary (“WoS”) form as this form of presence provides better regulatory control on operations of foreign banks. This is the preferred format in many countries now in the wake of the financial crisis. However RBI has not required the existing foreign banks to mandatorily convert into WoS though would expect them to do so voluntarily. So far there is hardly any enthusiasm shown by the existing foreign banks. The reason is that in terms of business opportunities while they hardly gain anything by converting into WoS (as India, unlike many countries, had allowed foreign bank branches to have the same business opportunities as domestic banks), the advantage from such conversion of virtually having no constraint on expansion is not attractive, rather cumbersome, to them due to the obligation to establish presence in rural areas. It is to be seen howRBI reacts to this though it is quite possible that its patience eventually runs thin on this issue.

Financial Inclusion

Financial inclusion is a top priority for the RBI and the Government of India. It is as much a welfare measure for the economically weak and underprivileged as is an imperative for economic growth. The essential components of financial inclusion are simple and easy to understand safe saving products, remittance facilities, entrepreneurial credit and advice, ability to borrow to tide over personal needs like marriage and illness etc, and availability of life and health insurance, all at affordable cost. Moreover it is important that there is easy access to these products. Banks therefore have to, while providing these products, establish their physical presence by a mix of brick and mortar branches and business correspondents. Since the transactions are low ticket, and delivery would entail higher cost, the way to make financial inclusion ultimately profitable for banks is to reduce the delivery cost by leveraging technology. Banks have been using business correspondents who use hand-held devices. With over 900 million mobile connections in the country, mobile banking provides a very effective channel for financial inclusion. In addition, these inexperienced customers will need protection.

RBI encouraged banks to pursue Board approved 3 year Financial Inclusion Plans (“FIP”) since 2010. The Prime Minister's Jan Dhan Yojana (“PMJDY”) launched



in August,2014 has reinforced the inclusion agenda. Accounts have been created for much of the excluded population to which a variety of financial services such as accident and life policies and sending Direct Benefits such as scholarships, pensions and subsidies to bank accounts have been attached. The salient features of RBI's inclusion plan are: allowing BusinessCorrespondents, drawing up and closely monitoring the FIPs, licensing of 2 universal banks in 2014 identified on the basis of their business plans to achieve financial inclusion; 11 differential licenses for Payment Banks and 10 licenses for Small Finance Banks (“SFBs”) catering to small payments/finance needs in the economy; simplification of KYC guidelines for low risk customers; and revising the Priority Sector Guidelines with a specific focus on small and marginal farmers and micro-enterprises etc. RBI also set up a committee to work out a medium term (5 years) measurable plan for financial inclusion which has recently submitted its Report.

The financial inclusion agenda is going to be at the centre of policy and execution thrust for considerable time.

Use of Technology

Greater use of technology is very important for all banks and more so for the PSBs. All PSBs are now on CBS platform and offer anywhere banking. Some also offer basic banking transactions on mobiles and digital cash through wallets. However banks, particularly PSBs now have to leverage technology for building data warehouses and do data mining and analytics. Data analytics at the back end are playing animportant role in customer acquisition and retention, developing business models and delivery channels, product customisation and risk management.

RBI is now working on next payment vision document. Retail payments in next few years are likely to be driven by mobile based systems riding over more than 900 million mobile connections and financial inclusion drive. With over 946 million Aadhar cards, Electronic Benefit Transfer (“EBT”) would promote an efficient payment system.

These areas will receive a lot of focus and resources in the coming times.

Financial Sector Legislative Reforms Commission (“FSLRC”)

The FSLRC Report is one of the most influential

and well researched Reports which will have a transformative impact on the Indian financial system and regulatory architecture. It attempts to create a legal framework for governing the financial sector by a non- sectoral, principles based approach and restructure existing regulatory agencies and create new agencies where needed. Its contents can be split into two parts: (a) those not requiring legislation- the non-legislative aspects of the recommendations are relating to governance enhancing measures on consumer protection and greater transparency in the functioning of financial sector regulators and (b) legislative recommendations relating to re-writing the laws.

There is much in the Report that has found ready acceptance i.e. broadly the non legislative measures. All regulators have agreed to implement these measures- for example RBI has put the timelines for various regulatory approvals on its website.

In fact quite a few of the non-legislative recommendations were already in operation, for example public consultation on draft regulations.

The legislative part is contentious and would require further consultations and careful evaluation of the cost-benefit calculus. Some proposals are more readily acceptable like setting up of Resolution Corporation. Some of the contentious issues have reportedly been sorted out between Government and RBI -like composition of the Monetary Policy Committee (“MPC”) and setting up of the Public Debt Management Agency (“PDMA”). But quite a few contentious issues remain. For example the setting up of a Financial Authority (“FA”) having regulatory jurisdiction over all areas except banks and systemically important payment and settlement systems which will continue to be regulated by RBI. Moving the regulation of NBFCs from RBI to FA will result in the fragmentation of credit markets and increase the risk of regulatory arbitrage. There is apparently no logic in this and would adversely impact financial stability. Similarly the proposal to transfer regulation of all trading- government securities

The current policy actions for the banking sector to deal with vulnerabilities are

predicated on the broad objectives as laid down by Governor Rajan when he assumed

office in September, 2013



market, money market and forex market which arehitherto regulated by RBI will have a negative effect on development of these markets at this juncture and may hamper the conduct of monetary policy as the major participants in these markets are banks. Moreover the benefits of setting up of FA is not backed by any evidence because both setups -unified regulators as well as multiple regulators failed during the crisis. So it is more worthwhile to bring improvements in the current architecture which hasfunctioned reasonably well rather than change it so fundamentally for undemonstrated perceived benefits. The idea of FA is apparently based on the need not to leave cracks in the regulations. On paper it certainlysounds very attractive but the presumption that therewould be synergy and perfect coordination within the regulatory behemoth that FA would be is not necessarily the reality as is so well documented in financial journalist Gillian Tett's recent book "The Silo Effect". Moreover it may lead to group think, dilution of specialisation, and greater vulnerability to political dominance. Thus it is clear that the legislative part of FSLRC recommendations requires extensive debate and this debate will be the dominant theme for quite some time in the coming months. Whatever be the outcome of this debate, it will shape the financial sector decisively and profoundly.

Conclusion

There are formidable challenges to be met like cleaning up the balance sheets of PSBs; restoring their profitability; meeting their capital requirements; and carrying out their governance reforms and developing human resources. At the same time there would be much greater competition with the entry of large number and variety of banks and increasing digitisation of products to meet customer preferences. This will provide plenty of opportunities for banks to innovate their business models. This would be beneficial to the system and consumers and the financial inclusion agenda. The coming period will also see increasing role of technology for building data warehouses, data mining and use of data analyticsin customer acquisition and retention, developing business models and delivery channels, product customisation and risk management. The debate on FSLRC legislative recommendations would occupy the centre stage and the outcome will alter the financial sector profoundly and decisively.

The coming years with so many challenges and opportunities are going to be very challenging and exciting for the banking sector.

About Author

Mr. Sinha joined the Firm as Senior Advisor (Financial Services) in 2014. Prior to joining CyrilAmarchand Mangaldas, he was associated with the RBI for a period of over 37 years and also held the post of the Deputy Governor in the RBI. During his tenure he was looking after Banking Operations & Development, Non-Banking Supervision, Urban Banking, Information Technology, Risk Monitoring and certain internal functions like Expenditure & Budgetary Control, etc. At Cyril Amarchand Mangaldas, he focuses on policy issues and also acts in an advisory capacity relating to banking and non-banking financial issues on both regulatory and transactional matters. Some of his core area of expertise includes banking sector M&A, foreign bank licensing regime and foreign bank subsidiarisation, prudential norms, and monetary policy. He is regarded as one of the most knowledgeble professionals in India in this field. He regularly speaks at international forums.


Mr. Anand SinhaSenior Advisor, Financial Services at Cyril Amarchand Mangaldas & former Deputy Governor of the Reserve Bank of India (RBI)

18


Masala Bonds - Spicy or Not?

History and Context to a Masala Bond?

Globally, there have been several debt instruments which are either (i) issued by onshore issuers and are denominated in the domestic currency but payable inUS dollars and sold to investors offshore and listed outside of the home jurisdiction; or (ii) issued by offshore issuers but are denominated in the domestic currency and sold to investors and listed in the home jurisdiction of such currency. These have been mainly used to provide issuers with access to another capital market outside of their own to raise capital.

Interestingly, the name of the bonds conjures up a theme immediately identifiable with the country or issuance. So we have seen dim-sum bonds from Hong Kong, Samurai bonds from Japan, Kangaroo bonds from Australia and Bulldog bonds from the United Kingdom. In that context welcome to Masala Bonds from India! Turning back in time, the first such currency hybrid debt instrument, was actually the bonds issued by Asian Development Bank in 2003 which was the first Rupee denominated bond issuance by a multilateral institution in the domestic Indian market. Fast forward to 2013 - 2014 and we see that International Finance Corporation did two similar transactions, a Rupee 20 billion Rupee denominated US dollar settled bond issue in two tranches and listed on the London Stock Exchange and the Singapore Exchange through their international global medium term note programme (the original Masala Bonds) and a Rupee 6 billion issuance of domestic bonds in four tranches and listed in India (the Maharaja Bonds). This was significant as in the current economic environment it signalled their support for India and set a benchmark for pricing (albeit above the Indian sovereign ceiling rating of BBB- internationally). The RBI in its first bi-monthly monetary policy for financial year 2015-16, put forward its intention to expand the implement the concept of Masala Bonds to permit Indian corporates to issue such bonds under an appropriate regulatory framework. The RBI in June 2015 came out with a draft framework for “Rupee

Linked Bonds Overseas” which following public comment and substantial revision was finalised through the “External Commercial Borrowing (ECB) Policy – Issuance of Rupee Denominated Bonds Overseas” Circular dated 29 September 2015 (“Rupee Circular”) and which was finally incorporated in the Master Direction dated January 1, 2016 as a separate route for fund raising under the external commercial borrowing ("ECB") framework. As Prime Minister Modi stated in his address in Wembley Arena during his official visit to the United Kingdom in November 2015 referencing James Bond, the fictional British secret service agent, to illustrate his point about the proposed Masala Bond to be launched by Indian Railways. "Bond reminds me of James Bond. Bond also reminds me of Brooke Bond tea. James Bond provides entertainment and Brooke Bond invigorates us." So what does a Masala Bond do?

Understanding the Instrument

Broadly speaking, under Indian foreign exchange laws due to capital controls, Indian corporates may only raise foreign currency borrowings through the ECB framework. This has also been substantially revised recently in November 2015. The ECB framework restricts the types of corporates that can borrow under ECBs, how much they can raise annually, the interest rate that can be charged, the types of lenders, the use of proceeds, convertibility and the security that can be given (amongst other things). In this respect, please see our article on the recent changes to the ECB framework. However the Rupee Circular provides a more liberalised framework for foreign currency borrowing for an Indian corporate in general. Any corporate or body corporate as well as Real Estate Investment Trusts and Infrastructure Investment Trusts are eligible borrowers and any investor from a Financial Action Task Force (“FATF”) compliant jurisdiction is a permitted lender. This could be companies, pension funds, sovereign wealth funds, partnerships, pension funds, insurance companies, other regulated entities, individuals and anyone from or incorporated in a FATF jurisdiction. Overseas branches of Indian banks however cannot lend, although if underwriting, have a 6 month period



to sell down to 5% of the issue size. Under the automatic route the amount will be equivalent of USD 750 million per annum. Cases beyond this limit will require prior approval of the RBI. The minimum maturity period is 5 years (unlike the other types of borrowings under the ECB Framework which prescribes a minimum average maturity). While it has been clearly spelt out that there should be no optionality before 5 years, there is no clarity on amortisation. A plain reading of the Rupee Circular would indicate that amortisation, if any should start after the 5th year. There is no pricing restriction unlike foreign currency borrowings under the ECB framework which has LIBOR+300 basis points cap for 3-5 year loans, LIBOR+450 basis points cap for a 5 year loan and LIBOR+ 500 basis points cap for a 10 year loan. It should be noted that the RBI has stated that the pricing is “subject to review based on the experience gained”. So we may see change on this in the future. The Masala Bonds can be listed or unlisted, secured or unsecured or convertible.

Whilst there is a restricted list in terms of the end use, the end use prescriptions are more liberal than the other forms of borrowings under the ECB framework. the proceeds of Masala Bonds can be used for refinancing Rupee debt, working capital or general corporate purposes. Proceeds cannot be used for real estate activities other than for development of integrated township or affordable housing projects, investing in capital market and using the proceeds for equity investment domestically, activities prohibited under Indian foreign direct investment guidelines, purchase of land or on-lending for any of the above.

Investors can hedge their exposure in Rupee through permitted derivative products with AD Category - I banks in India or through branches or subsidiaries of Indian banks abroad or branches of foreign bank with Indian presence on a back to back basis. Since foreign currency is coming into India and payments whilst calculated in Rupees, still have to be made in a foreign currency such as US dollars to bondholders (as the Rupee is not a freely convertible currency), conversion while required to be made at the “market rate on the date of settlement for the purpose of transactions”,the conversion will actually be made on a T-2 basis, as the issuer will have to convert rupees in the spot market two days in advance of the coupon and principal payment dates as such spot transactions will be settled on T+2 basis which will be the payment dates.

For other provisions not appearing in the Rupee Circular, the provisions of the ECB framework apply and to that extent there is an overlap. Authorised

dealer banks in India are licensed by the RBI to deal in foreign exchange. Part of their overall responsibility is to ensure the foreign exchange regulations of the RBI are complied with on a transaction by transaction basis in the specific scenarios for which power has been delegated to them. In the context of Masala Bonds, authorized dealer banks have been allowed to permit charges to be created on immovable assets, movable assets, financial securities and corporate or personal guarantees to be issued in favour of overseas lender to secure Masala Bonds, subject to satisfying themselves that: (i) the Masala Bond is in compliance with the Rupee Circular, (ii) there exists a security clause in the documents for the Masala Bonds requiring the Indian corporate to create charge, in favour of overseas lender; and (iii) if any consents from existing lenders of the company are required, that they have been obtained. It should be noted that in relation to security enforcement in respect of immoveable property, it cannot be sold or transferred to a person resident outside India (e.g. overseas investor) and will have to be sold only to a person resident in India. However sale proceeds can be repatriated to liquidate the Masala Bond. On enforcement of a share pledge, transfer of the shares has to comply with the overall foreign direct investment policy of India such as provisions relating to sectoral caps (i.e. maximum percentage of foreign investment permitted in that industry sector) and pricing (the valuation of the shares on transfer, by way of pledge enforcement has to, broadly, be in accordance with the market value at the time).

How it Differs from Other Offshore Debt raised by Indian Companies

Indian companies in the infrastructure sector have huge infrastructure requirements. Many infrastructure companies previously raised ECB loans or bonds for 5 years and which was permitted under the old ECB framework. Under the new ECB Framework, infrastructure companies are no longer permitted to raise 5 year foreign currency denominated loans. They can only raise 5 year Rupee denominated foreign currency payable loans and Masala Bonds. This will lead to the Masala Bond route becoming more attractive in respect of 5 year money requirements. Further, it is also a very important route for non-banking financial companies which are now only allowed to raise Rupee denominated foreign currency borrowings

Tax

Section 194LC of the Income Tax Act 1961 which


20


provides the lower withholding tax rate of 5% for long term bonds uses the term “borrowing in foreign currency from a source outside India”. This has created uncertainty as to whether the Masala Bond, being a Rupee denominated instrument albeit with payments being made in foreign currency, falls within the ambit of Section 194LC with the benefit of the reduced withholding tax rate. If it does not then substantially higher rates of up to 40% may apply depending on the entity type. As Indian issuers customarily according to the documentation have the requirement to gross up for any tax liabilities, this makes the product uneconomic for them from a pricing perspective. The Government of India, Ministry Of Finance, Central Board of Direct Taxes consequently issued a press release dated October 29, 2015 (“Press Release”) clarifying that withholding tax at the rate of 5%, would be applicable on interest income from Masala Bonds in the same way as it is applicable for off-shore dollar denominated bonds.

In terms of capital gains tax, the Press Release stated that the capital gains, arising in case of appreciation of Rupee between the date of issue and the date of redemption against the foreign currency in which the investment is made, will be exempted from capital gains tax. For this to become law, the necessary changes to the Income Tax Act will be proposed by way of amendments through Finance Bill, 2016. However it does not deal with appreciation due to the instrument per se going up in price (irrespective of Rupee appreciation) or capital gain due to trading during the tenor of the Masala Bonds. It assumes that the notes are purchased by investors on issuance and held by them until maturity and redemption which is often not the case in international bond markets.

Documentation

For a listed Masala Bond, the documents would broadly be the following: (i) an offering circular or prospectus which is the marketing document used by the company to sell the Masala Bonds to potential investors containing business information about the issue and the issuer (including financial statements) and a description of the instrument, tax disclosure,selling restrictions as well as potential risks for investors; (ii) subscription agreement between the issuer and the managers to the issue setting out the terms upon which the managers agree to purchase or procure purchasers for the bonds; (iii) trust deed between a financial institution as ‘trustee’ and the issuer whereby trustee is appointed trustee for the bondholders to protect their interests and containing the terms of the instruments; (iv) agency agreement

where the issuer company appoints agents to carry out particular functions on its behalf on respect of the Masala Bonds including issuing and redeeming bonds, handling payments due on the bonds, making calculations on the Masala Bonds and interfacing with the clearing systems and with bondholders in respect of the administrative functions; (v) if the Masala Bonds are secured, then security related documents, such as a mortgage deed or deed of hypothecation, share pledge, guarantees, escrow agreements and other charge related documents. There will be other letters and documents in relation to the closing of an issue of Masala Bonds such as Auditor’s Comfort Letter on financial statements, documents required for the admission to listing of the Masala Bonds, corporate authorisations, closing certificates and legal opinions from counsels.

Benefits and Challenges for the Instrument

The instrument provides much flexibility to Indian corporates in a time where corporate leverage is high and the country has great ambitions. From a macro economic perspective, this is a welcome move and perhaps a “dipping of the toe” into the ocean of the medium to long-term thrust to move to full capital account convertibility for the Indian Rupee by the RBI. If successful and actually traded on offshore stock exchanges, it can lead to a benchmark curve being constructed for pricing which could also assist the Rupee corporate bond market onshore which for many years has been plagued with little liquidity and trading, no market making function and therefore challenging price discovery. It can create a new investor type and lead to additional foreign currency flow which is required to deliver on India’s large infrastructure build out targets. Many Indian companies between 2012 to 2015 have struggled with redemptions of their previously issued foreign currency convertible bonds which were due for redemption as due to devaluation in the currency from 2007 onwards, the bullet repayments ballooned by20-30%. This caused financial stress to many companies, several of whom have had winding up petitions filed against them or had injunctions against

Masala bonds are a flexible product for investor and all types of issuers and

permit multiple structures and should be considered as part of any suite of capital raising instruments



dealing with their assets or had to restructure. This product removes the exchange risk for Indian issuers. But ultimately the risk needs to lie somewhere and with Masala Bonds, the foreign exchange rate risk lies with the investor as whilst they receive foreign currency/US dollar payments, the calculations of the amounts payable are by reference to underlying Rupee amounts. Are investors willing to take this risk as well as credit risk? How do they price this in respect of a currency which is not traded globally, although there is an offshore non-deliverable forward Rupee market. There is a limited onshore market for Rupee hedging even though the Rupee Circular permits this and from what we understand commercially, the cost of hedging is expensive. Investors need to not just take a view on an issuer’s repayment and credit risk but more macro economic factors such as GDP, inflation,policies and political or governmental risks.

Where is the Market Now?

The ability to use the proceeds of Masala Bonds to refinance Rupee debt is an enormous advantage to assist with reducing leverage in the Indian banking system and the non performing asset exposure. Given there are no pricing restrictions, not just large cap but mid to small cap companies can also utilise this product to raise foreign currency sourced debt. Companies can also use it to expand their investor base. There are several deals which were marketed in November 2015 and are public knowledge such as issuances by National Thermal Power Corporation and Housing Development Finance Corporation. However the main issue preventing closing seems to be one of pricing and the difference between issuer and investor expectations. The next few months will be interesting to see if these deals managed to set the benchmark issuance for India as at the time of printing, global markets seem volatile, but we will also have the financial budget in February 2016 which could provide a further positive boost for investors and issuers to proceed with a Masala Bond completion.

About Author

Niloufer has over 19 years experience in capital raising instruments globally. Her practice covers a wide range of corporate, banking, debt capital markets, regulatory advisory, structured investments, derivatives and insolvency/restructuring domestically and internationally. She advises large corporates, banks, funds and investors. Over 12 years of her career, which started in 1996 was at Linklaters and Morgan Stanley in London covering infrastructure and real estate sectors across all products. This gives a deep international and multi-jurisdictional experience as well as commercial understanding. Prior to joining Cyril Amarchand Mandaldas she was managing a team insolvency restructuring a US$ 10billion Lehman real estate loans and derivative portfolio. Over her career she has advised on transactions aggregating over US110bn in deal value. She is an advocate in India and a qualified solicitor of England & Wales.


Ms. Niloufer LamPartner


The Republic of India has exchange control regulations in place which, inter alia, regulate offshore borrowing by persons resident in India (commonly referred to as external commercial borrowings (“ECBs”), as well as the giving of guarantees or security for such offshore borrowings. ECBs encompass in their scope loans and other credit facilities typically made available in the loan market, notes or bonds (whether convertible or not) and financial leases. The regulatory mandate for the Indian central bank, Reserve Bank of India (“RBI”), includes management and control of foreign exchange and it is the designated authority under the Foreign Exchange Management Act, 1999 (“FEMA”). Pursuant to its powers under sections 10(4) and 11(1) of the FEMA, the RBI recently announced a new set of guidelines for raising of ECBs (the “ECB Policy”). The new ECB Policy was notified on 30 November 2015 and came into effect on 2 December 2015 – the date on which the associated amendments to the Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations, 2000 and Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2000were published in the Gazette of India. The new ECB Policy is broadly along expected lines as the RBI had put up draft guidelines for public comments in September 2015.

Headline changes

The new ECB Policy has introduced a differential regime for ECBs based on the currency and tenor of the ECB. Under the new guidelines, ECBs are now classified into three categories: (a) Track I: being ECBs denominated in any freely convertible foreign currency but with a minimum average maturity of at least 3 or 5 years (depending on the amount borrowed); (b) Track II: being ECBs denominated in any freely convertible foreign currency but with a minimum average maturity of at least 10 years; and (c) Track III: being ECBs denominated in Indian Rupees but with a minimum average maturity of at least 3 or 5 years

(depending on the amount borrowed).Long term ECBs denominated in a foreign currency – Track II ECBs - have for the first time been recognised as a separate category under the ECB Policy.

The new guidelines provide for a much liberalised regime for Track II and Track III ECBs with very limited restrictions on the end-use for the proceeds raised from such ECBs – in marked contrast to the tight end-use restrictions under the previous ECB Policy. As for Track I ECBs, which has historically been the most popular form of offshore borrowing by Indian companies, the new ECB Policy has brought in certain changes – most notably the exclusion of companies engaged in the infrastructure and service sectors from raising such ECBs as well as a reduction in the applicable all-in-cost ceiling offset by a relaxation in the end-use restrictions previously applicable to such ECBs.

Another noteworthy change is the expansion of the universe of entities that are eligible under the ECB Policy to be a lender for ECBs. Insurance companies, pension funds, sovereign wealth funds, financial institutions located in International Financial Services Centres in India and prudentially regulated financial entities will now qualify as eligible lenders under the new ECB Policy. This adds to the list of entities that were previously eligible, which includes international banks, multilateral financial institutions and government owned financial institutions, export credit agencies, suppliers of equipment, foreign equity holders (whether direct or indirect) and overseas branches and subsidiaries of Indian banks. Significantly, in what appears to be an attempt by the RBI to manage the exposure of overseas branches and subsidiaries of Indian banking companies, they are only permitted to participate in Track I ECBs under the new ECB Policy and have been expressly restricted from lending by way of Track II ECBs.

The definition of “all-in-cost” under the new ECB Policy now includes all fees, costs and expenses whether payable in a foreign currency or Indian Rupees with the only exclusions being commitment

Recent changes in the ECB Policy in India


24


fees, prepayment related fees or charges and any amounts paid to gross-up for tax withholding. Earlier, only fees, costs and expenses payable in a foreign currency counted towards the all-in-cost and any such fees, costs and expenses, if payable in Indian Rupees, were excluded.

Effective date of ECB Policy

As mentioned above, the new ECB Policy came into effect from 2 December 2015 and consequently, any facility or loan agreement entered into after 2 December 2015 must comply with the new ECB Policy. Given the scope and extent of the changes introduced by the new ECB Policy, it has affected potential financings that were under discussion as well as those which were in the documentation phase as the terms of such ECBs had been negotiated on the basis of the prevailing, and not the new, ECB Policy.

The new guidelines provide that where the facility or loan agreement has been entered into prior to the date on which the new ECB Policy came into effect, such ECB will be governed by the previous ECB Policy provided that the facility is drawn down in full by 31 March 2016. As a result, for any existing ECB that has been made available to an Indian company pursuant to a facility agreement entered into prior to 2 December 2015 and has an availability period extending beyond 31 March 2016, the availability period has been effectively curtailed by the new ECB Policy to 31 March 2016. Any draw down of such ECBs after 31 March 2016 will be in breach of the new ECB Policy so if the relevant borrower anticipates that it may be unable for whatever reason to draw down the available commitments in full by such date, it may wish to consider cancelling such commitments on that date in order to avoid incurring further commitment fees as per the terms of the facility agreement. Another impact of this time restriction for draw down is on ECBs where the conditions precedent to utilisation of the ECB are of a nature where satisfying those by 31 March 2016 may be challenging for the relevant borrower company.

The new ECB Policy provides for certain exceptions where eligible Indian companies may raise ECBs under the previous ECB Policy by entering into a facility or loan agreement until 31 March 2016. These exceptions are for: (a) ECBs raised for working capital by airline companies; (b) ECBs raised by consistent foreign exchange earners under the erstwhile USD10 billion scheme; and (c) ECBs raised for construction and development of low-cost affordable housing projects.

Track I ECBs

Companies engaged in the manufacturing or software development sectors, shipping and airline companies, units established in Special Economic Zones(“SEZs”) and Small Industries Development Bank of India are eligible to raise such ECBs. EXIM Bank of India may raise such ECBs but only with the prior approval of the RBI. As mentioned above, companies engaged in the infrastructure sector are no longer eligible to raise such ECBs and are permitted to only raise ECBs under Track II or III.

For ECBs for an amount up to USD50 million or its equivalent in the relevant currency of borrowing, the minimum average maturity must be at least 3 years and for all ECBs in excess of such amount, the minimum average maturity must be at least 5 years.

As regards end-use restrictions, in addition to what was permitted earlier, the proceeds of such ECBs may now be used for import into India, or sourcing from within India, of capital goods and for payment of the outstanding purchase consideration for capital goods already shipped or imported. Payments for technical know-how, services or on account of license fees, in each case, in connection with the import of capital goods are also now expressly permitted under the new ECB Policy. Refinancing of existing trade credit availed for import of capital goods has also been permitted. Shipping and airline companies raising such ECBs may utilise the proceeds only towards the import of vessels or aircrafts, respectively, and units in SEZs may use the proceeds only for their own requirements. Use of proceeds of such ECBs for general corporate purposes (including for working capital) is permissible only if the lender holds a prescribed minimum percentage of shares (whether directly or indirectly) in the borrower or is a group company and the minimum average maturity is at least 5 years (regardless of the amount raised).

The new all-in-cost limit applicable to such ECBs is 300 basis points per annum over 6 months’ LIBOR (or applicable bench-mark for the base rate), for ECBs with a minimum average maturity ranging from 3 to 5 years, and 450 basis points per annum over 6 months’ LIBOR (or applicable bench-mark for the base rate), for ECBs with a minimum average maturity in excess of 5 years. As noted above, these limits are 50 basis points less than those under the previous ECB Policy. In addition, the new ECB Policy caps the default interest that lenders may charge (whether for failure to



pay any amount when due or breach of any covenant) to 2 per cent. per annum over and above the contractual rate of interest.

Track II ECBs

In addition to all entities eligible to raise Track I ECBs referred to above, companies engaged in the infrastructure sector, holding companies, non-banking financial companies classified as core investment companies under applicable Indian regulations and real estate investment trusts (“REITs”) and infrastructure investment trusts (“INVITs”) established in accordance with applicable Indian regulations are also eligible to raise such ECBs.

The minimum average maturity for all such ECBs, regardless of the amount raised, must be at least 10 years.

As noted above, the new ECB Policy provides for very limited restrictions on the end-use for the proceeds of such ECBs. The proceeds may be utilised for all purposes other than: (a) real estate activities; (b) investments in the capital markets in India; (c) domestic equity investment; (d) purchase of land; and (e) on-lending to any other entity for any of the prohibited purposes referred to above. One notable consequence of these end-use restrictions is that in cases where the ECB is raised at the holding company level, the proceeds can be down-streamed by the holding company to its operating or other subsidiaries only by way of loans, and not by infusion of equity.

The all-in-cost limit applicable to such ECBs is a maximum spread of 500 basis points per annum over the applicable base rate. Default interest for such ECBs is also capped at 2 per cent. per annum over and above the contractual rate of interest.

Track III ECBs

In addition to all entities eligible to raise Track II ECBs referred to above, all companies classified as non-banking financial companies under applicable Indian regulations (“NBFCs”), all non-profit companies, non-government organisations, societies registered under the Societies Registration Act, 1860, trusts registered under the Indian Trust Act, 1882, co-operative societies registered under applicable State level laws, in each case, engaged in micro-finance activities (collectively, “MF Borrowers”), all companies engaged in research and development or training (but excluding educational institutions), all companies engaged in miscellaneous services

supporting the infrastructure sector, all companies providing logistics support and all developers of SEZs and national manufacturing and investment zones(“NMIZs”) are eligible to raise such ECBs.

The minimum average maturity conditions applicable to such ECBs are the same as those applicable to Track I ECBs, as set out above.

As for restrictions on end-use, NBFCs are permitted to use the proceeds of such ECBs only for: (a) on-lending to the infrastructure sector; (b) extending secured loans to entities in India for acquisition of capital goods or equipment; and (c) making available capital goods or equipment to entities in India by way of leasing or hire-purchase arrangements. Under the new ECB Policy, developers of SEZs and NMIZs may utilise the proceeds of such ECBs only for providing infrastructure facilities within the relevant SEZ or NMIZ being developed by them and MF Borrowers may utilise the proceeds for on-lending and capacity building. For all other borrowers eligible to raise such ECBs, the end-use restrictions are the same as those applicable for Track II ECB, as set out above.

Unlike the other two categories of ECBs, there is no all-in-cost limit prescribed for such ECBs. However, the ECB Policy does state that the pricing for such ECBs “should be in line with the market conditions”.

Some Observations

For Track III ECBs, the new ECB Policy appears to require all lenders (other than foreign equity holders) to mobilise Indian Rupees through swaps or currency trades undertaken only through a bank in India licensed as a Category I authorised dealer under applicable Indian regulations (“AD Bank”). As the offshore non-deliverable forwards market enjoys a fair amount of popularity with several entities, it remains to be clarified with the RBI whether this is mandatory requirement for ECBs denominated in Indian Rupees.

In addition, the existing standard form documentation for ECBs will need to be updated to reflect the payment mechanics of an ECB denominated in Indian Rupees as well as to cater to commercial issues arising

...a much liberalised regime for Track II and Track III ECBs with

very limited restrictions on the end-use for the proceeds...


26


the prior consent of the relevant borrower’s AD Bank in India.

About Author

Pranav focuses on Banking & Finance, Project Finance and Debt Capital Markets. He is qualified to practice both Indian and English law. With over 14 years of specialist experience in these practice areas, he has worked on a wide range of matters across various jurisdictions. Pranav worked for over 6 years in the banking group at Linklaters LLP and was based in London. He has advised a wide range of banks and financial institutions, multi-lateral agencies, governmental agencies and state owned enterprises and leading companies across a vast spectrum of financings - both in India and abroad.

as a result of any swaps or hedges entered into by the lenders in connection with such ECB. For instance, swap breakage or unwind costs may arise as a result of any failure by the borrower or other obligor to pay to the lenders an amount on its due date in accordance with the facility documentation. Such costs may also arise in case of any prepayment of the ECB, whether at the election of the borrower or otherwise. Lastly, any amendment to the amounts payable to the lenders or the dates on which such amounts are to be paid may also have an impact on the swap and hedge arrangements entered into by the lenders.

Whilst companies engaged in the infrastructure and services sectors have been expressly excluded from raising Track I ECBs under the new ECB Policy, the new ECB Policy also provides that an AD Bank may allow refinancing of an existing ECB (whether in full or in part) by raising of a new ECB provided the remaining maturity of the existing ECB is not reduced and the all-in-cost of the new ECB is less than the existing ECB. This raises the issue of whether such refinancing of an existing ECB may be undertaken by a company in the infrastructure sector or the services sector as any new ECB it raises in connection with such refinancing will in all likelihood fall within the Track I category.

The list of activities that qualify as “infrastructure” for the purpose of the ECB Policy has now been aligned with the activities recognised by the Government of India as comprising the infrastructure sector for the purpose of foreign direct investment. The noteworthy addition as a result of this is the inclusion of educational institutions but such alignment has also resulted in the exclusion of mining, refining and exploration activities which going forward, will not fall within the infrastructure sector under the ECB Policy.

NBFCs raising ECBs under Track III are only permitted to use the proceeds to on-lend to entities in the infrastructure sector, and not to other entities, or for asset finance for capital goods. Given that the typical client base of a NBFC will be much wider than entities in the infrastructure sector, this restriction effectively means that only infrastructure finance or asset finance companies within the wider universe of all NBFCs will raise Track III ECBs.

Lastly, the new ECB Policy does not significantly alterthe position in relation to the creation of security or the grant of guarantees (whether personal or corporate) in support of an ECB – which will continue to require


Mr. Pranav SharmaPartner

28


As the backlog of cases straining the Indian judicial system continues to grow, the system of arbitration as a dispute resolution mechanism has gained in importance as it provides speedy and direct resolution of disputes.

Arbitration as a mechanism for dispute resolution may have grown but it has not yet realised its full potential as speed and finality of the processes are being hampered by courts on a variety of grounds. Additionally, arbitral tribunals with no formal procedures have failed to act in a time-bound manner.

Various people have been looking at these problems to provide solutions including the Law Commission of India. There are also several judgments of the Supreme Court which lay down the law with regard to arbitration.

For instance, on the question of whether fraud is arbitrable, the Supreme Court in N. Radhakrishnan versus Maestro Engineer, reported in (2010) 1 SCC 72 held that an issue of fraud is not arbitrable. However, the Supreme Court in Swiss Timing Ltd. versus Organizing Committee, Commonwealth Games 2010, reported in (2014) 6 SCC 677 while dealing with an application for appointment of arbitrators under section 11 to adjudicate a dispute involving allegations of fraud, held that if an agreement between the parties before a civil court contains an arbitration clause, it is mandatory for the civil court to refer the dispute to arbitration. The Court in Swiss Timing Ltd. held that the judgment of the Supreme Court in N. Radhakrishnan is per incuriam. The Supreme Court has also held that the arbitral tribunal can inquire into issues of fraud while deciding disputes between the parties in World Sport Group (Mauritius) Ltd. versus MSM Satellite (Singapore) Pte Ltd. reported in AIR 2014 SC 968.

More recently, on the question of whether Indian

Recent Trends in Arbitration and Analysis of the New Arbitration Act

parties can have a foreign seated arbitration, the Madhya Pradesh High Court in its recent judgment in Sasan Power Ltd. versus North American Coal Corporation India Ltd. held that it was not against the public policy of India for two Indian parties to opt for foreign seated arbitration and that section 28 of the Contract Act, 1872 read with Exception 1 thereto would not operate as a bar to a foreign seated arbitration. The High Court also held that the court is duty bound to give effect to the intention of the parties and it is not in the interest of law or justice to permit the parties to take steps which may have the effect of nullifying the arbitration agreement and avoid arbitration. We understand that an appeal from the judgment of the Madhya Pradesh High Court has been filed in the Supreme Court. It remains to be seen how the Supreme Court considers the question of whether Indian parties can opt for a foreign seated arbitration.

The Law Commission in its report has considered many judgments of the Supreme Court and has given its recommendations to the government. Some of the suggestions deal with issues that have hampered the process of arbitration including challenges on grounds of public policy, interim injunctions and challenges in India in a foreign seated arbitration, time bound manner of arbitration, independence of the arbitrator and whether allegations of fraud are arbitrable.

The union cabinet chaired by the Indian Prime Minister had cleared the Arbitration and Conciliation (Amendment) Ordinance, 2015 to amend the Arbitration and Conciliation Act, 1996 and the President of India had signed the ordinance on October 23, 2015. However, in the winter session the Indian Parliament has passed the Arbitration and Conciliation (Amendment) Bill, 2015 and the President of India has given his assent on December 31, 2015. On the same day the President also gave his assent to the Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts Bill, 2015 which will deal with commercial disputes of a specified value (USD 1.5 million approx)



and may result in speedy resolution of disputes. Both the acts were notified in the official gazette on January 1, 2016 and have come into force from October 23, 2015. By way of section 26 therein, the Arbitration and Conciliation (Amendment) Act, 2015 has been made prospective with effect from October 23, 2015. However parties are free to agree on its application prior to the commencement of the Amendment Act. The amendments passed by the Amendment Act can be divided into four broad categories:

• which are in line with the judgments passed by the Indian courts• which dilute the effect of the judgments passed by the Indian courts• which are in line with international best practices and • which deal with timelines and fee structures

The first two categories will be dealt with together.

• The definition of international commercial arbitration [section 2 (1)(f)] has undergone a change in view of the principle laid down in the case of TDM Infrastructure versus UE Development reported in (2008) 14 SCC 271. In this judgment the Supreme Court held that when both parties are domiciled in India the arbitration between these parties will not be an international commercial arbitration. The change that has been brought in is in line with the judgment. The reference to the word ‘company’ has been deletedfrom section 2(1)(f)(iii). Therefore, even if management and control of an Indian subsidiary is exercised outside India, by a parent company then for the purpose of this provision the subsidiary will not fall under the definition of international commercial arbitration.

• A proviso has been added to section 2(2) which deals with the scope of the Act. By the proviso, sections 9 (interim relief), 27 (courts’ assistance in taking evidence) and 37 (appealable orders) have been made applicable to even arbitrations where the seat is outside India. Of course, parties in a foreign seated arbitration can opt out of this provision by an agreement. The amendment would help parties in a foreign seated arbitration to seek interim injunctions under section 9 in India and also file an appeal under section 37 of the Act against an order allowing or refusing to grant a relief. Therefore, Indian courts can exercise jurisdiction for interim measures even if the seat of arbitration is outside India. This amendment has found its way in the Act as a five judges bench in Bharat Aluminium versus Kaiser Aluminium reported

in (2012) 9 SCC 552 had held that the Act excludedparties in a foreign seated arbitration from seeking injunctions in India. Of course the decision was a step in the right direction as it did not allow challenges to a foreign award in India. However, the problem remained as an injunction order from a foreign court would only be enforceable if that country is a reciprocating territory. It would otherwise not be directly enforceable and a substantive suit would have to be filed creating a problem for a party to seek immediate protection. Also if an arbitrator passed an award in a foreign seated arbitration the award would have to be enforced in India and there was no practical remedy to enforce the interim injunction obtained by that party before the arbitral tribunal. Therefore, a change was brought in by this Amendment Act for interim measures in a foreign seated arbitration.

• Section 8 which deals with an application to the court to refer parties to arbitration, has been amended to include a two fold change. Firstly, the judicial authority has the power to refer any party to the arbitration agreement or any party claiming through or under that party to arbitration. Also the court will refer parties to arbitration unless it finds that prima facie there is no valid arbitration agreement. Secondly, in case an original agreement is not available with a party then a prayer can be made in an application under section 8 to request the other party to make it available. Before this amendment, an application under section 8 could not be filed without the original agreement or a duly certified copy thereof.

• In section 11 the reference to the phrase ‘Chief Justice or any person or institution designated by him’ has been substituted with reference to a court. This has been done to dilute the effect of the judgment in State of West Bengal versus Associated Contractors reported in (2015) 1 SCC 32. It was held in Associated Contractors that for the purpose of section 42 (jurisdiction) an application filed for appointment of arbitrator under section 11 is not to a court.

• The Amendment Act also brought about a change in the definition of public policy in section 34 (challenges to domestic awards) and section 48 (conditions of enforcement of foreign award). The challenge on ground of interest of India (as laid down by the Supreme Court) has been deleted both for domestic as well as foreign awards. It has been removed because the Law Commission suggested that the reference to the interest of India was vague and capable of misuse.


30


(i) A domestic award is in conflict with the public policy of India only if it has been obtained by fraud or corruption, or is against the fundamental policy of Indian law, basic notions of morality and justice and also if it is patently illegal. However, if the award is against the fundamental policy of Indian law, it would not entail a review on the merits of the dispute. Also if the award is challenged on the grounds that it is patently illegal the exception is that it shall not be set aside merely on grounds of erroneous application of law or re-appreciation of evidence.[Note: The changes in the Amendment Act reflect the law laid down by the Supreme Court in Associated Builders versus DDA reported in (2015) 3 SCC 49. Also, the definition of ‘patently illegal’ in ONGC versus Saw Pipes reported in (2003) 5 SCC 705 and ‘fundamental policy of India’ in ONGC versus Western Geco International reported in (2014) 9 SCC 263 seem to have been further narrowed down in the amendment to section 34.]

(ii) A foreign award is in conflict with the public policy of India only if it has been obtained by fraud or corruption, or is against the fundamental policy of Indian law, basic notions of morality and justice. However, if the award is against the fundamental policy of Indian law, it would not entail a review on the merits of the dispute.[Note: The changes in the Amendment Act reflect the law laid down by the Supreme Court in Renusagar versus General Electric reported in (1994) Supp 1 SCC 644 and Shri Lal Mahal versus Progetto Grano Spa reported in (2014) 2 SCC 433. Please note that Phulchand Exports versus O.O.O. Patriot reported in (2011) 10 SCC 300 had been overruled by Shri Lal Mahal.]

• Section 31A has been introduced in some way to de-incentivize frivolous proceedings. It deals with costs, including legal fees and expenses to be imposed on the unsuccessful party.

• Section 36 (enforcement of domestic award) – Where an application for setting aside an award has been made, the filing of the application shall not by itself stay the enforcement proceedings unless thecourt grants an order staying the operation of the award.

In line with international best practices

• Section 7 (arbitration agreement) has been amended to bring the Indian law in conformity withthe UNCITRAL Model Law on international

commercial arbitration and clarifies that an arbitration agreement can be concluded by an electronic communication.

• Section 9 (interim measures by court) – To reduce the role of courts and in spirit with the UNCITRAL Model Law on international commercial arbitration, section 9 has been amended to provide that once an arbitral tribunal is constituted the court shall not entertain an application unless the remedy before the tribunal is not efficacious.

• Section 12 (challenges to appointment of arbitrator) – section 12 has been amended following the principles of natural justice that an interested person cannot be an arbitrator. The Fifth Schedule (grounds for determining the impartiality of an arbitrator) and Sixth Schedule (disclosure by arbitrator) incorporates the provisions of the Red and Orange lists of the International Bar Association Guidelines on Conflicts of Interest in International Arbitration. The proviso to section 12 (5) however states that parties can waive the applicability of the Seventh Schedule (arbitrators relationship with parties or counsel) when a dispute arises by an express agreement in writing.

• Section 17 (interim measures before arbitral tribunal) – To decrease the burden on courts and in line with the UNCITRAL Model Law on international commercial arbitration, the Amendment Act provides for elaborate reliefs that can be made before the tribunal during the arbitral proceedings or at any time after the making of the arbitral award but before it is enforced in accordance with section 36 by a party. Any order passed by the tribunal shall be deemed to be an order of court for all purposes and shall be enforced under the Code of Civil Procedure.

Timelines and Fee Structure

(A) Timelines:

• Section 9 (interim measures by court) mandates that where the court passes an interim order for protection, arbitral proceedings shall commence within ninety days.

• Section 11 (appointment of arbitrators) – an application for appointment of an arbitrator is required to be disposed off expeditiously and an endeavour is required to be made to dispose off the application within a period of sixty days from the date of service of notice to the opposite party.



• Section 24 (hearings and written proceedings) – the proceedings before the tribunal are required to be held on a day to day basis and no adjournment should be given unless sufficient cause is made out. The tribunal may impose exemplary costs on parties seeking adjournment without sufficient cause.

• Section 29 A and 29 B have been introduced in the Amendment Act.

(i) Section 29 A deals with decision making by the arbitrator which is within twelve months from the date the arbitrator enters upon the reference. This section provides an incentive to the arbitrators if they render the award within a period of six months and then they are given an additional fee by the parties. Even though this provision provides for a twelve month time period for making the award, the parties can by consent extend the time for another period of six months. However, before the expiry of the eighteen months (12 months plus an additional six months) the court may on an application of any of the parties extend this time in case sufficient cause is shown and on such terms and conditions that may be imposed by the court. The court will dispose off this application within a period of sixty days from the date of service of notice. The arbitrator can even impose a cost on a party in case of delay.

(ii) Section 29 B deals with the fast track procedure for arbitration. The parties while agreeing to a resolution by a fast track procedure may agree that the arbitral tribunal should consist of a sole arbitrator who will be chosen by the parties. The procedure for fast track consists of written pleadings and submissions without an oral hearing. An oral hearing may be held if the parties make a request and only if the tribunal feels that it is necessary to have the hearing for clarifying certain issues. The award in a fast track procedure shall be made within six months. In case the award is not made within six months then the procedure for extension as provided in section 29A shall apply to the proceedings.

• Section 34 (challenge to a domestic award) provides that an application to the court challenging a domestic award shall be disposed off expeditiously and within a period of one year from the date of issuing a prior notice to the other party.

(B) Fee Structure:

• There is a reference to a fee structure in section 11(14) of the Amendment Act. Of course the discretion has been given to the High Court to frame rules for

the purpose of determination of fee structure and after taking into consideration the rates specified in the Fourth Schedule. This fee structure does not apply to institutional arbitrations. Also the fee structure provides for an additional amount of twenty five percent on the fee payable if a sole arbitrator is appointed.

The foregoing shows that the Arbitration and Conciliation (Amendment) Act, 2015 is a positive step forward which ensures speed, provides for timelines and narrows the challenges on the ground of public policy. These changes were much required and have finally resulted in the government acting to ensure that India becomes a country where the dispute resolution mechanism is respected and investors feel confident of being protected from unnecessarily long delays. There seems to be some sincerity in these steps taken by the government but it will have to be seen how these amendments play out in the long run. Nothing in the Amendment Act shall apply to arbitral proceedings commenced before October 23, 2015, unless parties otherwise agree. Provision of timelines to arbitrators and courts may initially put some stress on the already overburdened courts and it may be difficult to bind them to strict timelines. The Commercial Courts, Commercial Division and Commercial Appellate Division Act, 2015 which is supportive of commercial disputes may additionally flood the courts with matters relating to around 22 types of commercial disputes. These courts may see crowding and arbitration challenges may not significantly benefit from these. The Amendment Act does not provide for any timelines for enforcement of a domestic award or timelines for conditions for enforcement of a foreign award. Apart from this the fast track procedure for resolving a dispute before the arbitrator provides for extensions and these extensions may dilute the intention behind a fast track procedure. Finally the Amendment Act does not deal with some of the issues that the Law Commission in its report had suggested keeping in line with International best practices like the difference between seat and venue. In sum, therefore, the recent changes have been a long overdue step forward to support the value of arbitration as a dispute resolution procedure in India. However to match international standards, more needs to be done.

There seems to be some sincerity in these steps taken by the government but it will have to be seen how these amendments play out in the long run



Gauri has a rare combination of advisory and litigation experience of 22 years in both academic and corporate settings. She managed the litigation of some landmark cases such as the right of citizens to fly the national flag and reviving Satyam under new management after the largest ever corporate scam in India. Her areas of interest cover dispute resolution, commercial laws and other emerging areas such as data privacy and food safety laws.

Gauri also worked in the US at the George Washington University Law School in Washington D.C. where she was selected to be the first Director of the school’s newly established India Studies Center between 2007 & 2009.

Gauri is an independent director on the Boards of three prominent public listed companies in India.

About Author

“The author would like to acknowledge effort and assistance of Mr. George Varghese an Associate atCyril Amarchand Mangaldas”.


Ms. Gauri RasgotraPartner

34


The Competition Act, 2002 (Act) regulates the markets in India with the objective of promoting and sustaining competition in the market. The Competition Commission of India (CCI),1 established under the provisions of the Act, is the main agency entrusted with the duty to regulate and eliminate practices having an adverse effect on competition in India. The Act is largely patterned on the European Union (EU) competition law and governs three main areas: anti-competitive conduct, abuse of dominance and combinations. This article seeks to provide a broad overview on enforcement of provisions relating to the unilateral conduct of enterprises and explores the trends in different areas of Indian competition law jurisprudence relating to abuse of dominance.

Abuse of dominance under the Act

The substantive test and benchmark for analysis under the Act is to prohibit practices that have an appreciable adverse effect on competition in India. Section 4 of the Act deals with the regulation of abuse of dominance (ie, the regulation of unilateral conduct). The Act prohibits the abuse of a dominant position by any ‘enterprise’ or ‘group’, and defines dominant position as a position of strength enjoyed by an enterprise in the relevant market in India, which enables it to operate independently of the competitive forces prevailing in the relevant market or affect its competitors or consumers or the relevant market in its favour. In India, the determination of ‘dominance’ is based on a qualitative assessment of the prevalent market dynamics and the relative position of strength enjoyed by the market participants. Section 4 stipulates that practices such as imposition of unfair or discriminatory conditions on price in purchase or sale (including predatory pricing), limiting or restricting the production of goods, denial of market access, and leveraging market position in one relevant market to enter into another relevant market, shall amount to abuse of dominance.

Evidently, section 4 of the Act is a welcome departure from the earlier competition law regime under the aegis of the Monopolies and Restrictive Trade Practices Act, 1969, wherein emphasis was placed on the size of the concerned player, rather than the actual abusive practice or conduct of such a player.

Abuse of dominance requires an analysis of the level of dominance of the concerned enterprise and its abusive conduct. While determining the abusive conduct of a dominant enterprise or group, the CCI scrutinises the abusive practices by way of the following three steps:

• determination of the relevant market;

• assessment of dominance of such enterprise or group; and

• assessment of its abusive conduct.

While determining dominance, the CCI is required to consider the following factors listed under section 19(4) of the Act:

• market share;

• size and resources of the enterprise;

• size and importance of competitors;

• economic power of the enterprise, including commercial advantages over competitors;

• vertical integration of the enterprises or sale or service network of such enterprises;

• dependence of consumers on the enterprise;

• legal monopoly or dominant position;

Recent Trends in Abuse of Dominance

1The CCI is the principal regulatory body which regulates competition in India and has been established by the central government under section 7(1) of the Act.



3Enterprise has been defined in section 2(h) of the Act.4Case No. 54 of 2014.5Relevant market has been defined under section 2(r) of the Act.6Relevant product market has been defined in section 2(t) of the Act.7Relevant geographic market has been defined in section 2(s) of the Act.8Case No. 19 of 2010.9Case No. 10 of 2014.10Case Nos. 03, 11 and 59 of 2012.2Case No. 25 of 2010.

• entry barriers, including barriers such as regulatory barriers, financial risk, high capital cost of entry, marketing entry barriers, technical entry barriers, economies of scale, high switching costs;

• countervailing buyer power;

• market structure and size of the market;

• social obligations and social costs;

• relative advantage, by way of the contribution to the economic development, by the dominant enterprise; or

• any other factor that the CCI may consider relevant for the inquiry.

CCI’s jurisdiction: definition of the term ‘enterprise’

The Act prohibits abuse of dominance by an ‘enterprise or group’. The CCI in Reliance Big Industries & Ors v Karnataka Film Chamber of Commerce & Ors2, held that only the conduct of an ‘enterprise’ can be examined under the provisions of section 4 of the Act. For the purposes of the Act, a person or a department of the government, engaged in any activity relating to the production, storage, supply, distribution, acquisition or control of articles or goods, or the provision of services, would constitute an ‘enterprise’3.

Notably, the Act provides an exemption to any activity that relates to the sovereign functions of the government, including those related to energy, currency, defence and space. For instance, an activity in relation to the collection of taxes (a purely sovereign function) would not fall within the purview of the Act and an entity discharging such functions would not constitute an enterprise (M/s Red Giant Movies v Secretary, Commercial Taxes & Registration Department, Government of Tamil Nadu and the Commissioner, Commercial Taxes Department, Government of Tamil Nadu)4. Accordingly, the CCI cannot scrutinise the conduct of such entities to determine any plausible contravention of section 4 of the Act.

Relevant market

The definition of the relevant market is pivotal to any abuse of dominance analysis, given that the dominance of an enterprise is always determined with respect to a particular relevant market. In addition to being the basis for determining whether an entity enjoys a dominant position, the definition of the relevant market is crucial in analysing the anti-competitive effects of the relevant entity’s behaviour.

The relevant market is an aggregation of the relevant product market and the relevant geographic market.5 The relevant product market is defined as all those products or services that are regarded as interchangeable or substitutable by the consumer, on the basis of the characteristics of the product, its prices and intended use.6 The relevant geographic market is defined as a market comprising the area in which there exists distinct homogenous competitive conditions in terms of demand and supply of goods or services, which can be distinguished from the conditions prevailing in the neighbouring areas.7

In practice, the CCI’s definition of the relevant market varies from case-to-case, based on the differing factual matrix. In the absence of specific guidelines for defining the relevant market, the CCI does not follow a consistent approach in delineating the relevant market. As such, the CCI has restricted the relevant geographic market to particular suburbs in some cases (such as Belaire Owners’ Association v DLF Limited8 and Mr Om Datt Sharma v M/s Adidas AG & Ors9 ) and has, without any specific differentiation, defined the relevant market on an ‘all India basis’ in other cases. A narrow definition of the relevant market only facilitates establishing an entity’s dominance.

Interestingly, in Maharashtra State Power Generation Limited v Coal India Limited and Ors10 (Coal India), the CCI noted that defining a global market as the relevant market was contrary to the express provisions of the Act. The CCI reasoned that the explanation to section 4 of the Act indicated that the ‘dominant position’ is a position of strength enjoyed by an enterprise in the relevant market ‘in India’. Accordingly, the contention of the parties to define the relevant geographic market as the global market



11Case No. 17 of 2014.12Case No. 80 of 2014.13Case No. 03 of 2011.14The CCI went on to combine the two relevant markets of sale of spare parts and sale of repair services, under the bigger ‘after-sales’ services as the two markets were inter-connected.

was held by the CCI as legally untenable. Though the facts of Coal India may have warranted restricting the relevant market to India, by concluding that a worldwide definition of the relevant market would not be permissible in any instance of abuse of dominance, the CCI has adopted a narrow and restrictive view. In doing so, the CCI has failed to consider products which are not affected by national barriers.

In terms of the product market definition, the CCI has primarily considered demand-side substitution as a determining factor in delineating the relevant product market. For instance, in Coal India, the CCI did not include imported coal as a part of the relevant product market since imported coal could not be used as a substitute to domestic coal as it was expensive, had different qualities and the boilers used by Indian thermal power plants had specifications suited specifically to domestically manufactured coal.

The CCI has also had two occasions to determine the relevant market in relation to the constantly growing Indian online retail industry. In Ashish Ahuja v Snapdeal.com and Ors.11 (Snapdeal), the first case on the online retail industry, the CCI concluded that online retail and brick and mortar sales of distribution were not two different relevant markets but were merely different channels of distribution of the same product. However, in a more recent case involving e-tailers, Mohit Mangalani v Flipkart India Pvt Ltd and Ors.12 , the CCI left the definition of relevant product market open and opined that it was not taking a stand whether the ‘e-tail market was indeed a separate relevant product market or a sub-segment of the market for distribution’. This approach adopted by the CCI is at variance with the approach in the Snapdeal case. In Shri Shamsher Kataria v Honda Siel Cars India Ltd & Ors13 (Auto Parts), the CCI undertook a detailed analysis while delineating the relevant market. In this case, the information was filed against various automobile manufacturing companies or original equipment manufacturers (OEMs) on the basis that the OEMs were involved in activities leading to competition law concerns in India by restricting the availability of genuine spare parts of automobiles manufactured by them in the open market. It was also alleged that the car manufacturing companies controlled the operations of various authorised workshops and service stations that were

in the business of selling automobile spare partsbesides rendering after sale automobile maintenance services. The technological information, diagnostic tools and software programs required to maintain, service and repair the technologically advanced automobiles manufactured by each OEM were unavailable in the open market. Consequently, the repair, maintenance and servicing of such automobiles could only be carried out at the workshops or service stations of the authorised dealers of the OEMs.

The CCI did not accept the ‘unified systems market’ definition submitted by the OEMs and concluded that the automobile primary market and the aftermarket for spare parts and repair services did not constitute a unified systems market. The CCI noted that the consumers in the primary market (ie, the market for manufacture and sale of cars) did not undertake a whole-life cost analysis at the time of purchase of the automobile and, accordingly, the CCI bifurcated the relevant market into three separate markets, namely:

• the market for manufacture and sale of cars;• the market for sale of spare parts; and• the market for sale of repair services (the market for sale of spare parts and sale of repair services were held to be interconnected)14.

The CCI was also of the view that a ‘clusters market’existed for all the spare parts for each brand of car manufactured by the OEMs in the Indian automobile market.

Noting that each OEM had a 100 per cent. market share in each of the relevant markets, the CCI held each OEM to be a dominant entity in the aftermarket for their brand’s genuine spare parts and diagnostic tools, and also in the aftermarket for the repair services for their brand’s automobiles. As such, the CCI considered each individual separate brand of automobiles as a separate relevant market, instead of considering the broader relevant market of the aftermarkets for the entire automobile industry. Based on this analysis, the CCI concluded that the OEMs held dominant positions in the respective relevant markets and considered each OEM to have abused its dominant position.



Assessment of dominance

As highlighted above, under the provisions of the Act, dominance refers to the ability of an enterprise to operate independently of market forces and its position of strength which enables it to affect competitors or consumers or the relevant market in its favour. While determining dominance, the CCI is required to consider the factors listed under section 19(4) of the Act. Consequently, an enterprise’s dominance is a multifaceted assessment and there is no bright line market share test. Reaffirming this view, in Mr Ramakant Kini v Dr L H Hiranandani Hospital, Powai, Mumbai15, while assessing the dominance of the Hiranandani hospital in the relevant market for provision of maternity services by super speciality and high-end hospitals within a distance of 12 kilometres from the Hiranandani Hospital, the CCI clarified that the market shares of an entity is ‘only one of the factors that decides whether an enterprise is dominant or not, but that factor alone cannot be decisive proof of dominance’.

Similarly, in In Re M/s ESYS Information Technologies Pvt Ltd and Intel Corporation (Intel Inc) & Ors16, in addition to the market shares of Intel, the CCI’s assessment of Intel’s dominance was based on other relevant factors such as the consumer preference owing to the brand name, the existence of strong entry barriers in the relevant market, the significant intellectual property rights of Intel and the scale and scope enjoyed by Intel.

Assessment of abusive conduct

In relation to the assessment of abusive conduct, the CCI’s scrutiny is limited to the statutory provisions under section 4 of the Act which enlists a number of practices that are considered to be abusive (if such practices are conducted by a dominant enterprise). The practices enlisted under section 4 can be broadly divided into two separate kinds of abuses: exclusionary abuses, which include practices of the dominant entity, having the effect of excluding other players in the relevant market; and exploitative abuses, which include practices of the dominant entity which tend to exploit the dominant entity’s position by imposing unfair or discriminatory restrictions on other players and consumers in the market.

15Case No. 39 of 2012.16Case No. 48 of 2011.17Case No. 73 of 2011.18Case No. 79 of 2012.19Case No. 17 of 2014.20Case No. 74 of 2012.

Statutorily, an abuse of dominance is required to be treated as a ‘per se’ violation. However, in Dhanraj Pillai v Hockey India17, the CCI brought in the effects test but subsequently disregarded its own precedent. For example, in Faridabad Industries Association v M/s Adani Gas Limited18, despite Adani Gas Limited’s (AGL) good conduct by benefiting consumers and the ostensible clauses not being enforced, the CCI imposed a penalty on AGL.

Penalties and sanctions

The CCI has the power to impose the highest economic penalties in India. In case of contravention of section 4 of the Act, the CCI is empowered to levy a penalty of up to 10 per cent. of the average turnover of the enterprise for the preceding three financial years19 or direct the division of a dominant enterprise. However, as there are no guidelines issued by the CCI in relation to the determination of penalties, the CCI currently has absolute discretion in relation the imposition of a penalty and there are no guidelines to assist in the determination of the quantum of penalty. Additionally, in most cases there is absence of coherent justification for the penalties imposed. For instance, in the Auto Parts case, all the OEMs were fined the same percentage quantum, despite differences in conduct, which ought to have been considered as a mitigant.

The CCI has, in very few instances, taken into account factors that may be regarded as mitigating factors for the determination of the penalty. For instance, in one of the recent cases, the CCI has considered the steps taken by the opposite parties in the interim period (between the informant filing information alleging an abuse of dominance and the CCI’s order), which may have an effect of reducing competition law concerns, while determining the penalty to be imposed.

In the case of Indian Exhibition Industry Association v Ministry of Commerce & Industry & Anr20, the Indian Exhibition Industry Association (“IIAA”) filed an information against the Ministry of Commerce & Industry (Ministry) and Indian Trade Promotion Organization (“ITPO”) alleging the contravention of the provisions of section 4 of the Act based on the time gap restriction imposed by ITPO between two



exhibitions/fairs. In 2006, the ITPO had reformulated certain guidelines imposing a ‘time gap restriction’ of 15 days between two events having similar product profiles and coverage for events that were not conducted by ITPO. However, in case of ITPO fairs, the time gap was 90 days before the start or 45 days after the close of an ITPO event. Further, in 2007, the concerned guidelines were reassessed and the time gap of 15 days was maintained. However, in case of ITPO and third-party fairs having similar product profiles, the time gap was 90 days before the ITPO’s event and 45 days after it. The CCI held that ITPO was ‘playing a dual role as a regulator as well as the organiser of exhibitions’ and, as such, considered the acts of ITPO to be an abuse of its dominant position. The penalty imposed by the CCI on the ITPO was limited to 67.5 million rupees (around 2 per cent of the average of the turnover for the preceding three years). The removal of discriminatory features and the differences in time gap restrictions by an amendment in 2013 was considered by the CCI as a mitigating factor.

Further, the ‘turnover’21 to be taken into account while imposing penalties under the Act has also been subject to debate. Though the Act does not stipulate that the CCI must only consider the turnover that can be attributed to the business relating to which the abusive conduct has occurred, the Competition Appellate Tribunal (“COMPAT”) has held that in the case of multi-product companies, (ie, a company engaged in various lines of the business), the ‘relevant turnover’ which relates to the activity of the company contravening the provisions of the Act, should be considered (M/s Excel Crop Care Limited v Competition Commission of India)22. This view of COMPAT is contrary to the CCI’s practice of imposing a penalty based on the entire turnover of the infringing enterprise. However, COMPAT itself has failed to apply this concept of ‘relevant turnover’ in its subsequent decisions. For instance, in its decision in M/s DLF Limited v Competition Commission of India & Ors23 (COMPAT DLF), COMPAT did not restrict the calculation of the penalty on the basis of DLF Limited’s turnover arising only from the residential segment, despite the relevant market in that case being the market for ‘high-end residential accommodation’. COMPAT upheld the penalty levied by the CCI, which was calculated on the basis of DLF’s turnover pertaining to its entire business (ie, the

development of residential, office and commercial properties).

As stated above, in addition to imposing monetary penalties, under section 27(g) of the Act, the CCI has powers in addition to the imposition of a penalty, such as directing the division of a dominant enterprise. The exercise of one of such powers under section 27(g) (ie, the CCI’s power to direct modification of agreements) has been read down by COMPAT to cases where there is a contravention of the provisions of section 3 of the Act pertaining to anti-competitive agreements. In COMPAT DLF, COMPAT disapproved the approach adopted by the CCI in directing the Apartment Buyers’ Agreements (from which the abuse of dominance behaviour of DLF stemmed) to be amended, and noted that there was ‘absolutely no justification on the part of the CCI to change the language of the agreement altogether’. COMPAT noted that the specific power to modify agreements can be exercised by the CCI only in the limited circumstances where it finds that such agreements violate the provisions of Section 3 of the Act. COMPAT specifically observed that ‘no provision in the Competition Act permits the re-writing of the agreements’. In doing so, COMPAT has held that the scope of the CCI’s residuary powers under the Act24, whereby the CCI can pass any order or issue any directions as it may deem fit, are restricted. The CCI has appealed COMPAT DLF before the Supreme Court of India.

Trends in recent orders

In its first decision against a public sector undertaking, indicating that public sector enterprises engaged in economic activities are not exempt from CCI’s scrutiny, the CCI fined Coal India Limited (“CIL”) for having abused its dominant position in the market for the production and sale of non-coking coal to thermal power generators. Despite the dominant position of CIL being the result of a government policy and CIL being a creature of the statute, the CCI imposed a fineof 17.7 billion rupees (at a rate of 3 per cent of the average turnover for the last three years) on CIL for imposing unfair and discriminatory conditions under fuel supply agreements executed with power generation companies and directed modification of CIL’s agreements.

21Section 2(y) of the Act defines ‘turnover’ as below: ‘turnover’ includes value of sale of goods or services.22Appeal No. 79 of 2012, Appeal No. 80 of 2012, Appeal No. 81 of 2012.23Appeal No. 20 of 2011, Appeal No. 22 of 2011, Appeal No. 19 of 2012, Appeal No. 23 of 2011, Appeal No. 12 of 2012, Appeal No. 20 of 2012, Appeal No. 29 of 2013, Appeal No. 8 of 2013, Appeal No. 9 of 2013 and Appeal No. 11 of 2013.24Section 27(g) of the Act 25 Case No. 7 and 30 of 2012. 26 Case No. 61 of 2010..



As stated above, in Auto Parts, the CCI investigated the automobile industry where it found that 14 automobile companies were abusing their dominant position and fined the companies at 2 per cent of their average turnover in India for the past three years. The total fine imposed was 25.4 billion rupees. The CCI also directed the OEMs to sell spare parts in the open market without any restriction. Further, OEMs were required to permit independent original equipment suppliers to sell their spare parts and were prohibited from placing restrictions or impediments on the operation of independent repairers and garages. OEMs were also directed not to impose a blanket condition that warranties would be cancelled if the consumer availed of services of any independent repairer.

In June 2011, the CCI passed an order stating that the National Stock Exchange (“NSE”) was following unfair pricing policies and using its dominant position to attract more business. While directing NSE to levy charges in its currency derivatives segment, the CCI imposed a penalty of 555 million rupees on the NSE. Recently, COMPAT upheld the CCI’s order, stating that the NSE in continuing with the zero transaction fees policy indulged in exclusionary conduct.

It may also be noted that the CCI imposed a penalty of 10 million rupees on M/s Google Inc and Google India Private Limited (collectively, Google) for failing to comply with the directions of the director general seeking certain information with respect to the on-going investigation against Google. The CCI observed that no cause was shown by Google for non-compliance with the directions given by the director general. It was further noted that despite liberal indulgence shown by the director general in granting successive extensions, Google had engaged in delaying tactics to prolong the investigations. Accordingly, the CCI imposed the maximum penalty envisaged under section 43 of the Act (10 million rupees) and ordered Google to furnish all the information required by the director general within a period of 10 days. The CCI further clarified that in case of any non-compliance with the directions of the director general in future, each instance of non-compliance would be taken separately as an aggravating factor for the imposition of fine.

In Board of Control for Cricket in India (“BCCI”) v Competition Commission of India and Anr. , for the first time ever, the COMPAT set aside the order of the CCI in entirety which had held that the BCCI had abused its dominance in the market for 'organization of private professional leagues/events in India' on

account of violation of the principles of natural justice. The COMPAT ordered a refund of the penalty amount and remanded the case back to the CCI for fresh investigation.

Claim for damages

Notably, MCX Stock Exchange Ltd (MCX-SX) has filed an application with COMPAT claiming damages of 5.9 billion rupees, stating that due to the NSE’s exclusionary conduct it had lost transaction charges of 2.2 billion rupees, along with a treasury income loss of 3.4 billion rupees. This is the first instance where a company has filed claim for damages. Publicly available reports mention that MCX-SX intends to increase its claim for damages to 8 billion rupees.

First dawn raid

After five years of enforcing provisions relating to anti-competitive agreements and abuse of dominance, the CCI recently exercised its powers in relation to dawn raids and search and seizure for the first time. In contrast to the typical use of dawn raids as an investigative tool in cartel cases, the CCI conducted its first dawn raid in relation to a case of alleged abuse of dominance. The search and seizure powers of the CCI were used against JCB India and its wholly-owned subsidiary, JC Bamford Excavator, for failing to cooperate with the CCI’s ongoing investigation pertaining to the allegation of abuse of its dominant position.

Conclusion

The CCI has proven its mettle as a very proactive regulator within a very short span of time. The benefits of its orders in terms of deterrence of anti-competitive conduct must be appreciated. It has also established that the Act will apply on an ‘ownership neutral’ basis – it will regulate private companies as well as government companies – and the penalty imposed on CIL evidences this. The CCIhas also invoked its dawn raid powers to supplement

The CCI has in a short span of time established that the provisions of

the Competition Act, 2002 will apply on an ‘ownership neutral’ basis, regulating

both private companies and Government companies alike



its investigations. Interestingly, most of the CCI orders are being challenged in high courts or at COMPAT on grounds of non-compliance with due process, and it remains to be seen whether the CCI will opt to voluntarily issue penalty guidelines or be compelled to by the courts. Until this impasse is resolved, the industry will continue to take recourse to the courts and procedure, rather than substantive aspects, will continue to hold centre stage.

About Author

Nisha currently leads one of the largest competition law teams in India and advises on the full range of competition matters, including cartel enforcement, abuse of dominance, merger control and competition audit and compliance. Nisha has been recognized as a competition expert by ALB Asia’s 40 under 40 in 2015, International Law Office, Client Choice Awards in 2015, Chambers & Partners in 2014 and 2015, AsiaLaw Leading Lawyers 2013 and2014, Competition & Antitrust Expert Guides - India 2014, Euromoney B.R.I.C. 2013- Expert on Competition Law and the 2013 RSG India Report as “one of the most excellent Competition lawyers in India” for her work in competition law.

Nisha has successfully represented several high-profile clients in complex, precedent-setting behavioural matters. She has obtained a very significant number of merger control clearances in India (over 109 of the 230 odd merger notifications) and has also obtained clearance for 6 out of 8 valid Form II (long form) merger notifications, including India’s first Form II filing in the natural gas sector, the second Form II filing in the alcoholic beverages sector and two Form II filings in the highly contested cement sector which is under investigation for cartelization.

“The author would like to acknowledge effort and assistance of senior associates Ms. Soumya Hariharan and Ms. Shweta Vasani and associates Ms. Aishwarya Gopalakrishnan, Ms. Arunima Chandra, Ms. Smita Andrews and Mr. Sammith S. of Cyril Amarchand Mangaldas”


Ms. Nisha Kaur UberoiPartner

42


Background

India’s image as a favourable jurisdiction for foreign investments took a serious beating with the retrospective amendments to the Income Tax Act (“IT Act”) in 2012. The amendments effectively nullified the Supreme Court’s ruling, which had been in favour of Vodafone. The amendments, combined with various actions by the Revenue authorities not only spooked investors, but also earned India the ignominy of being engaged in “tax terrorism”. In a bid to boost India’s image on the world stage as a business friendly jurisdiction, the present National Democratic Alliance (“NDA”) Government is striving towards ensuring greater ease of doing business in India. Towards this end, the Government has taken various steps towards a fair, stable and predictable taxation regime. This article highlights the recent endeavours of the Indian Government towards an investor friendly taxation regime and also steps taken to improve the frequency and quality of information flow that will enable detection of tax evasion.

Policy measures and simplification

The NDA Government has promised to undo the harm done by previous regimes and to usher in tax reforms. While stopping short of reversing the retrospective amendments brought in 2012, the government has introduced a number of safety mechanisms to prevent Indian revenue authoritiesfrom harassing taxpayers on account of the retrospective amendments. In addition, the government has also emphatically declared that no retrospective revisions shall be carried out in the future.

The Government has also clarified its intention to usher in a “non-adversarial” tax regime that is simple,stable and predictable. In order to simplify the tax laws, it is proposed to reduce the basic tax rates for

Recent Trends In �e Tax Regime In India

of four years starting from FY 2016-17 in a revenue neutral manner. This would be achieved by withdrawing various tax exemptions and benefits that are currently available to corporate taxpayers.

In a bid to simplify the provisions of the IT Act, the Government has set up a committee under the chairmanship of retired Delhi HC judge, R.V. Eashwar. The committee has been given the mandate of studying and identifying the provisions of the IT Act, which are leading to litigation due to different interpretations. The Committee has also been tasked with suggesting modifications to bring predictability and certainty in tax laws, without compromising on the revenue collection. This is in the aftermath of the government shelving plans of introducing a simplified Direct Tax Code, which was proposed by the previous government.

Enhancing taxpayer experience

A sore point in relation to the interactions with the Indian tax authorities has been the rather treacherousexperience in relation to tax compliances and scrutinyassessments. In a bid to improve taxpayers’ experience, the CBDT has sought to introduce paperless scrutiny assessments on a pilot basis. Currently aimed at individual tax payers, the CBDT proposes to have tax officers corresponding with tax payers through e-mails with a major part of the assessment being carried out electronically. Further, the CBDT has directed the tax officers to state their email-ID and phone numbers in any notice/letter/communication issued to the taxpayers in order to facilitate electronic interface with the taxpayers1. Such initiatives would hopefully eliminate the need for taxpayers to make multiple trips to the tax office, thereby enhancing taxpayers’ experience.

1F.No.Dir. (Hqrs.)/CH(DT)/29/2015/2030, dated December 15, 2015.

Reduction of pending tax litigations

A number of additional initiatives have been


43


2Vodafone India Services Pvt Ltd. v. Union of India [2014] 368 ITR 1 (Bom).3Shell India Markets Pvt Ltd v. Union of India and Ors. [2014] 51 taxmann.com 519 (Bombay HC).4India has also signed TIEAs with several countries such as Argentina, Bahrain, British Virgin Islands, Cayman Islands, etc.

launched to reduce the quantum of tax litigationpending across various fora and to assuage the grievances of taxpayers. The Central Board for DirectTaxes (“CBDT”), the apex administrative body for Direct Taxes in India, has revised monetary limits for filing of appeals by the Indian tax authorities before the Income Tax Appellate Tribunal (“ITAT”) and theHigh Courts. The CBDT has also clarified that the pending appeals which are below the revised monetary limits may be withdrawn or not pressed further.

The CBDT has also directed that certain key senior tax officers would constitute collegiums in their respective jurisdictions. These collegiums will consider withdrawal of appeals filed by the Revenue in cases involving tax effect even above the revised monetary limit from the High Courts, if no questions of law are involved. It has been clarified that the issues would be considered settled by the Revenue or that the appeals to be no longer relevant, in view of subsequent amendments.

It is anticipated that these steps would significantly reduce the number of cases pending in relation to tax matters.

The Government has also taken a couple of additional initiatives to further reinforce its intention to reduce tax litigation and improve market sentiment:

(a) The Government has decided to accept the taxpayer friendly verdict delivered by the Bombay High Court in the cases of Vodafone2 and Shell India3 wherein it was held that the price at which an Indian entity allots shares to its overseas affiliate(s) cannot be challenged by the tax authorities by invoking Transfer Pricing Regulations. The tax authorities had alleged that infusion of capital by a non-resident entity into a domestic affiliate company ought to be at arm’s length price, which was rejected by the Bombay High Court on the ground that capital infusion is not in the nature of income for the Indian company and hence, transfer pricing regulations are not applicable in such cases.

(b) Succumbing to the demands of the foreign investors, the Government has also decided to grant retrospective relief to Foreign Institutional Investors in respect of applicability of Minimum Alternate Tax (“MAT”) which did not have any office or place of

business in India. MAT is levied under Section 115JBof the IT Act which provides that where the total income of a company in any previous year is less than18.5% of its book profit, such book profit shall be deemed to be the total income of the company and the company shall be liable to pay tax at 18.5% of its book profit.The Finance Act, 2015 amended the provisions of section 115JB of the IT Act to provide that capital gains from transfer of securities, accruing or arising to non-resident companies will be excluded from the chargeability of MAT, with effect from April 1, 2016. However, the uncertainty pertaining to the applicability of MAT for the earlier period persisted.

In the meantime, tax authorities passed orders againstcertain foreign investors raising tax demands on account of MAT. Pursuant to the uproar by foreign investors, the Government appointed a committee tolook into the applicability of MAT in respect of FIIs.Agreeing with the committee’s recommendations that it should not be applicable to foreign entities who did not have any place of business or office or establishment in India, the Government issued clarifications accordingly. These clarifications were cheered by foreign investors because it put an end to the uncertainty.

Improvement in the quality and frequency of information and prevention of tax evasion

The Government has been increasingly focussing on checking rampant increase in black money, and towards this end, had enacted the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (“The Black Money Act”). The Black Money Act aims to curb black money, or undisclosed foreign assets and income and imposes tax and penalty on such income. In addition, there has been an increasedfocus on trying to obtain information regarding taxpayers who have incomes outside India.

Towards this end, the Government has entered into Tax Information Exchange Agreements (“TIEAs”) with various jurisdictions. For example, the Union Cabinet has recently approved the signing of TIEAs with Seychelles and Maldives4. Additionally, the Government has executed an Inter Governmental Agreement (“IGA”) with the United States of America (“US”) to implement FATCA, whereby foreign financial institutions are required to



5Notification No. F. No. 142/11/2015-TPL, dated December 23, 2015: Draft Guiding Principles for determination of Place of Effective Management (POEM) of a Company (“Draft Guidelines”).

report matters in relation to the accounts of US persons to the US Inland Revenue Service (“IRS”). Under the IGA, the Indian financial institutions will provide necessary information to the IRS and similarly, the US will also enable provision of information pertaining to Indian taxpayers having financial assets in the US, to the Indian tax authorities.

These steps are expected to significantly enhance the quality and frequency of the information being available with the Indian tax authorities, which may go a long way in preventing tax evasion and generation of black money.

Other changes

In addition to the steps already taken / introduced as discussed above, certain other changes have also beenrecently introduced. The IT Act was amended last year to introduce a new tax residency criterion being “place of effective management”, in order to ascertain whether a company incorporated outside India can beconstrued to be an Indian resident company. POEM has been defined as a place where the key management and commercial decisions that are necessary for the conduct of the business of an entity as a whole, are made. In case a foreign company is construed to have its POEM in India, it will be regarded as a tax resident of India and it will be liable to pay tax in India on its worldwide income, just like any other company incorporated in India. Further, any payments of dividend to shareholders would also be liable to Dividend Distribution Tax on the dividends so declared.

The key issue, however, is that there is no clarity under the IT Act on the concept of POEM. In this regard, the CBDT has recently issued Draft Guidelines5 as to what constitutes POEM. Briefly, the Draft Guidelines aim to provide guidance and process in determining POEM of companies, factors which by itself would not lead to a conclusion of POEM and the process that the tax authorities need to follow in case of foreign companies establishing their POEMs in India. The Draft Guidelines also require the POEM to be determined on a year to year basis and such determination would be primarily based on whether or not the company is engaged in active business outside India. The CBDT has invited comments and suggestions from the public on the Draft Guidelines and the final Guidelines are expected to be issued to be shortly.

Another potential development in relation to

amendments to tax laws is in the realm of Base Erosion and Profit Shifting (“BEPS”) project of the Organization for Economic Co-operation and Development (“OECD”). BEPS refers to tax planning strategies that exploit gaps and mismatches in national taxation laws to artificially shift profits to low or no-tax locations. Since these locations generally would have little or no economic activity, little or no overall corporate tax gets paid anywhere in the world. Various action plans have been identified as part of the BEPS project, some of whichare likely to be adopted into the tax regime in India. Notable measures that may be introduced include theCountry-by-Country Reporting (“CBCR”) requirement for transfer pricing purposes. CBCR requirements would mean that companies with foreign subsidiaries and affiliates would be obliged to provide details of the place of incorporation, tax residency, revenues, profits, taxes paid, capital, and number of employees and details of foreign affiliate companies’ activities on a country-by-country basis.

In addition, regulations relating to Controlled ForeignCompanies (“CFC”), to tax passive income and thin capitalization to disallow interest payments beyond a specified threshold could also be introduced.

It is also pertinent to note that the General Anti Avoidance Rules (“GAAR”) which have already been introduced into Indian tax legislation are expected to be in force effective from April 1, 2017. GAAR gives Indian authorities the right to scrutinize and tax transactions which they believe are structured solely to avoid taxes. Among other things, GAAR empowers Indian tax authorities to declare certain arrangements as impermissible avoidance arrangements and once an arrangement is declared as such, it could be disregarded, combined or recharacterised either wholly or partially. If GAAR is invoked, it could also result in the denial of treaty benefits.

On the indirect tax front, the Goods and Services Tax (“GST”) is expected to be a major tax reform in

Government is working towards improving India’s image in relation

to ease of doing business, by also providing stability in the tax regime



the field of indirect taxes. GST is proposed to subsume multiple indirect taxes with a single unified system of tax, thereby reducing the cascading effect of multiple taxes on goods & services. The Constitution (One Hundred and Twenty Second)Amendment Bill, 2014, seeks to amend the Constitution to introduce GST. The Bill has been passed by Lower House of the Parliament and is yet to be passed by the Upper House. The Government is striving towards introducing GST in 2016.

Concluding remarks

The landscape of Indian taxation laws is undergoing a definite shift, albeit at a glacial pace. While the Government is taking laudable steps towards achieving a predictable and stable tax regime, the Government still needs to focus on providing a tax payer friendly experience through enacting less complicated tax laws, reducing litigation, and efficient functioning. Only then will India be able to achieve the distinction of a favoured investment jurisdiction and doing business.

The Government seems to be aware of its challenges and the recent actions / statements coming from the higher echelons appear to reflect the determination and perseverance of achieving such ambitious goals.

“The author would like to acknowledge effort and assistance of Ms. Shruti KP a Senior Associate at Cyril Amarchand Mangaldas”


Mr. S R PatnaikPartner & Head ofTax Practice

About Author

Mr. Patnaik has more than 17 years experience. He is qualified both as a chartered accountant and as a lawyer.

Mr. Patnaik has expertise in various aspects of direct tax, such as international tax, transfer pricing, corporate tax etc. He also has experience and expertise in various in-bound and out-bound M&A transactions. He has represented clients before multiple judicial fora including ITATs and High Courts and briefed Senior Counsels.Recently, The Asian Lawyer’s Emerging Markets Awards, 2015 awarded him as the ‘Tax Lawyer of the Year’ . He was nominated as one of the leading Tax Lawyers for multiple years by Asia Law. He has been featured as one of the leading Tax Controversy Leaders in India by the international publication “International Tax Review” in its Tax Controversy Leaders Guide 2014 publication.


The finance ministry of the government of India has recently tabled the Insolvency and Bankruptcy Code, 2015 (the “Bill”) in the Indian Parliament. The Bill provides for expeditious and time-bound resolution of insolvency process and if adopted in its current form, is likely to facilitate ease of doing business inIndia. The committee which drafted the Bill has takennote of the shortcomings of the bankruptcy process in India including observations in the world bank report which stated that the average time to resolve insolvency in India is significantly higher compared to the time taken in some of the other jurisdictions, and has included several measures to reduce the time for insolvency process. The Bill, if adopted in the current form, is likely to bring in a paradigm shift in the way enterprises will be run especially in the relationship between debtors and creditors. The proposed Bill brings in a unified framework which consolidates the insolvency legislations applicable to companies, limited liability partnerships, partnership firms and individuals. The intention behind the Bill is to replace certain statutes like the Sick Industrial Companies (Special Provisions) Repeal Act, 2003 and to amend certain other legislations including the existing laws governing companies in India. The objective of this article is to discuss some of the broad terms of the proposed Bill and to examine whether the Bill addresses some of the concerns of creditors in the existing bankruptcy regime.

The Bill proposes incorporation of the Insolvency and Bankruptcy Board of India (the “Board”) whichwill have several powers including issuance ofregulations and guidance related to bankruptcy, regulating the insolvency professionals and insolvency related process, promoting transparency and best practises. The Bill also seeks to establishadjudicating authorities to hear and dispose ofinsolvency resolution and bankruptcy applications.The National Company Law Tribunal (“NCLT”) is proposed as the adjudicating authority for companiesand limited liability partnerships and the Debt

�e New Bankruptcy Code - A New Horizon in Bankruptcy Laws in India

Recovery Tribunal (“DRT”) is proposed as the adjudicating authority for partnership firms and individuals. Where relevant, appeals from their ordersshall lie to the National Company Law Appellate Tribunal and the Debt Recovery Appellate Tribunal, respectively. The Bill also envisages distinct processes depending on the category of the debtor entity, that is, (1) companies and limited liability partnerships (together “Corporate Debtor”) and (2) individuals and partnership firms (together “Non-Corporate Debtor”). In cases of Corporate Debtors, default in repayment of debt (minimum INR 1 lakh (equivalent of USD 1500)) of such a debtor would trigger a right for relevant creditor to initiate corporate insolvency resolution process (“CIRP”). The basic thrust of the proposed Bill is to move from a recovery regime to a revival regime, bringing in institutional infrastructure for insolvency and bankruptcy and greater role for the creditors in the insolvency and bankruptcy process. The Bill imposes a moratorium on inter alia, institution or continuation of suits or proceedings against the Corporate Debtor including from transferring, encumbering, alienating or disposing off any asset or any legal right or beneficial interest of the Corporate Debtor, during the CIRP, such that all options for reviving the Corporate Debtor can be explored. The Bill proposes a process for corporate insolvency resolution which works on a speedier revival mode. For instance, upon default by a Corporate Debtor , a creditor (including both domestic as well as foreign creditors), a shareholder or a partner of the Corporate Debtor or any individual who is in charge of managing the overall operations and resources of the Corporate Debtor, and the Corporate Debtor on its own, can initiate the CIRP. The Bill contemplates for the affairs of the Corporate Debtor to be managed by insolvencyprofessionals on a going concern basis and the powers of the board of directors of the CorporateDebtor are suspended during the pendency of the



CIRP1. Also, while the Bill aims for the completion of the CIRP within one hundred and eighty days, it also provides for a fast-track CIRP which should be completed within ninety days from the insolvency commencement date.

One of the problems faced in restructuring processes under the existing regulatory framework is that certain creditors have tried to seek remedies outside the restructuring process and in the process, tried to de-rail any possibilities in reviving the prospects of the Corporate Debtor. The Bill has tried to address this issue by introducing distinct classes of creditors on the basis of the nature of the debt owed to them viz. financial creditors2 and operational creditors3. The decision making power would be vested with the committee of creditors, which shall comprise of only the financial creditors and decisions made by 75% of the financial creditors (by value) shall be binding on all creditors. A significant feature of the Bill is that once the resolution plan is approved by the NCLT, it binds all shareholders, creditors and other stakeholders of the Corporate Debtor. In fact, unlike under the existing regime where there is no enabling provision requiring a corporate entity to provide assistance to the creditors in the restructuring process, the Bill requires the personnel of the Corporate Debtor and its promoters or any person connected with the management of the Corporate Debtor to extend assistance and co-operation to the insolvency resolution professional for managing the affairs during the CIRP. Therefore, the expectation is that a single creditor should not be able to de-rail the bankruptcy process unlike under the existing regime, nor should the Corporate Debtor have the choice to not co-operate.

The Bill also provides for delegation of management and supervision of the entire insolvency process to professionals registered with the Board for timely completion of the process and preventing erosion in economic value of the assets. The CIRP will be controlled by the committee of creditors with the assistance of a resolution professional (“RP”) appointed by the order of the NCLT. The Bill vests significant powers in the RP including: (a) conducting a CIRP; (b) conducting the individual bankruptcy

1As per the terms of the Bill the CIRP process would need to be completed within 180 days subject to an extension of 190 days under exceptional circumstances.2The Bill defines a ‘financial creditor’ as a person to whom a financial debt (like money borrowed) is owed and a person to whom such debt may have been legally assigned or transferred in accordance with law (including a person resident outside India).3The Bill defines an ‘operational creditor’ as a person to whom an operational debt (like claims in respect of provision of goods and services) is owed and a person to whom such debt may have been legally assigned or transferred in accordance with law (including a person resident outside India). 4The Bill defines ‘financial information’ as one or more of the following categories of information, namely: (1) records of the debt of the person; (2) records of liabilities when the person is solvent; (3) records of assets of person over which security interest has been created; (4) records, if any, of instances of default by the person against any debt; (5) records of the balance sheet and cash-flow statements of the person; and (6) such other information as may be specified.

process; and (c) conducting liquidation of the Corporate Debtor. Also, the RP is entrusted with thepower to manage the operations of the Corporate Debtor during pendency of the CIRP, constituting a committee of creditors and coordinating their meetings, and preserving, protecting and managing the assets of the Corporate Debtor on a going-concern basis. The RP is also required to invite formulation of resolution plans, review the resolution plans received by it and to present the plans fulfilling the prescribed criteria to the committee of creditors for approval. On being approved by the committee of creditors, the resolution plan is to be approved by the NCLT (which can reject it only on limited grounds). There are other wide-ranging powers of the RP which can be exercised with the prior approval of the committee of creditors including raising of interim finance for the Corporate Debtor, change in capital structure and creation of security interest over the assets of the Corporate Debtor. The Bill tries to address the problem of information asymmetry that is persistent in the existing regime. Often, in a negotiation between a debtor and a creditor to restructure liabilities, there is asymmetry of information between the creditor and the debtor as the debtor would in most scenarios, have more information about the financial condition than the creditor, resulting in delay in negotiations and often, the outcome is not optimal. To address this, the Bill provides for information utilities which are agencies registered with the Board that create and store financial information4 in a universally accessible format and provides access to financial information stored by it to any person who intends to access such information. In fact, the Bill not only casts an obligation on certain persons to submit such financial information with the information utilities but it also provides that any person intending to submit any financial information can also submit such information with the information utility.

Aside of the CIRP, the Bill also provides that in case the resolution plan is not submitted or approved within the prescribed timelines or is breached, the Corporate Debtor will go into liquidation.



Additionally, a resolution professional has the power (based on the decision of the committee of creditors), at any time during the CIRP, but prior to the confirmation of the resolution plan, to initiate a liquidation process against the Corporate Debtor. The Bill also allows voluntary liquidation of a Corporate Debtors provided there is no default in payment of debt and subject to approval of creditors representing two-thirds in value of the debt of the Corporate Debtor. Once liquidation order is passed by the NCLT, the liquidator so appointed (likely to be the RP managing the CIRP) has wide-ranging powers to set aside the transactions carried out in past if they are found to be exorbitant, undervalued or preferential in nature. Furthermore, the Bill alters the order of priority for distribution of assets from the liquidation estate5 of the Corporate Debtor by creating prior charge in favour of secured creditors having relinquished their security interests and workmen for past twelve months dues. However, if a secured creditor realises his security, the unrealised portion of his dues will rank below the dues of unsecured creditors.

The Bill also proposes to revamp the bankruptcy regime for Non-Corporate Debtors. It puts forth a fresh start process for Non-Corporate Debtors with annual gross income less than INR 60,000 (around USD 1000) in order to give them discharge in respect of certain qualifying debts. Further, an insolvency resolution process in respect of Non-Corporate Debtors is proposed which may be initiated on default (minimum INR 1000 (around USD 150)) either by such a debtor himself or by a creditor by filing an application before the DRT. Once such an application is admitted, a moratorium on initiating legal proceedings relating to debt due will commence for a period of one hundred and eighty days. The Bill provides right to the Non-Corporate Debtor to prepare a repayment plan in consultation with the RP, which will be subject to review by the creditors. On approval of the repayment plan by the creditors and the DRT, it becomes binding on all the creditors. However, in case the insolvency resolution application or the repayment plan is rejected by the DRT, creditors have been given a right to have the Non-Corporate Debtor declared as bankrupt. There are several differences between the existing regime and the terms proposed under the Bill. This is

5The ‘liquidation estate’ comprises of all the assets owned by a Corporate Debtor in liquidation, subject to exceptions, for instance, assets held in trust by the debtor and assets of subsidiary companies. 6Though a new legislation for companies Companies Act was introduced in the 2013 Act, which replaced the 1956 Act, the provisions relating to insolvency has not been notified yet. Therefore, for the purpose of comparing the difference in the process for companies, we need to consider only the Companies Act of 1956.7Section 54 of the Bill

more significant in the case of limited liability companies where the existing insolvency or winding-up regime is under the Indian Companies Act, 1956 (“Companies Act”)6. Under the Companies Act, a company is allowed to initiate winding up proceedings only in certain cases such as (i) by way of passing a special resolution, (ii) if the Tribunal is of the opinion that it is just and equitable that the company is wound up, or (iii) inability of the company to pay debts. Under the Bill, other than the financial creditors, operational creditors and Corporate Debtors (i.e. company itself), following persons are also allowed to invoke the proceedings on behalf of the Corporate Debtor: (i) any member, partner authorised to make an application for the CIRP, (ii) an individual who is in charge of managing the overall operations and resources of the Corporate Debtor, and (iii) person who has the control and supervision over the financial affairs of the Corporate Debtor.

The Companies Act sets out several grounds on the basis of which a winding up proceeding can be initiated, including inability of the company to pay its debts. The Bill addresses the process of insolvency only in cases of non-payment of debt; other grounds continue to operate within the Companies Act. Another significant difference is on the classification of creditors where the Companies Act classifies creditors on the basis of secured and unsecured creditors while the Bill classifies creditors between financial and operational creditors. Priority waterfall upon liquidation is one of the major changes that have been proposed under the Bill where there is a preference to secured creditors over all forms of crown debt7.

The Bill is definitely a landmark step taken by the Government of India to ensure a speedier and creditor driven insolvency, rehabilitation and recovery regime. However, there are certain aspects of the Bill which need to be fine-tuned before this is promulgated. There are a few such concerns including a likely scenario wherein from the reading of Section 6 of the Bill read with amendment to sub-section 94(2) and Section 271 of the Companies Act, 2013 (the “2013 Act”) as provided in the Schedule of the Bill, it appears that a dual regime of insolvency under the Bill and under the 2013 Act is being contemplated. This could be a challenge since it is unclear as to how the



dual regimes will operate and it needs to be ensured that terms of the Bill and Section 271 (e) of the 2013 Act do not overlap8. Many commercial contracts (like concession agreements, direct agreements, various tripartite agreements) have commencement of any insolvency proceeding as a terminable event. Therefore, the moratorium on certain action9 in relation to the affairs of the Corporate Debtor, should be expanded to restrict the Corporate Debtor’s contractual counterparties (including Government entities) from terminating their contracts with the Corporate Debtor solely on the grounds that an insolvency resolution process has been commenced. Termination of such contracts on which the Corporate Debtor is dependant for its revenue cashflow would erode the value in the Corporate Debtor and defeat the purposes of the insolvency resolution process. Alternatively, it should be provided that the rights and benefits, as may be available under these commercial contracts, in favor of the secured creditors, such as substitution rights, will not be affected or taken away by such termination by the counterparties. Also, one of the objectives of the Bill, apart from speedier rehabilitation / recovery regime and resolution of non-performing asset issue, is to ensure that the creditors have more control over the affairs of the Corporate Debtor. In such case, it is necessary that certain debtors should not be allowed to present a resolution plan. For instance, Corporate Debtors who have (i) made investments for fraudulent purposes, (ii) failed to contribute equity as required under relevant financing documents, (iii) diverted funds, and/or (iv) been declared a wilful defaulter by the banks and financial institutions should not be allowed to present a resolution plan Section 30 (2) (b) of the Bill provides that repayment of an operational creditor cannot be less than the amount the operational creditor would have received as part of the proceeds from the liquidation estate. This reduces the ability of the committee of creditors to restructure the debt of the company as part of the resolution plan. The operational creditors have the right to file an application for initiating insolvency resolution process only in respect of undisputed claims. It has not been provided as to how the dispute in relation to the claim for the operational creditors will be settled. Also, this will result in frivolous disputes raised by the Corporate Debtor. Separately, some exemptions should be considered in

8This could be in a situation where the tribunal is of the opinion that it is just and equitable that the Company should be wound up 9 Section 14 of the Bill

relation to CIRP to ensure speedier implementation of any resolution plan which may involve restructuring, change in management, transfer of business etc of the Corporate Debtor. This could include exemptions from mandatory open offer requirements that could be triggered under the securities regulations, approvals from Competition Commission of India and provisioning norms prescribed by the Reserve Bank of India for a resolution plan approved by the creditors. There is also some amount of criticism amongst some of the domestic secured lenders against providing equal voting rights to unsecured lenders. The concern arises from a perspective that many of the large infrastructure projects are funded by secured lenders and in the event unsecured lenders are given the same voting rights as secured lenders, this may potentially impact the interest of secured lenders in being part of such consortium since some of the unsecured lenders could use their voting right as a tool to negotiate with secured lenders and exit such projects

At a time when the Indian banking industry is reeling under the pressure of non performing loans and poor recovery owing to failure of businesses, errant borrowers, inefficient and inordinate delays in enforcement, the Bill is expected to be a welcome relief for all stakeholders including lenders, companies, and the economy as a whole. Also, the swiftness of the Government of India in introducing the Bill in the lower house of the Parliament as a money bill goes on to prove the urgent requirement of a change in the insolvency laws of the country. The Indian Government has later modified it as a normal bill and has referred it to a joint parliamentarycommittee. Having said that, it needs to be ensured that the authorities and other statutory bodies (especially the NCLT) envisaged to be formed / appointed under the Bill are in place at the earliest upon the Bill coming into force and are adequately staffed and have excellent infrastructure. This is critical considering the fate of the company law tribunals that were supposed to be constituted way back in 2000 but have not seen the light of the day. There is no doubt that there may be challenges to the new law including potential review under

The basic thrust of the proposed Bill is to move from a recovery

regime to a revival regime



constitutional grounds and that there may be some hurdles faced by the regulatory authorities while it is implemented. However, the need for such a legal framework which provides for a speedier regime for resolution of insolvency cases in India is the need of the hour and required more than ever before.

About Authors

Joseph is a part of the banking and finance team and his primary areas of practice include asset financing, structured finance and debt restructuring. He regularly advices some of the leading private banks and foreign banks in India.

Joseph joined the Firm in June 2009 and was seconded to Deutsche Bank, AG, Mumbai branch from September 2009 to May 2010. Prior to joining Cyril Amarchand Mangaldas, Joseph was an associate in a leading law firm based in London. Joseph has also worked with ICICI Bank Limited, one of India’s largest private sector banks.


Mr. Joseph JimmyPartner

Dhananjay is a part of the Projects and Project Finance Team, specializing in oil & gas, telecom andport sectors. He advises lenders and developers bothin the infrastructure sector and has acted for many key players in this space.

After completing his B. A. LL.B (Hons.) at the National Law School of India University, Bangalore, India, he joined the Firm in 2006. He has been admitted as an advocate in the Bar Council of Maharashtra & Goa.

Mr. Dhananjay KumarPartner


�e New Indian Insider Trading Regulations: A Step in the Right Direction?Introduction

It is widely acknowledged that the efficiency of an economy’s securities market has a direct co-relation with how well market conduct is regulated. Amongst emerging markets, India has carved a niche for itself by developing a robust capital markets within a relatively short span of time. It therefore doesn’t come as a surprise that prevention of insider trading was one of the first issues on which the Securities Exchange Board of India (“SEBI”) legislated1, in 1992 – the same year that SEBI was established.

Since then, the 1992 Regulations have been revised a few times, with the need for a change often arising from the regulator’s learning of actual market situations. The 1992 Regulations were amended in 2002 and 2008.The most recent overhaul took place in 2015. With the local markets and market participants getting more connected, the underlying objective of the revamp was to align the Indian insider trading laws with the changing regulatory environment on insider trading globally. It is noteworthy, that the Indian legal regime on insider trading has always been more principle based than prescriptive. Overtime, recognising the evidentiary challenges of establishing an insider trading charge (and proving malafide intent), the law has incorporated a more strict liability type approach which seeks to penalise insiders who trade whilst in possession of unpublished price sensitive information (“UPSI”) [or material non-public information as is commonly known in other jurisdictions.] as opposed to on the basis of such information.

Before the amendments were carried out and implemented, SEBI constituted a committee in 2013 led by Justice N. K. Sodhi (the “Committee”) to review and recommend changes to help align

regulatory framework with commercial market needs while strengthening governance. The Committee submitted its recommendations in 2013 itself, which were then distilled into the SEBI (Prohibition of Insider Trading) Regulations, 2015 (“2015 Regulations”) and made effective since May, 2015.This article seeks to analyse and highlight some of the key changes introduced in the Insider Trading Regulations 2015 and its implications.

Who is an insider?

In terms of Regulation 2(h) of the 2015 Regulations, an insider means any person who is:i) a connected person; orii) in possession of or having access to unpublished price sensitive information in relation to a listed or to be listed company in India.

The definition of ‘connected person’ under the 2015 Regulations is wider2 in scope than the 1992 Regulations as it includes any person associated with the company in any capacity, including by reason of frequent communication with its officers, in a fiduciary, employment or contractual capacity, in the six month period prior to the concerned trade. The concept of “frequent communications” as an ingredient to establish connection with the officers of a listed company (which has the potential to go beyond common workplace and professional relationships), is quite open ended and likely to get interpreted on a case by case basis. These changes are in some ways sweeping as the 2015 Regulations shifts the burden of proof to demonstrate that that they were not in possession (“UPSI”)3 on to the connected person.

One thing that has remained unchanged from the erstwhile regulatory regime is the second limb of the ‘insider’ definition which is effectively a residual

1To introduce the SEBI ( Prohibition of Insider Trading) Regulations, 1992 ( herein after referred to as the 1992 Regulations)2While the previous regulations had two separate concepts, viz., deemed connected persons and connected persons, both these categories have be subsumed into the new definition of a “connected person”.3This corresponds to what is generally understood as material non-public information in other jurisdictions.



catch-all provision. This is an unqualified category and there is no carve out for persons who may receive UPSI in an unsolicited or inadvertent manner. The underlying purpose of this catch all provision was to brings within its ambit every person (irrespective of their connection or lack thereof, with a company) who has received or access to UPSI as an insider.

Hence the manner in which a person gets UPSI (making him an insider) is irrelevant. The possession of UPSI is in itself sufficient to make such person an insider. This principle had been recognized by the Securities Appellate Tribunal as early as 2006, in the matter of Anjali Bake v. SEBI [order dated October 26, 2006], where it was stated that when a person has had access to UPSI, “he becomes an insider. He need not be connected with the company”.

UPSI – Not generally available?

One of the key changes implemented through the 2015 Regulations is that UPSI4 excludes from its ambit, ‘generally available information’ which constitutes information that is accessible to the public on a non-discriminatory basis. An explanatory note to this definition states that information published on the stock exchanges’ websites will ordinarily be considered as generally available information.

Interestingly, prior to 2002, ‘unpublished price sensitive information’ was defined in the 1992 Regulations, as ‘any information which relates to…a company, and is not generally known or published by such company for general information...’. This definition was relied upon, in the case of HLL v. SEBI5 , by the Central Govt. to observe that for information to be ‘generally known’ it was not required for such information to be authenticated or confirmed by the company. Subsequently, the term ‘unpublished’ was amended in the 1992 Regulations to mean ‘information which is not published by the company or its agents and is not specific in nature’, therefore, creating a nexus between the information and publication of such information by the company itself.

Whilst this is likely to make the assessment that certain information that is publicly available (but not originating from the company) should not be considered to be USPI, possible the new definition

is likely to raise questions on the extent to which suchinformation should be disseminated in the public domain, for it to be considered as available on a ‘non-discriminatory’ basis. Given the lack of regulatory prescription on what ‘non – discriminatory’ could entail and rapidly evolving technologies for disseminating information, it will be interesting to seehow the scope of UPSI evolves over time.

The 2015 Regulations also do not spell out the thresholds of ‘materiality’ and ‘price sensitivity’ of information in relation to UPSI. However, illustrative guidance in relation to events that are likely to be considered UPSI have been provided and includes (i) financial results; (ii) dividends; (iii) change in capital structure; (iv) mergers, de-mergers, acquisitions, de-listings, disposals and expansion of business and such other transactions; (v) changes in key managerial personnel; and (vi) material events in accordance with the listing agreement. As such, other than the illustrative circumstances set out above, which are deemed to be “material” and “price sensitive”, for all other situations, the assessment of whether any particular information is material or price sensitive, will depend on the facts and circumstances of the case. It has however been recognised through case law, that the nature of the information does not have to be absolutely certain for it to be considered as being UPSI6. For instance, in the matter of Gujarat NRE Mineral Resources v. SEBI7, the SAT had held that commercial activity that is carried out by a company in the course of its normal business and operations would not amount to ‘price sensitive information’.

Separately UPSI can now also relate to the listed/to be listed company or its securities. While this may seem like a minor tweak, its implications are quite significant because now, even where the company has no knowledge about specific information (for instance an impending secondary block) would be considered as UPSI.

Communication of UPSI

In terms of the 2015 Regulations insiders are prohibited from communicating, providing or allowing access to UPSI unless required for legitimate purposes, performance of duties or discharge of legalobligations8 in terms of the 2015 Regulations. Additionally even procurement of UPSI and

4Regulation 2 (1) (n) of the Insider Trading Regulations 20155(1998) 18 SCL 311 MOF6In the matter of DSQ Biotech, SEBI Chairman Order dated February 27, 2003.7Order dated November 18, 20118Regulation 3(1) of the Insider Trading Regulations 2015



inducement to share UPSI which is not in furtheranceof ones legitimate duties and discharge of obligations would constitute in a contravention9. This is a standalone requirement which if not complied with could lead to a contravention, even in scenarios where there is no evidence/ confirmation of actual trading taking place pursuant to such communication.

The explanatory note to the definition of UPSI suggests that the purpose of the provision is to ensure that organisations develop practices based on ‘need to know’ principle for treatment of information in their possession. There is no prescriptive guidance detailing the manner in which Chinese walls and wall crossingprocedures will need to be implemented and it has been left to the discretion of the corporate entity (listed company/ or regulated intermediary/ consultants etc) which is required to implement a internal code and policy for prevention of insider trading. Infact, in the matter of Axis Bank Limited10, where SEBI has the opportunity to considered the Chinese wall defence, under the 1992 Regulations it was recognized that the presence of Chinese walls and other systems and processes as prescribed, in an organization would be a valid defence to insider trading. It was further observed that if a company “had all its systems in place for preventing communication of information and to ensure that such dealing was not by the person/employee in possession of the information, it is justified in trading even while in possession of UPSI.” Therefore, the burden of proof in such cases would on SEBI to prove that the there had been a break down of the Chinese walls and other systems and processes put in place to insulate UPSI.

PIPE Transactions

In terms of Regulation 3(3) of the 2015Regulations, sharing of UPSI is permitted in relation to: • any transaction that would entail making an open offer under the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011, provided that the board of the company is satisfied that the transaction is in the ‘best interests’ of the company; and• otherwise for transactions where the board of the company is satisfied that the transaction is in the ‘best interests’ of the company and the UPSI is made generally available two trading days prior to the trade.

The board of directors of the listed company is also

required to ensure that confidentiality and non-disclosure contracts are duly executed between the parties and that such parties keep information received confidential and not otherwise trade in securities of the company when in possession of UPSI.

This exception which has been introduced by the 2015 Regulations has been created specifically for PIPE deals (i.e., private investment in public enterprises), to create a process for conduct of pre-investment diligence by the investor. However, given that any UPSI made available to the incoming investor as part of the diligence is now required to be ultimately published, the information shared with the investor would have to be carefully evaluated.Further, the requirement for obtaining a board approval at the outset of a transaction may impact the dynamics of deal making in India as usually the management of companies are involved in the transaction (including disclosure of information to counter parties as part of due diligence) and the board steps in only at a later stage to approve the transaction.

Defences

The 2015 Regulations identify certain specific defences to insider trading, which include:

• Off market transactions inter-se transfers between promoters, who were in possession of same UPSI.

• In case of non-individuals where trading decisions were not taken by persons in possession of UPSI and arrangements were in place to ensure that no UPSI was provided to the person making trading decisions.

• Trades undertaken pursuant to a trading plan.

While the Committee had recommended this to be a valid defence available generally, as per the 2015 Regulations the parity of information defence is only available for inter-se transfers between promoters off the exchange.

SEBI has not incorporated some of the other defences suggested by the Committee , such as trades being contrary to the manner in which advantage may be taken of UPSI or trades being undertaken by another person without the knowledge of the insider (such as wealth managers or discretionary portfolio managers). Having said that, the list of defences set out in the

9Regulation 3(2) of the 2015 Regulations 10SEBI order dated March 28,2013



Insider Trading Regulations 2015 is an inclusive listtherefore, the possibility of a ‘blue sky defence’, i.e., defending a charge of insider trading on certain other grounds may be possible. This could also potentially result in a dilution of the strict liability approach that has been in place till date.

Trading Plan as a defence

The 2015 Regulations have also introduced the concept of trading plans as a defence to insider trading and prescribes the following requirements, inter alia:

• trading may not commence earlier than 6 months from public disclosure of such plan and should be for a period of at least 12 months;

• the trading plan must be specific and set out details of value or quantum of trades along with the nature of trades, and the interval or dates of trades;

• the trading plan would be irrevocable and any deviation could potentially result in a contravention of the 2015 Regulations. ; and

• the trading plan shall not commence unless the UPSI in possession of the insider at the time of formulation of the trading plan becomes generally available.

Under the current construct, the users of trading plans are likely to be limited to perpetual insiders (such as promoters) given that the trading plan is irrevocable. Further, the timelines specified for effecting trading plan may be considered as being too long and public disclosure of the plan considerably ahead of the actual trades reduces the appeal of trading plans.

Code of fair conduct and disclosure

Unlike the 1992 Regulations, which prescribed separate model codes of conduct for listed companies and market intermediaries, the 2015 Regulations only prescribe principles based on which every person who is required to handle UPSI in the course of business operations is required to formulate a code of conduct to regulate, monitor and report trading by employees. As such, a strict reading of the regulations would require unlisted securities market intermediaries to also comply with the trading window requirement (in addition to maintaining a pre-clearance mechanism).

Further, the 2015 Regulations also stipulate a 6 month

holding period for securities which is considerably longer than the previously prescribed holding period of 30 days. The 2015 Regulations also empower listed companies/ intermediaries to make their codes of conduct applicable to such other persons as they identify based on their role and function in the organisation.

Conclusion The 2015 Regulations has been a much needed overhaul to replace the old insider trading regime by adopting a transparent and consultative approach. However, there continue to be certain issues which need to be ironed out and will gain further clarity when applied to actual cases. Some of the new concepts (defences to insider trading, generally available information, etc.) would require careful analysis by the SEBI as well the Securities Appellate Tribunal to clearly demarcate the scope of ambit of the regulatory framework. There are however, quite a few changes that tighten the erstwhile regime and require listed companies and market participants to implement stronger controls and monitor the exchange of UPSI more carefully. It is also relevant to note that any regulatory investigation/ proceeding involving an allegation of insider trading cannot be settled through the Consent mechanism11 and hence would necessarily have to be dealt with through the adversarial process. While in most cases, the offence of insider trading is punishable with the payment of a monetary fine, SEBI does have the ability to initiate criminal action against the offender, though this power has been exercised quite selectively over the years. In cases which are of an emergent situation requiring remedial action to be taken by SEBI, orders barring the offender from accessing the market may also be passed by SEBI.

Additionally, SEBI has also recently been granted greater enforcement powers including the powers to attach property, bank accounts, etc. As such, the regulator is now better equipped to investigate and enforce insider trading cases.

11SEBI (Settlement of Administrative and Civil Proceedings) Regulations, 2014 which lays out the framework for the Indian equivalent of a plea bargaining process.

This exception has been created specifically for PIPE deals (ie. private

investment in public enterprises), to create a process for conduct of pre-investment

diligence by the investor



Therefore, while the introduction of the Insider Trading Regulations 2015 is a step ahead in the right direction, it needs to be coupled with constructive interpretation by judicial and quasi – judicial bodies going forward, to enhance the agility of the regulatory regime and lend dynamism to the way the regulations are interpreted to best serve the interest of the market and ensure investor protection.

About Author

Ipsita leads the firm’s financial regulatory practice. She has over ten years of experience and been recognised for her expertise in financial services and governance issues by clients in the RSG India Report, 2013. She was also nominated in the “Rising Star” category of the Euromoney Legal Media Group Asia Women in Business Law Awards, 2014. She routinely advises and represents a number of global and domestic financial institutions on entry strategy, compliance, regulatory contentious and non-contentious matters as well as market conduct issues.

“The author would like to acknowledge effort and assistance of Mr. Rohan Banerjee a Senior Associate at CyrilAmarchand Mangaldas”.


Ms. Ipsita DuttaPartner

58

About

Cyril Amarchand Mangaldas (“the Firm”) was founded in May 2015 to continue the legacy of the 97-year old Amarchand & Mangaldas & Suresh A. Shroff & Co., whose pre-eminence, experience and reputation of almost a century has been unparalleled in the Indian legal fraternity. Set up on the foundation of our glorious legal tradition and the outstanding legal practice built by Mr. Suresh A. Shroff, the Firm under the leadership of Mr. Cyril Suresh Shroff, along with its partners and associates, has come together to restructure and design a new blue print for the future.

With a long and illustrious history that began in 1917, the Firm is the largest full-service law firm in India, with over 600 lawyers, including 91 partners, and offices in India’s key business centres at Mumbai, New Delhi, Bengaluru, Hyderabad, Ahmedabad and Chennai. The Firm advises a large, varied client base that includes domestic and foreign commercial enterprises, financial institutions, private equity funds, venture capital funds, start-ups and governmental and regulatory bodies. The Firm prides itself in having a strong value system that keeps its clients as the central focus. Building on the strength of this value system, the Firm has fostered a collaborative work culture and adopts a pragmatic and solution-oriented approach to problem solving. Today, the Firm is recognised globally as a trusted adviser which consistently delivers quality, capability and commitment to its clients.

Our lawyers are recognised for their expertise, not just in corporate practice and dispute resolution, but also in specialist areas such as competition law, employment, intellectual property, real estate and tax. Several of these individuals are cited as leading practitioners by global publications like Chambers and Partners, International Financial Law Review, Asia Legal 500 and Euromoney. Our partners routinely advise and collaborate with governments and regulators on policy matters. Many partners of the Firm are also members of various government committees on legal and regulatory reform. In particular, our Managing Partner, Mr. Cyril Shroff, is involved at the highest level in the leading government and industry initiatives that are aimed at policy and regulatory reform, at both the domestic and international level.


CyrilAmarchandMangaldas



Notes:


Peninsula Chambers, Peninsula Corporate Park, GK Marg, Lower Parel, Mumbai - 400 013, IndiaTel: +91 22 2496 4455 • Fax: +91 22 2496 3666 • Email: [email protected]

new cam magazine without grid copy...masala bonds are the latest o˛ering which have hit the indian...

Documents