Delhi High Court Upholds Constitutional Validity of Anti-Profiteering Provisions in GST

The Hon’ble Delhi High Court (High Court) in a batch of writ petitions filed by companies aggrieved against orders/notices by the National Anti-Profiteering Authority (NAA), spanning across various sectors, has upheld the constitutional validity of the provisions pertaining to anti-profiteering under Goods and Services Tax (GST), i.e., Section 171 of the Central Goods and Services Tax Act, 2017 (CGST Act), along with Rules 122, 124, 126, 127, 129, 133 and 134 of the Central Goods and Service Tax Rules, 2017 (CGST Rules). The key findings of the High Court have been succinctly captured as under:

On legislative competence: The High Court held that Article 246A of the Constitution empowered the Legislature to make laws ‘with respect to’ GST. The phrase ‘with respect to’ was of wide amplitude and confers broad authority, thereby, conferring the power to legislate on all ancillary, incidental and necessary matters which are related to GST. Thus, Section 171 of the CGST Act was within the legislative competence of the Parliament under Article 246A of the Constitution.

On excessive delegation of legislative powers: The High Court held that Section 171 of the CGST Act clearly outlined the legislative policy of passing the benefit of ‘commensurate’ reduction in prices to consumers when there was ‘any reduction’ in rate of tax or benefit of Input Tax Credit (ITC). The word ‘commensurate’ denoted equivalence or proportionality as recognized in various Supreme Court judgments. Thus, the power of the NAA to determine procedure and methodology stemmed from Section 171 itself, which did not delegate any essential legislative function. The High Court observed that the powers conferred on NAA by way of Rule 126 of the CGST Rules were intended by the Legislature to be exercised by NAA itself. Thus, the principle of delegatus non potest delegare was not applicable to the present case.

On violation of Article 14 of the Constitution: The High Court, rejecting the Petitioners’ argument that NAA’s discretion in determining profiteering was unbridled, held that no standardized methodology or mathematical formula can be laid down for determining profiteering due to varying industries and case specific facts. The methodology adopted by NAA was fair as long as it aligned with the broad principles outlined under Section 171 of the CGST Act. The High Court, affirming Petitioners’ contentions, held that the method adopted by NAA for determining profiteering in real estate industry, based on credit-to-turnover ratio, was flawed. However, the Court held that any inconsistencies in NAA’s approach in computing profiteering may render its orders invalid but this would not invalidate Section 171 of the CGST Act.

On violation of Article 19(1)(g) of the Constitution: The High Court held that Section 171 of the CGST Act did not contravene Article 19(1)(g) of the Constitution since it pertained solely to indirect tax element of goods and services and did not infringe upon the freedom of the supplier to set prices on the basis of relevant commercial and economic considerations. The Court observed that wherever commercial factors necessitated price increase despite tax reductions, the suppliers were required to justify for offsetting reductions and not circumvent their obligation to reduce prices in a commensurate manner.

On comparison with anti-profiteering provisions of Australia and Malaysia: The High Court opined that the Petitioners’ comparison of Section 171 of the CGST Act with the anti-profiteering provisions in Australia and Malaysia was misguided as these provisions were essentially price control mechanisms and are not akin to anti-profiteering provisions enshrined under the CGST Act, which concerned itself with only indirect tax component of goods and services.

On time period during which reduced prices must be maintained: The High Court held that providing for a specific time period up to which the reduced prices must be maintained would not be in conformity with the scheme and intent of the CGST Act. The price reductions must be implemented as long as there exists a direct relation with the reduction of tax rate or benefit of Input Tax Credit (ITC), without any other factors offsetting the reduction.

On alternate methods of price reduction: The High Court held that legislative prerogative dictates the manner in which the tax reductions or ITC benefits are to be passed on to consumers. The suppliers cannot substitute price reduction with other forms like increase in volume, festive discounts, or cross-subsidization. The benefit of tax reduction must be passed on at the level of each Stock Keeping Unit (SKU) to each buyer and the profiteering amount be calculated accordingly for each SKU. Additionally, requiring the benefit of tax reduction to reach consumers by way of ‘cash in hand’ does not infringe any fundamental or other right.

On appeal: The High Court held that there is no vested right of appeal and whether to provide for an appeal or not was a pure question of legislative policy. There is no inherent or natural right to appeal. Furthermore, the orders of the NAA were subject to judicial review before jurisdictional High Courts under Article 226 of the Constitution of India.

On absence of judicial member in NAA: The High Court held that the issues for examination by the NAA primarily involve fact-finding tasks. Thus, it requires domain experts to perform their duties as outlined under Section 171(2) of the CGST Act and Rule 27 of the CGST Rules. The court observed that several statutory bodies, exercising quasi-judicial functions, do not require judicial members such as the Securities and Exchange Board of India (SEBI), Telecom Regulatory Authority of India (TRAI), Institute of Chartered Accountants of India (ICAI), etc. Regarding the issue of grant of casting vote to the Chairperson, the Court, in agreement with Petitioners’ submissions, held that allowing the Chairman a casting vote in case of a tie is deemed to be impermissible. However, since the said provision has not been used, the Court refrained from delving into a deeper discussion on this issue.

On time period for issuance of order: The High Court held that the time limit prescribed under Rule 133 for issuance of the order by NAA was directory rather than mandatory. The provisions did not provide for any consequences in case the time limits provided thereunder are lapsed. Furthermore, the Court held that beneficial legislation, such as anti-profiteering provisions, are enacted in the public interest. Thus, it should be construed liberally owing to larger consumer welfare.

On the scope of investigation by Directorate General of Anti- Profiteering (DGAP): The Court held that Rule 129 of the CGST Rules, by using the word ‘any’ conferred wide investigative power to DGAP encompassing all supplies of goods or services. The Court further observed that consumer ignorance or complexity in the supply chain cannot hinder the objective of a consumer welfare regulation.

On levy of interest and penalty: The High Court held that Section 171 of the CGST Act was broad enough to empower the Central Government to prescribe interest and penalty to dissuade the suppliers from benefits intended to be passed on to consumers. Thus, Rule 133(3)(b) & (d) of the CGST Rules, which empowered the authorities to levy 18% interest and imposition of penalty, fell within the rule-making power of the Central Government.

On comparison with pre-GST era taxes: The High Court rejected the Petitioners’ argument that the provisions of Section 171 of the CGST Act applied only in cases where there was reduction in rate of Goods and Service Tax (GST) or a grant of ITC under the GST Acts. It held that comparing pre- and post-GST era taxes aligned with the objective of the CGST Act.

Concluding remarks
The High Court, in the batch of writ petitions, restricted itself to only deciding the plea against the constitutional validity of Section 171 of the CGST Act and Rules 122, 124, 126, 127, 129, 133, and 134 of the CGST Rules. The Court itself acknowledged that there may be instances of arbitrary exercise of power under the anti-profiteering mechanism, and in such cases the appropriate remedy would be to set aside the orders on merits.

It is open for the affected parties to approach the Hon’ble Supreme Court against the judgment passed by the Delhi High Court on the aspect of the constitutional validity of the relevant provisions. However, in cases where the orders passed by NAPA are patently perverse, arbitrary, or lacking reason, the parties may choose to contest the same before the regular Bench of the High Court itself.

Some of the key issues raised by the Petitioners before the High Court touch upon the basic tax and legal jurisprudence of the land and it would be interesting to watch for any further developments in this regard.

 

Credits: Shashank Shekhar (Partner),  Tushar Joshi (Principal Associate) & Ishant Sharma (Associate)

The Telecommunication Act, 2023

The Telecommunication Act, 2023 (“Act”) has received presidential assent.

Recognizing the need for a legal framework that adapts to contemporary developments in communication technology, the Act aims to introduce an overhauled regulatory framework for governing telecommunication industry. The primary objective is to address the challenges posed by modern aspects of the telecommunication sector, including network security, spectrum allocation, consumer protection, and competition.

Key Features of the Act

(i) Authorisation: The Act aims to overhaul the pre-existing licensing regime for telecommunication services, telecommunication networks, and radio equipment. Unlike the previous legal framework, which required the telecom department to issue more than 100 types of licences, registrations, and permissions, the Act seeks to simplify this procedure. It does so by consolidating many of these into a single authorisation mechanism. Under the Act, telecommunication has been defined as the ‘transmission, emission or reception of any messages, by wire, radio, optical or other electromagnetic systems, whether or not such messages have been subjected to rearrangement, computation or other processes by any means in the course of their transmission, emission or reception’ and telecommunication network has been defined as ‘a system or series of systems of telecommunication equipment or infrastructure, including terrestrial or satellite networks or submarine networks, or a combination of such networks, used or intended to be used for providing telecommunication services, but does not include such telecommunication equipment as notified by the Central Government.’

(ii) Assignment of Spectrum: Under the Act, spectrum will be assigned through auction except for specified purposes, where it will be allocated through an administrative process. The specified purposes include (a) teleports, (b) television channels, (c) direct to home, (d) mobile satellite service in L and S bands, (e) headend in the sky, (f) digital satellite news-gathering, (g) public broadcasting services, (h) use by the central government, state governments, or other entities authorized by the government, (i) national security and defence, (j) disaster management, (k) weather forecasting, (l) transport, (m) BSNL or MTNL.

(iii) Spectrum Utilisation: The Act has introduced measures to encourage the efficient use of spectrum, including the concept of terminating spectrum assignments if they remain unused for a specified period. Additionally, the Act has introduced new provisions for spectrum sharing, trading, leasing, and surrender.

(iv) Right of Way: The Act allows the Central Government or any authorized entity or their contractors or agents to make an application to any person concerning any public or private property to seek the right of way for telecommunication infrastructure under, over, along, across, in or upon such property.

(v) Power to intercept and search: The Act provides the power to the Central Government to intercept, monitor, or block certain message or classes of messages between two or more persons on specified grounds which includes: (a) security of the state, (b) prevention of incitement of offenses, (c) occurrence of public emergency or (d) interest of public order. These actions will be subject to procedure, safeguards, and duration as prescribed. Telecommunication services can also be suspended on similar grounds. The Central Government has the power to make temporary provisions about any telecommunication infrastructure, network, or services in the occurrence of any public emergency or public safety. Further, the Act allows any officer authorised by the Central Government to search a premise or vehicle on specified grounds, provided he has a reason to believe that unauthorised telecommunication equipment or network used to commit an offence is kept or concealed there. The officer can also take possession of such equipment.

(vi) Protection of user: The Central Government will provide measures to protect users, which will include: (a) prior consent to receive specified messages which includes advertising images, (b) creation of Do Not Disturb registers, (c) mechanism to allow users to report malware or specified messages. Entities providing telecommunication services need to establish an online mechanism for registration and redressal of grievances.

(vii) Offences and Penalty: The Act prescribes penalties for telecommunication service providers as well as the users. Under the Act, the offence of providing telecom services without authorisation or gaining unauthorised access to a telecommunication network or data is punishable with imprisonment up to 3 (three) years or a fine up to INR 2,00,00,000 (Indian Rupees Two Crores) or both. Using unauthorised network or service will be punishable with a penalty of up to INR 10,00,000 (Indian Rupees Ten Lakhs).

(viii) Repeal: Except for specific sections and rules, including chapter 3 (power to place telegraph lines and posts) of the Indian Telegraph Act, 1885, and the rules, orders, made or purported to have been made under the pre-existing laws, the Act has replaced the majority of the Indian Telegraph Act, 1885, Indian Wireless Telegraphy Act, 1933, and Telegraph Wires (Unlawful Possession) Act, 1950.

(ix) Status of OTT communication services: The Act defines telecommunication broadly, encompassing the transmission, emission, or reception of any message via wire, radio, optical, or other electromagnetic systems. This had raised concerns about the Act potentially applying to a wide range of IT and digital services. However, the Telecom Minister, Shri Ashwini Vaishnaw has clarified that OTT players or applications will not fall under the scope of the Act and will continue to be regulated by the Information Technology Act, 2000.

Critiqued shortcomings

One of the key concerns raised is the lack of awareness for individuals subject to interception and power to search. Concerns have been flagged regarding mass surveillance and potential infringements of privacy, as the Act allows monitoring of any message, potentially compromising the privacy of all users. Critics have emphasized the need for stringent safeguards and proportional measures to address these concerns. Moreover, the Act does not specify the procedural aspects, nor does it provide for safeguards against such actions, raising concern for having a broad and arbitrary scope.

The Act is also facing criticism for mandating authorized entities to identify telecommunication users through biometric verification. Critics have highlighted a divergence from the Telegraph Act, 1885, which allowed various authentication methods, including offline options. The Act lacks safeguards such as the explicit mention of alternative authentication modes to Aadhaar, like passport. It has led to the apprehension that the Act may provide a legislative basis for the mandatory linking of Aadhaar to mobile phones which was earlier ruled unconstitutional by the Supreme Court of India.

Further, given the lack of clarity regarding the utilization, storage, processing, and sharing of biometric data among the majority of the population, coupled with the existence of data protection legislation with extensive exemptions for the government, critics argue that adopting such technology for routine procedures, especially without a viable offline alternative, should be avoided.

Credits: Aditi Kumari & Tarush Bhandari

RBI Cybersecurity Regulations for Financial Institutions

The integration of data and technology in the banking sector has sparked debates on IT governance of the financial sector. Technology offers convenience, but also attracts cybercrime. Because of which cybersecurity has become critical—the market value of cybersecurity in banking which reached $38.52 billion in 2021 and is projected to compound at 22.4 per cent by 2029.

Under the extant regime, there were twelve separate guidelines and notifications governing the space, which were deemed obsolete with the changing landscape. The inadequacy of the existing framework is illustrated from the fact that Indian banks reported 248 data breaches in 2022—a staggering 20 per cent of the world total. This jolted the RBI to rethink the IT governance and cybersecurity framework for the financial sector. It released a draft of the new IT guidelines in October 2022. And on November 7, 2023, the RBI notified the master direction on ‘Information Technology Governance, Risk, Controls and Assurance Practices’ which will take effect from April 1, 2024.

The master direction will apply to all RBI regulated entities except local area banks and NBFC-core investment companies. It prescribes procedures and framework for strategic alignment, risk management, resource management, performance management and business continuity/ disaster recovery management. It also provides for periodic reviews of risks, IT and information security risk management framework, information security policy and cyber security policy.

The framework provides for the constitution of three major committees by the regulated entities — IT strategy committee of the board, IT steering committee and information security committee. The regulated entities are also required to designate a senior level executive having no direct reporting relationship with the head of IT Function as ‘chief information security officer’. Further, the regulated entities have been recommended to conduct disaster recovery drills at least on a half-yearly basis for critical information and back up data in a secured manner as a business continuity measure.

Earlier, the boards of regulated entities were focused more on the business, financial and credit risks. But now the RBI has conferred additional obligations on the board of directors and audit committee of regulated entities, requiring them to ensure that all necessary measures related to IT, information assets, business continuity, information security and cyber security are periodically reviewed. The audit committee will be responsible for the information system audit of regulated entities.

Cyber incidents reporting
In case of any cyber incidents, the regulated entity is required to communicate the details to the RBI in addition to the board, senior management, customers and CERT-In. Though the guidelines does not expressly provide penal provisions, any contravention or non-compliance of the master direction by the regulated entities will attract penalties as prescribed in Section 46 of the Banking Regulation Act, 1949.

The master direction has captured the essence of the Digital Personal Data Protection Act, 2023 and is in line with the overall objective of the authorities to eliminate the threat of any data breaches and cybersecurity incidents altogether. Thus, whether in-house or outsourced, regulated entities need to ramp up cybersecurity investments and IT resources significantly.

The investments and efforts required by the financial institutions to follow the directive might seem big right now, but in the long-term dividends are multi-fold as it will pay the way for instilling customer confidence, financial stability, data privacy, deep rooted cyber resilience, stronger brand reputation and institutionalisation of good practices.

Credits: Rashi Dhir, Senior Partner & Head of Corporate, & Trisha Shreyashi, Consultant

DPDP Act: Managing Data Protection Compliance in Businesses

Six years and four iterations later, the Digital Personal Data Protection Act, 2023 (DPDP Act) in its present form seeks to overhaul the present legal framework governing personal data.

The data privacy regime in India has been based on Section 43A of the Information Technology Act, 2000 and the IT Rules, until now. The need for a separate codified data law has been felt for a while especially when we are all becoming increasingly obsessed with data.

Data is the new oil of the digital economy. Thus, data protection compliance has become a necessary burden. The DPDP Act creates additional and burdensome obligations on data fiduciaries aka the businesses collecting and processing the data.

Contrary to the IT Rules and the EU GDPR, the DPDP Act does not categorise data into ‘sensitive’ or ‘special’ groups. It extends the ambit of the legislation to any digital personal data. This comes with a number of caveats – the dos and don’ts. Luckily for the businesses, the DPDPA will likely come into force in 2024. This transition period may be utilised by the businesses to adapt their compliance with the regulatory directives.

According to DPDPA, businesses need to ensure the accuracy, completeness and consistency of the digital personal data collected. Once the purpose for which the data was collected, stored and retained is completed, the businesses shall have to erase the same at the earliest.

Data Breaches
There is an underlying stern intention of the Government that is very clear from the DPDP Act. The government wants the businesses to ensure that there are no breaches. Not only are there strict penalties, but the government has also left no scope for interpretation or exception. All breaches are to be reported to the data protection board and the individuals so impacted. This is an added obligation upon the fiduciaries who are already required to report any data breach to the Indian Computer Emergency Response Team (CERT-In) within six hours of the breach.

In the event of failure to comply with the said compliances, the organisation could be sanctioned with fines ranging between INR 10,000 to INR 2.5 billion. The said monetary penalty shall be imposed regarding certain factors such as – nature, type, causation, impact, duration, repetition and gravity of the breach. This is a major departure from the extant directive-based regime.

It appears that the authorities have put their foot down that all efforts must be made by the fiduciary to avoid data breaches. If it so happens, the breach must be promptly reported and the failure to do so shall attract hefty fines.

Obtaining consent
As a first step, businesses shall have to screen the vast volumes of information on their repository and map the data that may be considered ‘personal’. Accordingly, the businesses that collect, process and monetise personal data need to ascertain where, how and whose personal information is lodged within their systems.

Thereafter, the notice and consent formalities are to be completed. The data fiduciaries shall need to identify and provide the information as to the purpose of collection and processing of the data in addition to the record of previous consent given by the data principal.

In such a scenario it appears that seeking fresh consent may prove to be a better alternative for organisations with huge databases. The process is indeed taxing but vital to ensure the data principal’s right to privacy is protected and the data is utilised for a lawful purpose, in a lawful manner.

One may note that the organisations are required to apprise the data principals that they have the right to access their data, correct it, modify it, erase it and appoint a nominee on their behalf to exercise these rights. The data fiduciary is obliged to inform the data principals of the manner in which such rights may be exercised. The data principals also have the right to be briefed about the grievance redressal mechanism.

It is pertinent to mention that certain entities or classes of organisations may be notified as Significant Data Fiduciary (SDF) on the basis of the volume and sensitivity of data processed and the risks associated. The SDFs are tasked with additional obligations such as undertaking periodic data protection assessments by an independent data auditor and appointment of a data protection officer who shall be answerable to the Board of Directors.

Thus, businesses shall need to revisit and revise their present policies and user interfaces to comply with the higher compliance burdens. While the DPDP Act places an onerous responsibility on businesses to ensure the highest levels of data protection, it is necessary.

As a result, multiple automated operations that organisations have been performing routinely in regard to digitised data is likely to be regulated as per the DPDP Act. While the Act is yet to be enforced, the businesses can use this transitional phase to align themselves to meet the obligations laid out in the new act, consider improving their IT & cybersecurity systems, and monitor their supply chains and contractual arrangements to meet the new compliance requirements.

Authors: Divya Sharma, Counsel & Trisha Shreyashi, Consultant.

Taxing Job Work Services By Malsters: Imbroglio Settled By GST Council

The introduction of the Goods and Services Tax (GST) regime on 01.07.2017 marked a watershed moment in India’s indirect tax landscape. While the GST law is still at a nascent stage, we are gradually witnessing a shift from compliance related disputes to substantive disputes under the new tax regime.

The systemic levy of GST is also applicable on the services of job work rendered by maltsters (engaged in processing barley to malt) to Alcohol Beverage (Alcobev) companies. Until 2021, the incidence of GST on the Alcobev companies for availing the job work services for conversion of barley to malt a.k.a. the malting process, by the maltsters, was only 5 per cent. This was on account of 5 per cent GST applicable under the Rate Notification to job work services rendered ‘in relation to food and food products’.

However, in its 45th Meeting, the GST Council recommended 18 per cent GST on job work services provided ‘in relation to manufacture of alcoholic liquor for human consumption’. This recommendation, which was followed by a corresponding amendment to the Rate Notification, was erroneously interpreted by the GST Department to even include within its scope the job work services rendered by maltsters processing barley grains into malt. This interpretation would have led to 18 per cent GST outflow on job-work services rendered by maltsters.

Accordingly, various maltsters started receiving notices from the GST Department demanding the differential GST on the job work services rendered by them to Alcobev companies. This, in turn, meant excessive tax cost for the Alcobev companies on account of the non-availability of input tax credit of GST paid on input and input services.

Essentially, malt is one of the constituting ingredients that goes into the preparation of not only alcoholic beverages but also other non- alcoholic beverages, cereals, confectionaries, baked food items, pet foods, pharmaceuticals etc. The process of malting involves mainly three steps – steeping of barley grains, germinating and kilning/heating.

Generally, the Alcobev companies/ breweries procure the barley grains from the farmers and outsource the activity of conversion of barley into malt to the maltsters. Once the barley is converted into usable form for brewing liquor, the malsters supply the processed barley i.e. malt back to the breweries.

For manufacturing of beer (brewing), the malt is crushed and mashed in water at different temperatures, filtered and boiled along with hops, cooled, and then transferred for fermentation along with yeast. The fermented beer is then sent for maturing and bottling as liquor brewed for consumption. Sometimes, the brewing activity is outsourced by the Alcobev companies to contract bottlers which was recommended to be saddled with the higher rate of 18 per cent GST by the GST Council in its 45th meeting.

In the backdrop of the above, various representations were made by the Alcobev Industry to the Central Board of Indirect Taxes and Customs (CBIC)/GST Council seeking clarification on the applicable rate of GST on job work services rendered for conversion of barley into malt. The issue was also challenged before the High Court.

Fortunately, the issue was taken up by the GST Council in its 52nd Meeting held on 7 October 2023. The GST Council has sought to clear the air in this regard by way of clarification that job work services for processing of barley into malt attracts 5 per cent GST as applicable to ‘job work in relation to food and food products’ and not 18 per cent. This comes as a major relief to the Alcobev industry which otherwise was staring at huge tax costs.

The formal shape and form of the clarification is, however, awaited.

Authored by Shashank Shekhar (Partner), Tushar Joshi (Principal Associate), and TRISHA SHREYASHI (Consultant) for the BW Legal.

https://bwlegalworld.businessworld.in/article/Taxing-Job-Work-Services-By-Malsters-Imbroglio-Settled-By-GST-Council/18-10-2023-495390/

Explained: New Rules for Foreign Portfolio Investors – SEBI’s Move to Slice through Corporate Layers

The Securities & Exchange Board of India (SEBI) recently issued a circular amending the Foreign Portfolio Investors (FPI) Rules, in terms of additional granular disclosures to lift the veil off the Ultimate Beneficial Owners (UBO). The entities have only 90 days to comply with the mandates, which will be closing around November 2023. It is pertinent to understand the stipulations, the regulator’s intent, and the significance for stakeholders to abide by the new directives.

The tweaks come in light of the regulator’s attempts to trace the real identities of the ultimate beneficiaries of a handful of FPIs invested in Adani Group Companies. The Adani group incident has underscored the glaring possibility of one natural person holding a significant economic interest in FPI via various investment vehicles.

The concentration of investments by FPIs in a single group or company acting in concert with the promoters of corporate groups breaches the Minimum Public Shareholding (MPS) regulatory requirement of 25 percent in the listed entity. This impacts the price volatility while the ultimate beneficiary hides behind corporate cloaks.

The circular aims to address such situations where stakeholders are unaware of other participants who have sway over the share prices, management dynamics, and corporate decisions.

What is the SEBI directive?

The circular targets the FPIs based in ‘High-Risk jurisdictions’ that pose a higher risk of money laundering or terror financing. SEBI estimates that high-risk FPIs that hold over a fund size ceiling of Rs 2.5 lakh crore worth of assets under management would need to make these additional disclosures.

Such FPIs are required to undergo enhanced scrutiny and stricter KYC norms. They are mandated to make annual disclosures of their ultimate beneficiaries, submit monthly consolidated reports of investments across securities and report changes in shareholding exceeding 10 percent within 15 days. This shifts the onus on the listed entities and the FPIs to maintain adequate records and notify the authorities in line with the continuous disclosure regime adopted by SEBI.

It has also mandated granular reporting of data by entities with any ownership, economic interest, or control rights in high-risk FPIs. This means that even a percentage of direct or indirect holding in high-risk FPIs will be required to be reported. This will be compulsory irrespective of overseas jurisdictional laws for the secrecy/confidentiality of its domiciled investors.

This will solve two-fold concerns of the regulator in monitoring the high-risk FPIs in a manner that ensures that investors are not pushing back the overseas funds belonging to the promoters, and they are not routing money from surreptitious entities sharing borders with the Indian subcontinent.

The move shall ensure that the promoters are not breaching the MPS ceiling and that 25 percent shares of the listed entity are actually available for trading on the public bourses.

In order to meet this compliance, the FPIs will either have to embrace the regulator’s directive, or divest to bypass scrutiny, or diversify their holdings. It is pertinent to note that the circular stipulates exemptions from granular disclosures for certain FPIs that have a broad-based, pooled structure with a wide investment base. These include government or government-related investors, public retail funds, Exchange Traded Funds with less than 50 percent exposure to Indian markets, pooled investment vehicles, and such FPIs that are unable to liquidate.

Right off the bat, this is a move to uncloak the ultimate beneficiaries of the funds.

Earlier attempts and the final call to unveil real beneficiaries

This circular is a severe departure from the earlier stances held by the regulator.

The SEBI (FPI) Regulations, 2014 did not require an upfront declaration of all the last natural persons for registration of FPIs. The requirement to disclose was triggered for only such entities holding a stake over 25 percent in the said FPI, as per the Prevention of Money Laundering (PML) (Maintenance of Records) Rules, 2005. The threshold was reduced to 10 percent earlier this year.

Moreover, the Listing Obligations & Disclosure Requirements (LODR) obligated the listed entity to comply with the MPS requirement and disclose significant beneficiaries in the shareholding pattern. The Ministry of Corporate Affairs too had issued stringent disclosure obligations on individuals holding a certain percentage of beneficial interest in Indian companies under the Companies (Significant Beneficial Owners) Rules, 2018. However, this was limited to Indian companies alone.

The beneficiary regulations were further tightened when upfront disclosure of FPI BOs was mandated in 2018 and the reference to opaque structures of FPIs were deleted in 2019 to end ambiguity. Until then, the opaque structure doctrine protected FPIs from disclosing the ultimate natural person at the end of the chain.

Additionally, the Indian Government put out protectionist measures to curb opportunistic takeovers in the wake of Indo–Chinese tensions, in 2020. This was known as the ‘Press Note – 3’. It spelt out rules for ultimate beneficial owners of investor entities originating from neighbouring countries sharing borders with India.

The earlier directives aimed to pierce the corporate veil and identify the UBOs of the FPIs. However, they failed as it counteracted the government’s initiatives for ease of doing business. Furthermore, the rules were inadequate for the determination of ultimate beneficiaries of the FPIs and whether the overseas funds were to comply with these guidelines. The FPIs and their investment vehicles were not regulated enough due to each being below the statutory threshold under the PMLA 2005 rules.

Thus, the circular

This is SEBI’s third attempt and final call for objectivity, after the directive to provide details of senior management of the ultimate parent entity of all existing FPIs who had declared no UBO from ownership or control perspectives.

These changes aim to strengthen due diligence norms in Indian securities markets, promote proactive reporting, and mitigate international financial crimes. This will also lead to the diversification of FPI portfolios by potentially increasing the return on investments and decreasing their risk exposure.

In addition to getting rid of the menace of promoters masking their shareholding in listed companies, this may be deemed progress in ensuring free float of shares and better price discovery in the Indian market.

The circular holds a significant impact considering the ongoing probe into the Adani incident. The allegations levelled against the Adani group underscore the loopholes under the previous disclosure regime that may have been exploited by ultimate beneficiaries of the FPIs invested in the group. The roll-out of the additional granular disclosures of FPI BOs strikes at the heart of this issue.

https://www.financialexpress.com/market/explained-new-rules-for-foreign-portfolio-investors-sebis-move-to-slice-through-corporate-layers-3270716/

The CCI’s Wider Merger Net Draws Deal Value into Focus

The Competition Commission of India (CCI) recently published its draft regulations governing business combinations for public consultation. A key aspect of these revised regulations is their guidance on the enforcement of a newly introduced deal value threshold (DVT) that will trigger the need of CCI’s pre-approval for deals valued above ₹2,000 crore. Interestingly, ‘deal value’ would also include the value of any investment in the target by any acquirer group entity in the last two years.

The need to introduce new-age merger thresholds (alongside more traditional turnover-based thresholds) assumed significance after Facebook’s acquisition of WhatsApp escaped antitrust scrutiny despite its deal value being $19 billion. WhatsApp did not meet the requisite turnover/asset levels as it was a free app and its balance sheet did not reflect the true value of its prodigious data bank. Since then, several countries have introduced DVTs to plug leakages of major strategic mergers and acquisitions (M&As), especially involving startups and tech mavericks with low sales or assets.

Critics of a DVT have been airing their concerns that any such test may bring too many no-issue foreign deals under scrutiny. However, the experience from Germany and Austria (DVT front-runners in Europe) helps alleviate some concerns. Although the German competition authority initially received many queries on whether deals should be notified based on a DVT, there were only a few deals that required a filing. Along with tech deals, some deals were from the pharma sector; these were valued highly based on the market potential of their R&D pipeline of products in advanced clinical trials.

India, however, has decided to take a slightly different approach in introducing a DVT insofar as it has completely dropped the application of any turnover/asset based threshold to deals that breach the value limit. Most countries have retained the application of turnover thresholds in some form along with DVTs (except the US, where the turnover thresholds become inapplicable only if the deal value hits $446 million).

India’s introduction of a DVT will impact both foreign and domestic deals worth over ₹2,000 crore where parties would miss out on the benefit of the de-minimis target exemption. Many such deals could earlier escape CCI scrutiny if the target company did not have the requisite turnover (₹1,000 crore) or assets (₹350 crore) in India.

It would therefore be vital for the CCI to judiciously apply the domestic nexus qualification that has been spelt out in the regulations as “substantial business operations in India” (SBOI). This would be crucial to ensure that the CCI’s limited resources are used for assessing deals that may actually impact the Indian market and filter out foreign deals with no ‘real’ nexus to India.

At first glance, the SBOI criteria applicable to targets may appear expansive, raising the risk of ‘false positives’ (no-issue deals triggering scrutiny). However, a closer look would explain the need to keep it broad to protect the very purpose of introducing a DVT and not let a ‘killer acquisition’ slip through the cracks. The standard SBOI threshold has been kept at 10%, but it has been made applicable to three different metrics: i.e., turnover, user base and gross merchandise value (GMV). This is because a DVT is sector agnostic and would equally apply to manufacturing industries, where turnover can be a relevant metric to assess domestic presence, as well as digital sectors, where user base or GMV may be more appropriate. The user base of a target would include the number of users, subscribers, customers or visitors at any point within a year preceding the deal. This should effectively translate to figures based on relevant industry standards such as monthly active users (MAU), daily active users (DAU), or unique visitors (access frequency of a website).

The SBOI language is broad enough to even cover indirect users and passive visitors. The challenge would be to ensure that such figures are accurate and reflect the actual position. The CCI should preclude unnecessary filings that may breach the threshold at some (indirect) level without ‘truly’ establishing a local nexus through the scope or scale of a target’s operations.

This is where the role of pre-filing consultations with authorities assumes significance; these have globally proven effective in preventing filings of purely foreign deals with no local nexus. Although consultations with the CCI are non-binding, they offer businesses an avenue for seeking clarifications on filing queries to avoid inadvertent gun-jumping. On DVT consultations, in particular, the CCI should assist businesses with filing decisions.

Although some tweaks may be expected in the final version of the regulations after public consultations, the DVT rules are unlikely to undergo many changes. The regime should gradually get streamlined, based on the CCI’s experience and learnings after DVT implementation and the international best practices that may emerge over time.

While it remains to be seen how effective a DVT proves at addressing ‘killer acquisitions’ and protecting competition in data-driven markets, it is good to see the CCI emerge as a front-runner in deploying digital-age tools to deal with modern antitrust challenges head on.

The article has been authored by our Competition Partner, Vivek Agarwal. Associates Divyansh Prasad and Rohan Zaveri contributed to the article. This article was recently published in the Mint (a leading Indian business newspaper).

Mediation Bill: A New Beacon of Hope

The Mediation Bill as passed by both Houses in August 2023 and currently awaiting Presidential assent, seeks to codify, institutionalise and promote the process of mediation, by establishing the Mediation Council of India, recognising mediation service providers, and providing for the registration of mediators. It also provides for online and community mediation.

Essentially, it makes pre-litigation mediation voluntary in nature, allowing parties to choose whether or not to participate in the process.

Originally, the Bill had made pre-litigation mediation compulsory, but the Standing Committee on Personnel, Public Grievances, Law and Justice proposed to make pre-litigation mediation voluntary and not mandatory.

Now, a provision acknowledges the autonomy of the involved parties and allows them to opt-out of mediation after undergoing two sessions if they desire. Mediation can be coaxed but not forced.

Further, the Bill provides for creation of a ‘Mediation Service Provider’ or MSP, to conduct mediation procedures, accreditation, maintenance of panels and all operations ancillary thereof. The MSP shall be graded by the Mediation Council of India.

The Bill provides an indicative list of subject matters not fit for mediation, including disputes involving allegations of fraud, forgery, claims involving minors, persons suffering from intellectual disabilities and mental illness, disputes affecting the rights of third party which is not part of the mediation proceeding, tax disputes and disputes under the Competition Act.

Although, an indicative list goes a long way in reducing doubt, broadly worded subject matters such as “settlement of matters which are prohibited being in conflict with public policy or is opposed to basic notions of morality or justice or under any law for the time being in force” would possibly warrant liberal interpretation, which may prove to be a bone of contention between parties.

The Bill expands mediation to include family disputes, community conflicts and other unconventional domains in addition to civil and commercial disputes. Moreover, the Mediation Bill will have an overriding effect for conducting mediation over other laws, except for legislations specified under the second schedule and to proceedings conducted by the Lok Adalat. The second schedule includes the industrial disputes, industrial relations code, sexual harassment of women at workplace act, family courts act, finance act etc.

The Bill also provides for parties to seek interim relief before the commencement or during the mediation proceedings, by approaching the appropriate court/tribunal, in “exceptional circumstances.”

It is probable that the threshold for the grant of interim relief would be similar as under Section 9 of the Arbitration and Conciliation Act of 1996. However, the Bill is silent on the meaning of “exceptional circumstances”, leaving it up to judicial interpretation to fill in this lacuna.

Further, the Bill initially envisaged that the mediation process must be completed within 180 days, which may be extended by another 180 days by the parties. However, it appears that adhering to the suggestions of the Report of the Standing Committee, this was reduced to an initial period of 120 days, which could be extended by 60 days. Even if the parties fail to reach a settlement through pre-litigation mediation, the court or tribunal may at any stage refer the parties to mediation if they request the same.

Enforcing Settlements

The Bill seeks to enforce mediated settlement agreements (MSA) as per the provisions of Civil Procedure Code, as if it were a judgement or decree passed by the court. With this development, parties to the dispute will have quicker access to resolution in addition to reduced burden on the courts. This provision follows India’s ratification of the Singapore Chapter of UN convention on International Settlement Agreements Resulting from Mediation in 2019.

The mediation settlement agreements may be challenged within the period of 90 days from the date of receipt of the copy. The challenge can be made on the narrowed scope under grounds of fraud, corruption, impersonation or subject matters falling within the first schedule. Furthermore, the Bill ensures that any information disclosed during mediation shall not be used in subsequent proceedings except if required to prove domestic violence, child abuse, coercion etc.

Nonetheless, it lacks sanctions and penalties in the event of breach which renders the provision essentially moot.

The Bill has followed the suit of codifying the mediation provisions in International Centre for Settlement of Investment Disputes (2018), Uniform Mediation Act of USA, Model Law on International Commercial Conciliation (2002), among others. The code emerges as a beacon of hope in addressing the issues of binding confidentiality, party empowerment, procedural clarity, bias and neutrality.

However, the loopholes require immediate attention so as to instill confidence in the process.

Anuradha Dutt is the Managing Partner of DMD Advocates and Haaris Fazili is an Associate Partner at the firm. Trisha Shreyasi is an advocate and columnist.”

Busting the Myth Around Compounding Competition Law Violations

Competition Commission of India (CCI) has recently got its fifth Chairperson, after a hiatus of around seven months. CCI had a rather dry spell after its last Chair had retired in October 2022 until the government invoked the doctrine of necessity to allow CCI to clear certain high-value M&As which were stuck due to lack of quorum. On 23 May 2023, CCI went back to being fully functional and a spurt of enforcement orders is now imminent. The government has also enforced certain provisions of the Competition Amendment Act, 2023 (Amendment Act), including enhanced penalty for misrepresentation in merger control cases and a 25% penalty pre-deposit to appeal a CCI order. More crucial provisions such as deal-value based merger threshold, penalties based on total global turnover, and settlement of CCI cases need to wait a bit longer until CCI finalizes ancillary regulations necessary to implement them.

To put to rest discussions around the possibility of any criminal connotation associated with certain competition law violations due to the usage of words ‘offence’ and ‘punishable with fine’, the Amendment Act has replaced them with ‘contravention’ and ‘liable to a penalty’, respectively. The only criminal provision under the amended law is for non-compliance of certain orders which provides CCI the power to approach the courts and initiate criminal proceedings which may result in imprisonment or fine or both (Section 42(3)). Since CCI does not otherwise have any power to initiate contempt proceedings, the rationale behind this criminal provision is to deter repeated attempts at flouting CCI orders. Although CCI also has the power to impose penalties for non-compliance under Section 42(2), this power was not available for non-compliance of all orders prior to the amendments. So, CCI had to resort to criminal proceedings to ensure compliance of its orders. Although it is not necessary for the CCI to first exhaust its power to impose penalties for non-compliance before initiating criminal proceedings, this might become a norm post the amendments.

The 2023 amendments have also introduced a new provision which allows compounding of ‘offences’ not ‘punishable’ with mandatory imprisonment (Section 59A). Compounding, simply put, means agreeing not to prosecute an offender in lieu of some monetary consideration. Since the concept of ‘punishment’ now exists only in Section 42(3) cases, the concept of compounding is also limited to these cases. However, due to the broad wordings used in Section 59A, some experts have indicated that compounding may also be available to competition law violations resulting in civil penalties. This could have been possible prior to the amendments when the use of words ‘offences’ and ‘fines’ was not restricted only to Section 42(3). Despite the ongoing murmurs, I do not see the possibility of a compounding window opening for competition law violations, which may ultimately lead to bypassing the CCI process and penalties. Since the amendments have introduced a separate provision for the settlement of CCI cases, there is no basis to speculate that the compounding provision could have been intended to act as an additional settlement/ leniency option.

Another contention has been that compounding is not for offences punishable with both, imprisonment ‘and’ fine. Given that Section 42(3) allows for punishment which can only be monetary fine, there is no reason to keep it out of the scope of compounding. The Companies Act also contemplates a similar situation where compounding is allowed for offences punishable with ‘imprisonment or fine or both’, but not with both ‘imprisonment and fine’. It is also important to note that CCI’s power to recover penalties imposed for violating competition rules is in addition to its power to initiate criminal proceedings for non-compliance. So, one cannot take the plea of double jeopardy to avoid either the penalty for contravention or the punishment for non-compliance. This position has already been settled by courts.

Given a great deal of pendency in courts, compounding is generally considered to be a more efficient option. The Supreme Court in a matter relating to compounding under a different statute observed that the interest of justice will be better served if parties resorted to compounding at an early stage instead of engaging in protracted litigation thereby causing undue delay and strain on judiciary. It also issued guidelines to impose additional costs if compounding was not exercised within the first two hearings. The more the delay, higher the costs. Such learnings from the experience from other statues could form the basis of some guidance which may be published to ensure that the new provision on compounding is not abused. Such guidance may also cover certain important issues such as, calculation of compounding amount and availability of the compounding option to repeat offenders. For example, under the Companies Act, compounding is not allowed if an offender has compounded a similar offence in the previous three years. It is also interesting to note that the use of the word ‘may’ in the new provision clarifies that compounding cannot be claimed as a matter of right by an offender. This is because the objective behind allowing compounding is not to defeat the purpose or efficacy of Section 42(3). Courts must consider CCI’s objections (if any) before allowing compounding and ensure that the provision is not misused as a delay tactic or to circumvent the punishment.

The article has been authored by our Competition Partner, Vivek Agarwal, associate Divyansh Prasad, and associate Rohan Zaveri.

Competition Law Amendments: Of Penalties and Misses

Based on recommendations made by a parliamentary panel in December 2022, the government has tweaked its proposed amendments to India’s competition law and is set to introduce the Competition Amendment Bill (2023 Bill) in Parliament. The most significant change in the 2023 Bill is that the Competition Commission of India (CCI) can now impose penalties up to 10% of the total global turnover of enterprises found to have contravened the competition law. Currently, penalties are generally calculated as a percentage of only ‘relevant turnover’ in India, which excludes sales from products which have no relation to the contravention. The current law uses the word ‘turnover’ in the penalty provision and does not specify if it is ‘total’ or ‘relevant’. In 2017, the Supreme Court clarified that turnover for imposing penalty should mean ‘relevant turnover’. It held that when the contravention “involves one product, there seems to be no justification for including other products” for imposing a penalty. Some argued that this significantly watered down the deterrent effect which the law and its draftsmen sought to achieve.

Interestingly, the government has also retained a provision that required the CCI to come out with regulations to ‘determine’ the turnover to be considered for penalties. Effectively, there may still be some elbowroom for the CCI to alleviate industry’s concerns around steep penalties through its regulations, even if the statutory limit on the maximum penalty will now be based on the total global turnover. In practice, the CCI seldom imposes the highest possible penalty on large companies and would, no doubt, continue to be mindful of the principle of proportionality whilst calculating penalties. But this development would exacerbate the need for much-awaited guidelines on determining an ‘appropriate penalty’ for a contravention, which the CCI is now required to publish under the proposed amendments.

There was no recommendation made by the panel to introduce this change, but it may have been triggered by the CCI’s recent experience in cases involving a big-tech company where the CCI had concerns about the company’s computation of its relevant turnover. Even if the objective may be to deter companies from breaching competition rules, this change may have far-reaching consequences, especially for multi-product conglomerates and big-tech companies with global operations (like Amazon), which may be under investigation for the conduct of one of their divisions and may be exposed to massive penalties based on their total global turnover.

Another interesting change in the 2023 Bill is the expansion of the scope of liability of cartel facilitators. The amendments proposed to codify the liability of cartel facilitators which ‘actively participate’ in the furtherance of a cartel. Later, the panel recommended that the scope of this proposal must be limited by an explicit obligation that the CCI must first prove that a facilitator “intended to actively participate” in a cartel. Surprisingly, the 2023 Bill has instead expanded its scope by removing the word ‘active’. Additionally, this presumption can now be raised against entities which may not have in fact participated but may have only ‘intended’ to participate in a cartel. There is no guidance on how the intention to participate would be established, especially when there is no actual participation. Such a broad provision raises over-enforcement risks and may expose certain entities (including digital intermediaries and national industry bodies organizing meetings without any agenda to share sensitive information) to the undue hardship of having to rebut such a presumption during a probe (as this issue is unlikely to come up before the CCI at the preliminary pre-investigation stage). It may, therefore, be prudent to limit this provision to cover only genuine cartel facilitators.

A recommendation of the panel that has not made it to the 2023 Bill is the inclusion of cartels in the proposed settlement regime. An objection to settling cartel cases was that there already exists a leniency regime for them. However, leniency and settlement regimes are designed to secure efficiencies at different stages of a CCI inquiry, and they co-exist in other countries. While leniency is primarily aimed at freeing resources of the investigative arm of the CCI (DG), settlements ensure efficiency once the investigation is complete and there is evidence of contravention against parties.

Even if the intention was not to offer two discounts to cartelists (one for leniency and another for settling), a provision for settlements could be made only for non-leniency cases where parties decide to defend themselves. Certain companies may not initially opt for leniency, as they may either not be aware of the evidence that exists against them or decide to take a chance hoping that all of it may not get unearthed. However, once evidence comes on record through an investigation report, companies may be given an option to reconsider their initial decision and settle the case with the CCI by agreeing to pay a discounted penalty and committing themselves to future compliance. This would be a win-win both for the company and the CCI, as extensive resources on both sides would be saved. This would also bring finality to CCI decisions as settlement orders would not be open to appeal. The exclusion of cartel settlements seems like a missed opportunity to free some of the Commission’s vital resources and improve its penalty recovery rate.

Divyansh Prasad contributed to this article and these are the author’s personal views.

Vivek Agarwal is partner, DMD Advocates and co-chair, competition committee, PHD Chamber of Commerce & Industry

Online Platforms May Have to Rethink their Parity Deals

There were many interesting developments in the antitrust space last year, including two reports by a parliamentary panel—one on proposed amendments to the Indian competition law, and the other on a new Digital Competition Act (DCA) to regulate anti-competitive practices of digital gatekeepers. Based on a statement made by the chairman of the panel in his first public interview of 2023, the government is working towards getting parliamentary approvals for the proposed amendments and the DCA this year itself. Another highlight of 2022 was a surge in Competition Commission of India (CCI) pursuits in the digital sector, which included ordering various detailed investigations and imposing hefty fines on Google, MakeMyTrip (MMT) and Oyo for not complying with Indian competition rules.

A recent CCI order worth a mention is the one against MMT and Oyo which dealt with allegations that MMT imposed price-parity and room-parity obligations on its hotel partners. In other words, hotel partners were not allowed by MMT to offer rooms on their own website or any other online travel agent at better terms than offered on the MMT platform. Such clauses, through which a platform coerces a seller not to offer its products or services at better terms on competing platforms or on its own website, are known as parity or ‘most-favoured nation’ (MFN) clauses. Although the focus of competition authorities has been price MFN clauses at the retail level (as these directly impact the final retail price), such clauses can also be for non-price terms and even at a wholesale level. Non-price terms may include access to the entire inventory of a seller, additional services, free upgrades and other promotions.

Retail MFN clauses are broadly of two types: (i) Wide MFN clauses, restricting better terms on the seller’s own website and any other sales platform; and (ii) Narrow MFN clauses, restricting better terms only on the seller’s own website. Views on the anti-competitive effects of wide MFN clauses seem to be more or less consistent across the world. Such clauses are likely to soften price competition among platforms, leading to higher prices for consumers, increase entry barriers by disabling new entrants from competing on prices, and facilitate collusion among platforms by increasing price transparency.

On the other hand, narrow MFN clauses are generally prohibited if their anti-competitive effects outweigh their efficiencies. The latter includes ease of ‘search and compare’, lower prices for consumers and protection of a platform’s investment (against the free-rider problem). Several European countries like France, Austria and Italy now have specific legal provisions to generally prohibit MFN clauses in the online hotel booking space. However, some of them have acknowledged the efficiencies associated with narrow MFN deals. The test involves weighing the extent of restrictions against the efficiencies arising from them. In doing so, the scope of such restrictions must be limited to what is indispensable to achieving the desired efficiency.

As far as digital gatekeepers go, the trend is to prohibit them from imposing both wide and narrow MFN clauses. After Europe’s Digital Markets Act, the Indian parliamentary panel has also recommended this prohibition in the proposed DCA. Based on the market power of gatekeepers, the anti-competitive effects of MFN restrictions imposed by them are likely to outweigh any efficiencies.

Although the term “MFN” found a passing reference in the CCI’s Snapdeal/Kaff order of 2019, the MMT-Oyo case is the first instance when the CCI has provided concrete guidance on the anti-competitive effects of a systematic MFN system. The CCI examined the “combined effect” of retail MFN clauses with MMT’s deep discounting strategies. MMT not only ensured the lowest room rates and best conditions (e.g., free breakfast and gym access) from hotels, but also offered additional discounts. This effectively reduced the net final price to the end-customer below the best available room rate. This practice led to the creation of an ecosystem where MMT could cater to a majority of online hotel bookings due to its low prices, accumulate massive commissions from hotels, and use them to fund higher discounts. The CCI observed that such an arrangement would reduce any incentive for other online travel agents to compete on commissions and would eventually lead to higher prices for consumers. Although the CCI has made its position clear on wide MFN arrangements through its MMT order, it has not conclusively opined on narrow price parity. It has only indicated that narrow clauses may be justifiable on grounds of deterring free riding. It may not be possible to draw general conclusions on narrow MFN clauses as compared to wide ones, as their effects could vary with the characteristics of different markets. However, efficiencies arising from narrow clauses must not be overlooked and must be weighed against their ill-effects.

MFN clauses are likely to stay on the CCI’s radar, especially those imposed by dominant players. Whilst the MMT order discussed concerns around those imposed by a dominant platform, similar concerns exist even for non-dominant yet popular platforms. Zomato and Swiggy are already being investigated by the CCI for imposing such clauses on restaurants. It may thus be prudent for popular platforms to keep themselves up to date on this issue and self-assess risks of their MFN deals. Prevention would be better than a cure.

Divyansh Prasad, associate, DMD Advocates, contributed to this article. These are the author’s personal views.

Vivek Agarwal is partner, DMD Advocates and co-chair, competition committee, PHD Chamber of Commerce & Industry

Gear Up Wisely to Clamp Down on Important Digital Intermediaries

Hard on the heels of its recommendations on the Competition (Amendment) Bill, 2022, India’s Standing Committee on Finance tabled its report on “anti-competitive practices by big tech companies” in the Lok Sabha on 22 December 2022. To address the unique needs of digital markets, the committee has recommended the introduction of a ‘Digital Competition Act’ (DCA), which would ensure a fair, transparent and contestable digital ecosystem in India. The committee has also recommended the establishment of a dedicated ‘Digital Markets Unit’ at the Competition Commission of India (CCI), staffed with skilled experts to handle issues and cases related to digital markets.

Based on the committee’s proceedings, it appears that a consensus has finally emerged on the need for ex-ante regulations for tech giants. The CCI’s earlier stance was that existing competition rules are ‘flexible’ and ‘robust’ enough to ensure fair competition in the digital space. However, the CCI has now itself submitted to the committee that it “strongly feels that ex-ante provisions are required.” This view seems to have developed based on various learnings and challenges during multiple competition inquiries into the digital markets in the recent past.

The absence of an ex-ante regime may lead to the creation of gatekeepers and could result in a ‘winner takes all’ problem. To avoid this, the committee has recommended that a small number of leading tech players which can negatively influence competition must be identified as ‘Systematically Important Digital Intermediaries’ (SIDIs), based on their revenue, market capitalization and number of active users. Stakeholders must collaborate to arrive at a reasonable definition of a SIDI. Certain mandatory behavioural obligations should be imposed on SIDIs and they must be required to submit an annual compliance report to the CCI and publish a copy on their websites. A key challenge nevertheless would be to monitor compliance by SIDIs, as these reports would be prepared by them internally.

Another key recommendation of the committee is that any merger or acquisition (M&A) involving a SIDI, where the target provides services in the digital sector or enables data collection, must be notified to the CCI, even if it does not otherwise trigger a CCI filing. Although ‘killer acquisitions’ have been identified as a concern, deliberations with stakeholders seem limited to the introduction of a deal-value based threshold, in addition to existing turnover/ asset based thresholds. There seems to be no discussion during the committee’s meetings to introduce a requirement to pre-notify every deal led by a SIDI in the digital economy. Although there is no specific recommendation to suspend the consummation of such deals until CCI approval, it is surprising that there is no minimum threshold or local nexus requirement to keep no-issue deals out and avoid an unnecessary burden on the CCI.

Based on its deliberations, the committee has identified ten key competition issues in digital markets in India. To address these, the committee has recommended that a SIDI should: (i) not make platform access conditional on acceptance of ‘anti-steering’ conditions; (ii) not indulge in self-preferencing, including search biases or a pre-installation requirement of its own apps (i.e., must maintain platform neutrality); (iii) not make access to platform’s core service conditional on subscribing to any other service (i.e., bundling); (iv) neither commercialize user data of third parties using the platform nor use it to compete with its business users; (v) not curtail the freedom of businesses to list their products or services on various platforms/ websites at any price or terms; (vi) not indulge in self-preferencing in search rankings (i.e., a search bias) and must offer fair and non-discriminatory terms to ensure organic search results; (vii) allow use of third-party apps and prompt users to positively choose their default apps so that such apps can fairly compete with the SIDI’s own apps; and (viii) offer transparency on advertising revenues. Considering the submissions of news publishers on bargaining power imbalances and global developments on this issue, especially in Australia, the panel also recommended that a SIDI must ensure fair advertisement revenue-sharing arrangements with news publishers.

The committee has also emphasized the need to globally harmonize regulations governing digital markets to reduce the overall regulatory burden. This indicates that the DCA may be developed along the lines of Europe’s Digital Markets Act. Whilst doing so, we must be guided by learnings from other countries which may be marginally ahead of us in implementing similar rules. At the same time, we must be mindful of our local market conditions and tailor the DCA to our specific requirements, aligning it with other digital policies and laws which are already in the pipeline.

A consistent theme in the parliamentary panel’s report is the exceptional growth of the digital economy in India and its bright forecasts (not to mention its contribution to keep the Indian economy on its feet during the pandemic).

Given that digital markets are now beginning to manifest initial signs of maturity, some level of state intervention may be reasonable to ensure fair competition and the successful co-existence of mavericks and smaller players.

As a closing remark, I must mention that one must not lose sight of the fine balance which must be struck between the need to regulate and the freedom to innovate. Whilst arriving at such a balance, we must also focus on developing the concept of ‘voluntary and informed consent’ and make it compatible with the use of big data, which is currently considered to be a ‘destroyer’ of informed consent.

Divyansh Prasad, associate, DMD Advocates, contributed to this article. These are the author’s personal views.

Vivek Agarwal is partner, DMD Advocates and co-chair, competition committee, PHD Chamber of Commerce & Industry

We’re a Step Closer to an Overhaul of our Competition Law

The Standing Committee on Finance recently tabled its report on the Competition (Amendment) Bill, 2022, in the Lok Sabha. The committee was directed to review the bill and submit its report within a short period of three months. It invited suggestions from various stakeholders—including industry bodies, lawyers and economists—on the bill and discussed them with the Competition Commission of India (CCI) as well as various government ministries. Based on these deliberations, the committee identified nine key areas and has offered recommendations on eight of them. The bill, along with these recommendations, is likely to come up for discussion before lawmakers in Parliament during the Budget Session.

Deal value threshold for CCI filings: One of the bill’s key proposals was the introduction of a deal value-based threshold. Currently, a deal triggers the CCI filing requirement when certain thresholds based on parties’ turnover/assets are met. In addition to the parties’ test, the bill proposed a mandatory CCI filing requirement for all deals valued above ₹2,000 crore, provided any party to such a deal has substantial business operations in India (a ‘local nexus’ requirement, that is).

However, there was no clarity on how the deal value would be calculated (especially in part/no cash deals) and what nature and quantum of a local nexus could trigger a filing. Many found this threshold too low and apprehended that it would catch deals unlikely to raise any competition issue. Although the committee made no recommendation to raise this threshold, it suggested that the local nexus requirement should apply to a target and not to an acquirer. However, as of now, the manner of calculation of a deal’s value and guidance on the nature/quantum of the local nexus has been left to the CCI to decide through its regulations.

The Standing Committee on Finance has also approved the standard required for establishment of “control” over a target to be the ability to exercise “material influence”. However, for more certainty, it has recommended that the CCI must specify what would constitute “material influence” through its regulations. This could include guidance on the level of shareholding, special rights, board representation, structural/financial linkages and other arrangements required to breach the material-influence threshold.

On the CCI approval timelines, the standing committee rejected the proposal to make them more aggressive, and suggested sticking with the current timelines, which are more realistic.

Settlement of cartel cases: To ensure faster market corrections and to save resources, the bill had proposed a mechanism to settle certain ongoing CCI cases. The committee has now proposed to expand the scope of the settlement mechanism to include cartels. The bill had excluded cartels because these are considered the most pernicious violation of competition law and there already exists a leniency regime for whistle-blowers who are willing to cooperate with the CCI. Any additional settlement procedure could send out a wrong signal, especially to serial cartellists.

While the committee suggested that admission of guilt may not be mandatory for settlements, it allowed the provision of compensation for consumers affected by a cartel. Interestingly, under the current regime, compensation provisions kick in only when the CCI finds an entity guilty. The committee also made it clear that parties would have the option to withdraw from the procedure if there is no agreement with the CCI on settlement terms, and in case of non-agreement, parties may even appeal the CCI order. A key driver of settlements is reduced litigation and settling parties will therefore not be allowed to appeal the settlement order (as the terms would already be agreed with the CCI).

The standing committee on finance also made certain recommendations on: (i) limiting the scope of hub-and-spoke cartels to exclude those who did not intend to actively participate in the furtherance of a cartel, such as online platforms acting only as intermediaries or entities merely facilitating the organization of meetings; (ii) not raiding or recording statements under oath made by external legal counsels or independent advocates, which would compromise the principle of attorney-client privilege; (iii) using the rule-of-reason (instead of ‘per se’) approach to assess an abuse of a dominant position; and (iv) allowing a dominant company to impose reasonable conditions necessary to protect its intellectual property rights. On the issue of a judicial member being a necessity at the CCI, the committee did not make any comment, as the matter is currently pending before the Supreme Court.

I believe that the proposed amendments are still up for more fine-tuning before they become law. Although the standing committee’s recommendations are in the right direction and do iron out some kinks, a lot still depends on CCI regulations, which are expected to flesh out the details. No doubt, its endeavour would be to avoid a devil in the details.

Divyansh Prasad, an associate at DMD Advocates, contributed to this article. These are the author’s personal views.

Vivek Agarwal is partner, DMD Advocates and co-chair, Competition Committee, PHDCCI.

Supreme Court’s Decision to Review ‘Vijay Madanlal Chaudhary v. Union of India’, And Potential Knock-On Effects

The Supreme Court on 25 August 2022 issued notice on a review petition, Karti P Chidambaram v. Directorate of Enforcement R.P. (Crl.) No. 219/2022, seeking review of the judgment passed just about a month earlier in Vijay Madanlal Choudhary v. Union of India SLP (Crl.) No. 4634 of 2014, which attempted to lay to rest various controversies arising under the Prevention of Money Laundering Act, 2002 (PMLA). The Supreme Court observed that at least of the two issues in the review petition required consideration. First, not providing the accused with a copy of the Enforcement Case Information Report or ECIR; and second, the reversal of the burden of proof and the presumption of innocence.

This is a positive development, as the judgment in Vijay Madanlal Choudhary confirmed the Directorate of Enforcement’s uncanalised discretion to initiate prosecutions under the PMLA even where there is neither act nor intention to project tainted funds as untainted; and blessed the Directorate of Enforcement’s policy of refusing to provide the ECIR to the accused, thus hamstringing the accused’s ability to challenge the initiation of proceedings under the PMLA.

The reference to “at least two of the issues” is also important – as even though the Directorate of Enforcement on 26 August 2022 filed an affidavit seeking to limit the notice issued to only two issues – a review of these issues alone will no doubt have knock-on effects on various other findings in the judgment.

Providing the accused with a copy of the ECIR:

The first of the two issues discussed in court on 25 August 2022 is the providing the accused with a copy of the ECIR. The primary justifications in Vijay Madanlal Choudhary for treating the ECIR as an ‘internal document’ of the Directorate of Enforcement and distinct from a First Information Report (FIR) registered by vanilla investigative agencies such as the State Police or the Central Bureau of Investigation, are:

-That the manner of conducting an investigation by the Directorate of Enforcement cannot be governed by analogies drawn from the Code of Criminal Procedure, 1973.

-That the Directorate of Enforcement is a special investigative body governed by a special mechanism, and its officers are not police officers within the meaning of the Code of Criminal Procedure, 1973.

-That though the ECIR represents the starting point of initiating penal action or prosecution by the Directorate of Enforcement, and is, for all intents and purposes, analogous to an FIR, there is neither statutory mandate nor requirement to ‘formally register’ an ECIR.

While the Court in Vijay Madanlal Choudhary was undoubtedly correct in stating that the ECIR is not mandated by statute, the ECIR remains the only document and piece of evidence which can possibly contain an articulation of the jurisdictional facts necessary for the exercise of powers under the PMLA. To initiate an investigation under the PMLA without any record of jurisdictional facts would likely amount to an impermissible roving and fishing inquiry.

There is a growing and pernicious tendency among statutory and executive authorities to withhold documents by classifying them as ‘internal’ or ‘secret’ – especially when these documents are the basis for curtailing fundamental rights. Whether the document withheld is an ECIR, ‘secret’ information/reports/file-notings or Look Out Circulars (which prevent people from leaving India), the motive behind the concealment is clear – to arrogate to these authorities the ability to curtail fundamental rights, while side-stepping judicial review. This practice of government agencies indirectly curtailing the plenary jurisdiction of the High Courts under Section 482 of the Code of Criminal Procedure, 1973, and under Articles 226 and 227 of the Constitution of India, must be stopped.

For any accused to validly challenge the initiation of an investigation under the PMLA, and to question the existence of jurisdictional fact(s), it is imperative for both the accused and the court hearing the challenge to know the basis for initiation of action under the PMLA. The Court’s analysis in Vijay Madanlal Choudhary that Section 19(1) of the PMLA is a sufficient safeguard, since the accused will be sufficiently informed of the grounds of arrest, misses the point. The very initiation of action under the PMLA ought to be amenable to meaningful judicial review to test whether the State – acting through the Directorate of Enforcement – is violating fundamental rights without the authority of law.

Put simply – regardless of whether the ECIR is a statutory mandate – in the case of an FIR, the accused has the right to seek redress from court for violation of procedural guarantees and fundamental rights from the very beginning, i.e., at the registration of the FIR – though this power is exercised sparingly by the High Courts under Section 482 of the Code of Criminal Procedure, 1973. An accused in an FIR can thus move court against the initiation of an investigation by the police on several grounds, e.g. that they are not named in the FIR, that the FIR points to the guilt of someone else, that the allegations in the FIR are manifestly attended by mala fides or that even assuming the accusations in the FIR to be true, they are on the face of it absurd, inherently improbable, do not disclose the commission of the offence alleged, etc. (in terms of State of Haryana v. Bhajan Lal, 1992 Supp (1) SCC 335). By withholding the ECIR on the ground that it is an ‘internal document’ unlike an FIR, the Directorate of Enforcement seeks to sidestep not only judicial scrutiny, but to also sidestep a rich body of jurisprudence on quashing FIRs. There is no justification for denying meaningful access to the High Courts to an accused in an ECIR, however sparingly the power to quash the FIR/ECIR may be exercised.

Knock-on effects of furnishing the ECIR:

A review on the issue of not providing the ECIR to the accused can be justified on any number of grounds, however the effect of review would result in the Directorate of Enforcement being a little less ‘special’ and inching their position closer to that of the ‘regular police officer’ referred to throughout the judgment under review. Though the Court in Vijay Madanal Choudhary spent significant time distinguishing why Tofan Singh v. State of Tamil Nadu (2021) 4 SCC 1, where Customs Officers acting under the NDPS Act were treated as police officers, would not apply, there is good reason (strategically) why the Additional Solicitor General argued that Tofan Singh was per incuriam. Even if the safeguards available under the Code of Criminal Procedure are not available in ‘pen and ink’, the more the officer of the Directorate of Enforcement resembles a ‘regular police officer’, the more reason there is for accused in a PMLA case to have access to the same, or at least similar, safeguards. The corollary to such a review would be that the issue of analogies to the Code of Criminal Procedure, 1973 require a re-look. This would include the admissibility of incriminating statements under Section 50 of the PMLA, since being named in the ECIR (and having access to it), like being named in the FIR, may be sufficient to claim that the person summoned is an accused, and may invoke the right against self-incrimination.

While the Court spent much time extolling the virtues of the safeguards baked into Sections 17-19 of the PMLA, a requirement to furnish the ECIR would likely also demand a re-look at the manner in which the powers of arrest, search, and seizure, are exercised by the Directorate of Enforcement, since similar safeguards are admittedly insufficient when it comes to the ‘regular police officer’. Even if Sections 17-19 are not reviewed per se, furnishing the ECIR itself would add an additional layer of safeguards – by acting as a condition precedent to the exercise of coercive powers, by fleshing out details of the accusation beyond merely informing an arrested accused that they are suspected of committing an offence under Section 3 of the PMLA, and perhaps most importantly, by providing a meaningful opportunity to challenge coercive actions taken by the Directorate of Enforcement.

Reversal of burden of proof and the presumption of innocence:

The findings in Vijay Madanlal Choudhary on the reversal of burden of proof and the presumption of innocence are based on the ‘seriousness’ of the offence, drawing support from other statutes defining ‘serious offences’ – such as, the Terrorist and Disruptive Activities (Prevention) Act, 1987, the Maharashtra Control of Organised Crime Act, 1999 and the Narcotic Drugs and Psychotropic Substances Act, 1985 – coupled with the compelling state interest in tackling these ‘serious offences’.

It can easily be argued that the so-called ‘seriousness’ of an offence is irrelevant to the burden of proof – which should always be on the prosecution. However, within the framework of the judgment under review, a review of issue of the reversal of burden of proof and the presumption of innocence would in effect be a review of the ‘seriousness’ of the offence of money laundering, and the compelling state interest in tackling the offence.

Knock-on effects of reversing the reversal of burden of proof:

A reversal or dilution of this finding in Vijay Madanlal Choudhary would, within the bounds of the logic of the judgment under review, mean that the offence of money laundering is less ‘serious’ than offences under, say, TADA or the UAPA. Since Vijay Madanlal Choudhary holds that ensuring the ‘effectiveness’ of the PMLA in terms of Parliament’s intent requires that, “and” in Section 3 of the PMLA must be read as “or” to cast the net of the offence as wide as possible, such a reversal or dilution of the ‘seriousness’ of the offence of money laundering would pave the way to review the Court’s interpretation of Parliament’s intent.

The effect of reading “and” as “or” in Section 3 is that the commission of any scheduled offence which results in mere acquisition or possession of proceeds of crime (which include any economic offence, barring a failed attempt) dehors any act or intent to ultimately project the proceeds as untainted immediately results in the commission of the offence of money laundering – without any separate/unique act or intent.

Thus, if the offence of money laundering is found not to merit a reversal of the burden of proof on review and is, therefore, less ‘serious’, this will have a bearing on whether the Court in Vijay Madanlal Choudhary correctly interpreted how wide a net Parliament intended to cast in Section 3 of the PMLA – and whether Parliament genuinely intended that a person who robs a bank be treated at par with a person who robs a bank and uses the funds to finance a Bollywood film – projecting tainted money as untainted.

Consequences of the judgment and the pending review:

Vijay Madanlal Choudhary has done little to change the approach of trial courts and the Directorate of Enforcement in the prosecution of PMLA offences, except for permitting grant of bail to persons who have undergone half the maximum punishment as under-trials, and the abatement of PMLA proceedings where the prosecution of the scheduled offence abates by reason of closure, discharge, acquittal, or quashing.

The Directorate of Enforcement will continue to take its hardline stance that the ECIR is an internal document which need not be shared with the accused, and the High Courts and trial courts will continue to enforce the twin conditions for bail under PMLA, including the reversal of the burden of proof.

The order issuing notice on review, unfortunately, does even less – it is unlikely that the contingent review will translate into litigants securing relief based on a two-line non-speaking order – though litigants will at least try to take advantage of the pending review to avoid adverse orders of a final nature.

The shift in perspective between the Supreme Court bench which decided Vijay Madanlal Choudhary and the bench issuing notice on review seems to have been brought on by a difference of just one member. Since neither of the presiding judges are on the Supreme Court’s current roster, the outcome of the review petition will depend greatly on the third judge before whom the review is ultimately decided.

The difference of one member is far from trivial. As Justice Krishna Iyer’s introductory paragraphs in LIC v. DJ Bahadur (1981) 1 SCC 315 (where he sat as one of three judges) remind us:

“The judicature, like other constitutional instrumentalities, has a culture of national accountability… A court is more than a Judge; a collegium has a personality which exceeds its members. The price a collective process, free from personality cult, has to pay is long patience, free exchange and final decision in conformity with the democracy of judicial functionality. Sometimes, when divergent strands of thought haunt the mentations of the members, we pause, ponder and reconsider because we follow the words of Oliver Cromwell commended for courts by Judge Learned Hand: ‘My brethren, I beseech you, in the bowels of Christ, think it possible that you may be mistaken.’”

A bench is more than the sum of its parts. One can only hope that the learned judges who ultimately decide the review petition, two of whom have already acknowledged that “at least two of the issues” merit review, remain open to the possibility of reviewing more issues than two.

CCI Clears Deal Without Remedies for the First Time Following Show Cause Notice

The Competition Commission of India has unconditionally cleared PayU Payments’ acquisition of BillDesk, marking the first time the authority has cleared a deal without extracting any remedies after raising preliminary competition concerns in a show cause notice.

The CCI revealed yesterday that it has cleared PayU’s €4.7 billion acquisition of IndiaIdeas.com, which trades as BillDesk. The merger will create the largest digital payments company in India and one of the 10 largest online payments providers globally. The companies announced the tie-up in August 2021 but filed with the CCI in April.

The CCI raised prima facie competition concerns in a show cause notice in July, warning that the deal would create a company with a market share above 40% in the digital payments sector. The authority sought an explanation as to why it should not launch a detailed Phase II investigation.

But PayU, advised by Nisha Uberoi at Trilegal, subsequently convinced the CCI to approve the deal without any remedies – the first time the authority has done so following a show cause notice.

The CCI has issued over a dozen of these show cause notices during past deal reviews, eventually demanding commitments to resolve its concerns in Phase I or Phase II.

In this case, the authority reportedly met with several rivals and other market participants that expressed concerns about the post-deal market share of the merged company.

PayU and BillDesk submitted in their filing that the deal does not give rise to competition concerns but said the relevant Indian markets are retail digital people-to-merchant payments; online people-to-merchant payments; and risk management for digital payments.

The companies argued that those markets are dynamic and highly competitive – with segments consisting of more than 100 rivals providing similar or substitutable products and services. There are also low switching costs for merchants in those markets, while the various products and services on offer are open and interoperable, the companies said. Finally, pricing, entry and participation in the relevant markets are regulated by the Reserve Bank of India and the Indian government, they argued.

BillDesk is a popular payment gateway in India while PayU parent Naspers has strengthened its position in the digital payments sector “by growing inorganically”, said Vivek Agarwal, a partner at DMD Advocates in New Delhi.

Given that the merger will consolidate the companies’ already leading positions, it was likely to receive detailed scrutiny, Agarwal said.

“However, the CCI’s view has been clear that it does not want to over-regulate digital markets to impede innovation and consumer welfare,” he said.

The authority has been conducting a detailed analysis of mergers in the digital economy based on traditional rules to ensure there are no immediate concerns, Agarwal said.

Given the dynamic nature of these markets, it may be difficult for the CCI to unwind any harm to competition through ex-post enforcement, he said. The authority sometimes asks for undertakings – which are different from remedies – to alleviate any non-price concerns, Agarwal added.

Those undertakings typically look to make sure that companies stick to statements made in their 􀀁lings following approval, especially in areas where there may be competition concerns – such as how the data of the parties would be consolidated and used post-merger, he added.

PayU did not respond to a request for comment.

Counsel to PayU Payments and parent company Prosus
Trilegal
Partners Nisha Uberoi in Mumbai and Gautam Chawla in New Delhi, assisted by Harshita Parmar, Mathew George, Rahat Dhawan, Shivangi Chawla, Aditi Khemani Samriddha Gooptu, Pramothesh Mukherjee, Ishan Arora, Rishi Kauntia, Madhav Kapoor, Akanksha Mathur and Varunavi Bangia

EconOne

Counsel to IndiaIdeas.com (BillDesk)
Shardul Amarchand Mangaldas & Co
Partner Aparna Mehra in New Delhi, assisted by Rahul Shukla and Kshitij Sharma

Counsel to the selling shareholders
AZB & Partners
Partner Bharat Budholia in Mumbai

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