Friday, May 1, 2020

COVID-19 AND THE EXTENT OF CONTRACTS ENFORCEABILITY: IMPACT ON COMMERCIAL CONTRACTS



Introduction
With an unprecedented turn of events in the wake of COVID -19, the enforceability of contracts have become a major lookout. Giants such as Inox Leisure Ltd., PVR, Cinepolis are invoking the Force Majeure [“FM Clause”] in their contracts for subduing the rental obligations to their landlords.[1] COVID-19 has caused serious market disruptions and financial dislocations. The basic assumption is that there is a fundamental change in market circumstances due to the uncertainty of an outbreak, and there is a persisting problem until the extenuation of the disease. In this light, it is pertinent to administer, whether a party can invoke the doctrine of frustration under Section 56 of Indian Contract Act [“ICA”] or the FM clause; if yes, under what set of circumstances shall this be invoked.
A claim to avoid adherence to legal obligations in the contract can be fundamentally challenged on various grounds. Parties may seek to invoke the FM clause on the primary grounds of impossibility due to the unforeseeable COVID-19 outbreaks. Yet another ground that can be invoked is the performance of the contract to be commercially impractical or fundamentally expensive to further avow the contract.
The doctrine of Frustration under the ICA and Impossibility
Section 56 of the ICA, 1872 states an agreement to do an act which has become impossible or unlawful to be void. Unlike the common law jurisprudence which confides in different theories like just and reasonable principle,[2] construction,[3] multi-factorial approach,[4] it enunciates positive rules for the frustration of a contract.[5] This doctrine is applicable when a supervening event happens which was unexpected, beyond the control of the parties leading to an impossibility performance of the contract.[6] In the seminal case of Satyabrata Ghose v MugneeramBangur and Co,[7]   impossibility is the second paragraph of Section 56 as interpreted,
‘[T] he performance of an act may not be literally impossible, but it may be impracticable and useless from the point of view of the object and purpose which the parties had in view. Therefore, if an untoward event or change of circumstances totally upsets the very foundation upon which the parties rested their bargain, it can very well be said that the promisor finds it impossible to do the act which he promised to do.’[8]
This understanding creates a contrast with the wordings of Section 56 of the ICA. Section 56, paragraph 2 envisages the discharge of contract by two reasons – first, impossibility, and second illegality by reason of any event which the promise could not prevent. In the latter condition, illegality arises due to faults that are within the control of a party, whereas; the former condition does not prescribe such the same. This leads to an immaculate understanding of the non-enforceability of a contract if performance has been rendered impossible due to the party’s fault. However, this isn’t in conformity with the subsisting position. Self-induced frustration cannot be a ground to avoid contractual obligations.[9] However, this interpretation can be simulated in illustration 5 of Section 56;
Illustration 5: A contract to act at a theatre for six months in consideration of a sum paid in advance by B. On several occasions A is too ill to act. The contract to act on those occasions becomes void.
This illustration elucidates an understanding that due to self-incapacitation, the contract shall deem to be void. Hence, a sharp divergence from the literal interpretation of Section 56 can be noted down.
Further, any change of circumstances cannot be considered an ipso facto ground for avoiding contractual obligations. The landmark case of Alopi Parshad & Sons Ltd, v Union of India[10] held that a contract is not frustrated merely because circumstances have changed. The court’s power to dissolve a contract under Section 56 is limited in its scope. The contract is not frustrated until the fundamental basis of the contract is changed,[11] and is radically different from the existing circumstances.[12]


FM Clause and Impossibility
The Courts have applied the doctrine of frustration restrictively, and thus, are reluctant to discharge a party from adhering to the contract.[13] In Paradine v Jane,[14] the court held that usually contracts are not discharged by any frustrating event, and if such a scenario would have existed, the parties must have included such eventualities in their contract. Therefore, to averse the risk, which is unforeseen and beyond the reasonable control of human, the parties devise mechanism like the FM Clauses. It should properly be inserted in a contract. Omissions of inclusion of such provisions will render the incurrence of liability.
The FM clause seeks to anticipate unforeseeable eventualities and settles the allocation of risks beforehand rather than in an imposed manner.[15] Even after having a close affinity with the common doctrine, it is very narrowly interpreted in its relieving effect.[16] It doesn’t include the acts of negligence, omission, or default of the contracting party.[17]
For an event to qualify as an FM, the event preventing performance must be unforeseeable and irresistible.[18] If there is an alternative way to perform obligations, even after the dramatic change in market circumstances, such would not qualify to invoke a Majeure clause.[19] In Palmco Shipping Co. v. Continental Ore Corp., [20] unavailability of the Suez Canal route cannot tantamount to frustration if goods can be transferred via the Cape of Good Hope. There should be a direct link between the supervening event and the impossibility of performance.
In India, an FM can be traced back to Section 32 which stipulates the impossibility of rendering performance on the ground of an uncertain and unforeseeable future event becomes impossible. Impossibility can be interpreted as the deviation of the basic foundations on which the contract was agreed upon.[21] Commercial Impossibility is not within the purview of impossibility.[22]
Since, COVID-19 is an unprecedented outbreak that has ravaged businesses, including stock exchanges meeting circuit breaks, it is forcing Govt. to impose nationwide lockdown which soars contractual obligations across the world owing to commercial hardships. Therefore, it is quintessential to culminate meaning from the construction of the contract through language and wordings.[23]
Covid- 19 and FM : A tale of uncertainty
To ascertain whether COVID 19 is an FM event or not, the actual result would depend on the contractual context and intention of the parties.
In 2003 SARs in an epidemic-related case Li Ching Wing v Xuan Yi Xiong,[24] a tenant claims that the tenancy agreement is frustrated owing to an isolation order issued by the Govt. for which a tenant could not be inhabited for 10 days. The Court held the SARS epidemic to be an unforeseeable event, and, 10 days are insignificant to claim frustration in a two-year lease agreement. Similarly, even though, COVID-19 is an unforeseeable and a supervening event, it is assumed to be temporary in nature, thus, it is highly unlikely that frustration can be claimed within the framework of Section 56 of the ICA. Rather, if a contract contains an FM clause containing specific inclusions like a pandemic, and epidemic expressly, or by necessary implication, the contractual obligations may be suspended for a while. For instance, if the theatres are facing closure owing to lockdown orders, it would be safe to invoke the FM clause in their agreement with the landlords to suspend their legal obligation to pay rent till the outbreak continues.
However, the drafting of these FM clauses assumes an understanding to incorporate this specific exclusion within its scope. The burden of proving for establishing the FM clause rests on the party who invokes it.[25].  Effectively, in severity and unusual nature of events, the burden would be wrapped under the general context of the contract unless a specific clause is directed towards a different event. Therefore, the burden would be on the parties to establish that COVID 19 has led to the impracticality and impossibility to perform such contractual obligations, and no alternative way is available to them for obeying such obligations.

Grounds for Invoking FM Clause
·       Temporary Unavailability –The subject matter of the contract, either a person or an object that is fundamental to render the performance of the contract is temporarily unavailable. Time is the essence of such contracts. In Play Larga,[26] due to the outbreak of war, the Cuban Govt. denounced any trade with the Chilean Government. However, the buyer from Chile invoked FM clause containing expression ‘temporary interruption’ which extended to 30 days. The court held that such ‘temporary interruption’ cannot be subsumed with this catastrophic event because an extension of time was incomprehensible. Similarly, in various commercial contracts like supply contracts, services, and outsourcing agreements, the inevitable consequence is a failure to discharge contractual obligations owing to non-availability of the subject matter of the contract[27] even at exorbitant prices,[28] where an agreement was to deliver the goods at a particular time. Mere temporary interruption without a time constraint cannot be invoked.[29]
However, in agreements of Computer and IT, Cloud Computing, automation services contract, it would be difficult to prove the direct causation because COVID-19 is not preventing them from any other alternative medium to provide services. However, if the FM clause contains specific exceptions like a power cut failure, back-up arrangements, [30] it can be beyond the reasonable control of the supplier.
·       Failure of Specific Sources – If the subject matter of the contract is obtained from a specific source that became unavailable owing to no fault of either party, the FM clause can be invoked, for example, the deteriorations of the corps.[31] For instance, 70% of the coffee produced in India is exported, and Italy is one of the major importers. In such circumstances, where coffee could not be produced owing to lockdown measures, the exporters can claim that the subject matter of contract to not be available, and cannot be arranged through any other medium, even with extra-ordinary efforts in the wake of COVID-19 outbreak, since the production of the coffee is a fundamental essence of the contract, and thus FM is validly invoked.
·       Method of Performance – Due to COVID-19, Gateway Terminal, India’s biggest container terminal has invoked FM Clause,[32] because due to lockdown, all terminals have not been operation. In such circumstances, where the availability of terminals for offloading stock is fundamental to the contract, this does lead to the impossibility of the contract, where the performance cannot be rendered through any other medium available.[33] With regards to Commercial Contracts like in terms of distribution; in Peter Dixon & Sons Ltd. v. Henderson, Craig & Co. Ltd.[34], during WWI when British Ships were not available, foreign ships could have made available at an increased freight, the party couldn’t invoke the FM clause. For example, in supply and distribution agreements, any imports from China, an epic-center of the pandemic, would not be avowed owing to a total prohibition of transport mechanism by Indian Govt. Since, the impact could have been foreseen by the suppliers in China, it is flexible for them to invoke FM by relying on impossibility.
·       Illegality – On account of any amendment or enactment of any new legislation which may fluster the purpose of existing contracts owing to illegality, the contract may be rescinded. Any agreement cannot be acted against the law.[35] Govt. of India invoking Section 51 to 54 of Disaster Management Act, 2005 and Section 3 of Epidemic Disease Act, 1882 to override any laws in specific circumstances like rental obligations towards landlords is justified. In such rent agreements, the landlords cannot force tenants to obey the contractual obligations. Also, if the supply of medicine has requisitioned for public services in India, and any amount of export from India is strictly prohibited, the contractual obligation may be discharged.[36]


Pressure Points and Drafting Solutions
The FM clause is a scheme of civil law,[37] and thus, its scope is dependent on the construction, language, and wordings of the contract,[38] which gives rise to disputes and claims with respect to a specific set of facts. The FM can be covered in different shapes and can be flexible, as may be construed by the parties in the contract.  Therefore, it is pertinent to include FM clauses in the widest sense as to incorporate unforeseen risks like COVID-19, and to decide the fate of the enforceability of the contract thereon. A commercial contract is to be interpreted in a manner which gives business efficacy to such contracts,[39] and thus it is necessary to include a tenet of different measures in FM clauses. Following are some drafting solutions that may be feasible to be incorporated within the contract to avoid the liability.
1.     Whereas Clause:
Under English Law, it is assumed that when a party entering into the contract, they are deemed to have consented to the risks associated with the contract, even though the circumstances change. However, incorporation of ‘whereas clause’ in the contract highlights the intention of the parties, and provides a good example of a muddled meaning.[40] This clause serves as an interpretative guide to further clauses, and the contract in a whole.[41] During this pandemic, a clause may allow a party to avoid contractual obligations if significant market circumstances change. This clause is not substantive to bestow relief, and thus, must be followed by some clauses like hardship clause, MAC clause to gain relief.
2.     Use of Express Conditions along with a Hardship Clause:
The principle to apply express conditions in a contract is pertinent because of a robust trend of adhering to strict compliances to express conditions.[42] For instance, a party may incorporate a clause ‘right of parties when significant market conditions changes’ in which circumstances like COVID 19 can be encapsulated, and the party may decide relief on whatever basis like renegotiation, adjustment, or any hardship clause.
3.     Material Adverse Change [“MAC”]
MAC clause is generally used in the context of Mergers and Acquisitions but can be used in the contract of sale of goods. MAC is a clause which highlights that if there is a significant material change in business, the affected may terminate the contract.[43] Alternatively, the clause could provide for renegotiation, and after the failure of renegotiation, the adjustment clause by the court can be rendered. Since, largest stock exchanges of the world hitting circuit breakers, a downturn in the whole sectors leading to MAC in the businesses across the world in the wake of a pandemic - is the safest to incorporate the MAC clause.
4.     Hell or High Water Clause:
In this clause, the parties agree that regardless of a dramatic change of circumstances, the obligations are paramount duties to perform the contract, and thus making payment even on the occurrence of impossible events. It is mutually agreed that no party can obtain relief due to a substantial change in the contract.
5.     Renegotiation and Adjustment Claims:
On the occurrence of the supervening event, it is likely that the party would like to renegotiate amongst themselves. Therefore, re-negotiation and adjustment claims through a price adjustment variance, the appointment of a third person as an agent, escalator, or de-escalator clause are suggested.
Conclusion:
Amidst the outbreak of COVID-19, the invocation of FM, and the doctrine of frustration are practical and probable in all aspects. The doctrine of Frustration has been narrowly applied, and the courts have been reluctant to bestow relief thereon. This simulates an understanding that parties may renege the contract on the grounds of the FM clause incorporated within the agreement. It would holistically depend upon the construction of the contract as to pandemic like COVID-19 can be assimilated within the explicit or implied meaning of the contract. Therefore, the drafting of such an extensive clause is a safe approach. In the future, parties may incorporate a set of clauses relieving themselves from the consequences of such outbreaks.
SHUBHAMGUPTA

[1]Forum Bhatt, Inox Joins PVR To Invoke FM, BloombergQuint  (Apr. 08, 2020, 3:57 PM), https://www.bloombergquint.com/business/inox-joins-pvr-to-invoke-force-majeure
[2]M. P. Ram Mohan et. Al., The doctrine of frustration under section 56 of the Indian Contract Act, 4 Ind. L. Rev.  85, 89-90 (2020).
[3] Davis Contractors Ltd v. Fareham Urban District Council, [1956] 3 AC 696 (Eng.) (‘Davis’).
[4]Sea Angel,  [2007] EWCA (Civ) 547 (Eng.).
[5] Frederick Pollock & Dinshaw Mulla, Indian Contract Act and Special Relief Acts 323 (11th ed. 1990 ).
[6] Kesari Chand v. Governor-General in Council, (1949) ILR (Nag.) 718 (India).
[7] AIR 1954 SC 44 (India).
[8] Id.
[9]Balwinder Singh v. State of Punjab,  (2017) 185 PLR 356 [16] (India).
[10] (1960) 2 SCR 793 (India).
[11]Dharanjamal Gobindram v. Shamji Kalidas, AIR 1961 SC 1285 (India).
[12]Davis, supra note 3.
[13]British Movietonenews Ltd. v. London and District Cinemas [1952] AC 166 (Eng.); Tsakirog- lou & Co. Ltd. v. Noblee Thorl G.M.B.H [1962] AC 93 (Eng.); J. Lauritzen A.S. v. Wijsmuller B.V. (The Super Servant Two) [1990] 1 Lloyd’s Rep. 1 (Eng.).
[14][1647] EWHC KB J5 (Eng.); 82 ER 897 (Eng).
[15] FM and Frustration 45 (Ewan McKendrink eds., 2nd ed. 1995) (‘Ewan’)
[16]Nicholas, FM and Frustration, 27 Am. J. Comp. Law 231 (1979).
[17]Schmitthoff’s, Export Trade 199 (9th ed. 1990).
[18] Ewan, supra note 15, at 06.
[19] Nathan M. Crystal & Francesca Giannoni-Crystal, Contract Enforceability During Economic Crisis: Legal Principles and Drafting Solutions, 10 Global Jurist [i] (2010). (‘Nathan’)
[20][1970] 2 Lloyd’s Rep. 21.  (Q.B.) (Eng.).
[21] Krell v. Henry [1903] 2 KB 740 (Eng.)
[22] Karl Ettinger v. Changandas,  [1916] 40 (Bom.) 301 (India).
[23] Energy Watchdog v. CERC, (2017) 14 SCC 80 (India) ( ‘Energy’).
[24][2004] 1 HKLRD 754 (H.K.).
[25]Tamplin SS Co v. Anglo Mexican [1916] 2 AC 397 (Eng.). (‘Tamplin’).
[26] [1983] 2 Lloyd’s Rep. 171 (Eng.).
[27][1989] 1 Lloyd’s Rep. 148. (Eng.).
[28]Tennants (Lancashire), Ltd. v. C. S. Wilson and Co. Ltd. [1917] AC 495 (Eng.)
[29] Tamplin, supra note 25.
[31]Couturier v. Hastie, [1856] 5 HL (Cas.) 67 (China).
[33] Energy, supra note 23.
[34] 1919(2) KB 778 (Eng.)
[35] Indian Contract Act, Act. No. 9 of 1872, Imperial Legislative Council (1872) (India).
[36]Tennants (Lancashire), Ltd. v. C. S. Wilson and Co. Ltd. [1917] AC 495 (Eng.).
[37] Ewan, supra note 15, at 08.
[38] Energy, supra note 23.
[39] Id.
[40]Block Gertrude, Consider the Whereas Clause, 68 Wis. Law. 36, 37 (1995).
[41]UNIDROIT Principles, Preamble, http://www.unidroit.org/english/principles/contracts/main.htm.
[42]Nathan, supra note 19.     
[43]Timothy R. Donovan & Jodi A. Simala, Successful Partnering between Inside and Outside Counsel §41.32 (2010).

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Thursday, March 26, 2020

Extraterritorial Compliance with Corporate Governance Norms

The Securities and Exchange Board of India (SEBI) has elucidated its position with the respect to the extra-territorial application of its corporate governance norms. In a recent informal guidance in the matter of KCP Limited, SEBI interpreted regulation 24(1) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR). The provision stipulates that an independent director of a listed company is to be appointed on the board of directors of an unlisted material subsidiary, whether incorporated in India or not. SEBI found that the provision needs to be adhered to extra-territorially if a foreign subsidiary’s home jurisdiction does not prohibit the compliance thereof. This post seeks to analyze the regulator’s approach towards the extra-territorial application of corporate governance norms.
Informal Guidance
KCP Limited (the applicant) sought an interpretative guidance from SEBI regarding compliance with regulation 24(1) of LODR.  KCP Limited has a subsidiary in Vietnam, namely KCP Vietnam Industries Limited (KCP Vietnam), incorporated under the laws of Vietnam. KCP Limited, in its application, has reiterated that a limited liability company incorporated in Vietnam does not need to form a board of directors. Article 55 of the Law on Enterprises of Vietnam posits that a limited liability company is not required to have a supervisor’s board unless it has more than 11 members. KCP Vietnam has 8 members and, thus, it not mandatory to form a supervisory board.
In response, SEBI stated that KCP Limited is required to comply with regulation 24(1), and that the Vietnamese Law of Enterprises does not prohibit the company, which is a subsidiary of the company incorporated in India, to form a supervisory board to run the company. SEBI has given directions to appoint an independent director of KCP Limited as a director of supervisory board of KCP Vietnam.
Comment
SEBI directions to form a supervisory board even if the foreign laws do not require it demonstrates an approach to ensure corporate compliances extra-territorially. In GVK Industries Limited v. Income Tax Officer, the Supreme Court of India held that the Parliament may exercise its legislative powers with respect to extra-territorial aspects or cause, events, things, etc., only when such extra-territorial aspects or causes have, or are expected to have, some impact on, or effect in, or consequences for: (a) the territory of India, or any part of India; or (b) the interests of, welfare of, wellbeing of, or security of inhabitants of India, and Indians. In Sahara India Real Estate Corporation Ltd. v. SEBI, the Supreme Court held:
“Subsection (1) of Section 11 of the SEBI Act casts an obligation on SEBI to protect the interest of investors in securities, to promote the development of the securities market, and to regulate the securities market, “by such measures as it thinks fit”. It is therefore apparent that the measures to be adopted by SEBI in carrying out its obligations are couched in open ended terms having no prearranged limits. It is necessary to record here that the aforesaid power to adopt “such measures as it thinks fit” to promote investors’ interest has not been curtailed or whittled down in any manner by any other provisions under the SEBI Act, as no provision has been given overriding effect over subsection (1) of Section 11 of the SEBI Act.”
SEBI, a quasi-legislative body, may enforce its law if it affects the interest of the securities market in India. SEBI’s direction to form a supervisory body instead of constituting a board of directors or appointment of independent director pursuant to regulation 24 LODR seems to simulate an approach to at least create a supervisory position to comply with corporate governance norms, inter alia, the appointment of independent director. A ‘supervisory board’ generally performs supervisory functions to check the legality, accuracy and honesty in the management and administration of the company’s business activities. At the outset, this approach displays SEBI’s trajectory to streamline the flow of information between the companies, and to avoid any informational asymmetry that becomes a subject of financial irregularities in listed companies in India. This stance taken by SEBI serves as guidance for companies with material subsidiaries to ensure that corporate governance may be adhered to when the foreign laws does not prohibit the same explicitly.
Further, it is necessary to highlight that SEBI has been lenient in terms of application of the provisions of the Companies Act 2013 as compared to the LODR. In response to an informal guidance sought by HCL Technologies Limited, SEBI adopted the view that if subsidiary’s home jurisdiction does not require compliance with or obligation to get its financial statement audited, the listed company can proceed by placing unaudited financial statement on its website. However, the stance that has been taken in the present informal guidance shows a different approach when it comes to corporate governance norms.
- Shubham Gupta
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Wednesday, February 19, 2020

Tracking the Data Protection Regime in India


The article is authored by Abhishek Tripathy, a fourth-year law student at the Institute of Law, Nirma University. 

 The Personal Data Protection Bill, 2019 as introduced in Lok Sabha has been referred to a Joint Parliamentary Committee of both the Houses, under the Chairperson of Smt. Meenakshi Lekhi for further evaluation. It has to be noted that this bill is not the same as the Draft Personal Data Protection Bill, 2018 which was made public by the Srikrishna Committee last year. The bill which is most likely to be placed in the winter session is expected to have certain changes especially with regards to the data localization norms. The bill will mark the way for a new data protection regime in India.
Background

The Information Technology (Reasonable Security Practices and Procedures and Sensitive Personal Data or Information) Rules which was released on 18th April, 2011 by power conferred under Section 87 (2)(ob) read with Section 43A of the Information Technology Act is the only existing law on data privacy in India. The SPDI Rules is currently the only existing law that ensures the safety and security of sensitive personal data or information. The IT Act defines sensitive personal data or information as such personal information which should be protected by the government with due consultation of professional and experts. According to Section 43A of the Act, a corporate body has to be accountable to the possession of any sensitive personal data or information, and any wrongful use of the same will make it liable to pay damages to the person aggrieved. 

The 2011 rules which specifically deal with body corporates and persons illustrate certain fundamental principles on data privacy. The rules define personal information as any information that directly or indirectly assists in the identification of an individual. A body corporate thus in case of usage of any information should provide a clear and accessible statement of its policies, the type of information and the purpose of such collection. Such Information collected must be necessary and shall not be retained for longer than required. Consent is the cornerstone of privacy laws around the world and the use, transfer or processing of personal data is impossible without prior permission. Obtaining consent is a prerequisite for the collection of information and an option of non-participation must be provided prior to the collection of information. 

The SPDI rules also allow for a right to review to the providers of information with an option to amend or change any data that is inaccurate. Moreover, the data collected cannot be used in any other manner than for the purpose for which it is collected. Security of information is the sole responsibility of the body corporate which acts as a data fiduciary in the entire process. Any kind of grievance should be dealt with by an officer (appointed by the body corporate) within a month of receipt of such grievances. Consent can also be withdrawn by the provider if it is sent in writing to the concerned corporate/person. Disclosure of SPDI to third parties is not prohibited if a similar level of data protection is provided and such disclosure is necessary for the performance of a contract between the three parties. A body corporate is said to comply with reasonable security practices and procedures, if they have implemented such security practices and standards such as either IS/ISO/IEC 27001 standard or the codes of best practices for data protection as approved. In cases of a breach, a body corporate can be mandated to prove the requisite practices followed. The absence of effective enforcement machinery, therefore, raises concerns about the implementation of the SPDI Rules.

The SPDI Rules recognise financial information, health information, etc as "sensitive personal data" and thus regulate its collection, use and disclosure. 
The other primary legal instruments that address data protection in the financial sector include the Credit Information Companies (Regulation) Act, 2005 (CIC Act), the Credit Information Companies Regulation, 2006 (CIC Regulations) and circulars issued by the Reserve Bank of India (RBI). According to the CIC Act, credit information companies (CICs) are identified as collectors of information and have to adhere to privacy principles at the stage of collection and use of such credit information. Maintenance of data secrecy along with adherence to a large number of recognised data protection principles is mandated by the CIC Act. As per RBI regulations, information collected through KYC and various other information collected therein should be kept secure and in utmost confidentiality. Data protection norms for personal information collected under the Aadhaar Act are found in the Aadhaar (Data Security) Regulations, 2016 (Aadhaar Security Regulations). The Aadhaar Security Regulations mandates UIDAI to have a security policy encapsulating varied measures adopted to keep information secure such as maintenance of confidentiality and controlling access to data collected. 

The Data Protection Bill, 2019


The bill is expected to have major changes with regard to the data localisation norms. The draft e-commerce policy was received with a lot of backlashes as it advocated that data of all kinds should be localized from India. The cost of maintenance, investment and trade were supposed to get adversely affected due to the government’s stance on data localisation. The bill of 2019 addresses this concern by differentiating varied kinds of data. The differentiation will be on the basis of “Sensitive Personal Data” and “Critical Data”. The sensitive personal data can be processed with consent outside the country but cannot be stored. The Critical Data, which is to be defined by the government (mostly on security and defence matters), will have to be mandatorily processed and stored in India. Whereas the general data can be processed and stored outside India. The entities will be given up to 2 years to make changes in their structure to adhere to the provisions of the Act. For the purpose of the investigation, certain agencies will be exempted from the bill. The penalty from a gross violation can go up to 15 Crore or 4% of the global turnover, whichever is higher. Minor violations can attack penalty up to 5 Crores or 2%, whichever is higher. The data protection bill will establish a much needed rigid and full-fledged data protection framework in India. 
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Understanding 'Network Effect'

The article is authored by Abhishek Tripathy, a fourth-year law student at the Institute of Law, Nirma University. 

 Network effect can be defined as a consumer’s effect from using a good or service on the total perceived value of that product or service for others. The number of users/consumers who use a product or service is directly proportional to the value of the network. Let’s take the example of an online messenger, suppose X no. of people join the messenger, it will attract Y no. of people who are not on the platform but want to access X through the services provided by the messenger. The e-commerce scenario in India is majorly a two-sided market, wherein there is a user network, a seller network and they both are connected through an intermediary. E-retailing platforms, food delivery applications, etc act as an intermediary to connect the supplier to the consumer. In a two-sided market, an increase or decrease in the number of users on either side of the market will affect the other side of the market i.e. more the no. of users, more the sellers would get attracted to the platform and vice versa (indirect network effect). This determines the value of the platforms and dominance in a certain sector which results in the market tipping in favor of the one with a greater number of users. Thus, there is a need to keep a check on entities with an existing network effect to prevent anti-competitive practices such as predatory pricing, unfair trade practice, etc. In the case of MCX v. NSE, the concept of network exchange was extensively discussed, perhaps for the first time in Indian competition jurisprudence. The dissenting opinion in the case laid down certain characteristics of network effect; 

  1. The network effect creates an inverted U demand curve, equilibrium of which show variance in network sizes.  
  2. The pace of market expansion is greater in industries with network effect as compared to no-network industries.  
  3. Strong network effect creates natural oligopolies. Network industries are characterised by high inequalities of market shares and profits.  

It should be noted that there are two kinds of competition, one type of competition is “in the market” whereas the other type of competition is “for the market.” Network effect plays an important role in the later, as the network industries try to attract more users to gain a dominant position in the market. In such determination, it is important that the competition regulators take the market structure into equation before deciding on the relevant market. A Chicken-Egg problem, on the other hand, is stated as one in which a participant on one side of the market will be willing to participate to the platform activity only if he expects an adequate number of participation from the other side. For example, consumers would like to go for those credit cards, which are accepted by more merchants; similarly, merchants would like to join those platforms which have a large number of consumers. However, there are several two-sided markets that only perform the job of matching buyers and suppliers. Till the time enough number of both the participants are attracted to the platform, market makers are required, who try to resolve the temporary imbalance by standing in between the two parties i.e. they are willing to find out the existing problem to ensure smooth functioning of the platform.  The rise of e-commerce has again raised the age-old debate of inclusion of structural aspects of the market in the ambit of competition supervision. The first major school of thought to develop emerged at Harvard University when, in the 1930s, researchers conducted analyses of specific industries. In the middle of 20th century Harvard economists such as Edward Chamberlain, Edward Mason, Joe Bain argued that structure of an industry is essential to be looked into in order to examine competitiveness in the economy. The original insight of Harvard school developed a general theory that linked market structures to market performances, known as Structure-Conduct-Performance (SCP) paradigm stating that performance is determined by firms’ conduct, which is in turn determined by the market structure. According to the Harvard School approach, the regulators have to apply the presumption of illegality irrespective of the nature of the transaction. It is irrelevant if the said transaction is causing any benefits to the consumers, as the assessment is done on the performance of the entity and the existing structure in the market. On the other hand, the proponents of Chicago school consider consumer welfare as the utmost parameter in addressing competition concerns. With the advent of Chicago and the Post-Chicago school of thought, SCP had slowly lost its importance. Now as the markets get tangled and trickier, it is important that factors such as network effect should be considered as a relevant factor in tackling varied issues. 
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Thursday, January 23, 2020

SEBI engulfs non-monetary transactions - Extending the scope of Material Financial Relationships


This article is authored by Shubham Gupta


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Thursday, January 16, 2020

SEBI swerved on non-interference in Winding Up matters

This article is authored by Shubham Gupta, a 4th year student the Institute of Law, Nirma University.

Introduction
In the recent Adjudication officer (‘AO’) order dated on 31st December2019, SEBI took a stand that it can proceed with the adjudication proceedings against a company even though the company is under liquidation. This stand is inconsistent with the approach adopted by SEBI till now and is likely to be non-est. in law.
In this matter of Rajadhiraj Industries Ltd., AO had initiated adjudication proceedings against Rajadhiraj Industries Ltd for non-redressal of investor grievances on SCORES platforms within the stipulated time, and failure to submit to Action Taken Report. When SCN notice was issued to the company, and it was found that company is into closure since 1996, and from MCA records, it was observed that the company has been provisionally wound up by the order of Indore High Court, MP. The appointed official liquidator informed AO that the company is under liquidation, and thus, no legal proceedings can be initiated against it.


Taking U-turn from the existing approach, AO ordered that it can proceed with the adjudication proceedings- banked on that the adjudication proceedings as to determine whether the SEBI laws were violated or not and, to impose penalty. Taking reference to the apex court judgment in SV Kondaskar, OL v VM Deshpande[1] – ruling that liquidation court would have full power to demand the penalty from the liquidator, AO held that adjudication proceedings wouldn’t be hampered by the appointment of an Official liquidator.
Analysis

At the outset, this order is contrary to stand taken by SEBI till now. Previously, the position in respect to adjudication proceedings was different and had a radical inclination towards the halting and  prohibiting the institution of any new proceedings by SEBI without the approval of the appropriate authority. Earlier, M/s Nova Surgikos Limited, the similar facts were arrayed with respect to non-redressal of SCORES complaints, and AO ordered the non-continuation of proceedings owing to the company is under liquidation. Likewise, in Everonn Education Ltd, yielding to the fact that liquidator has been appointed to overlook the affairs of the company, AO desisted from a continuation of the said proceedings owing to non-approval from the court. It was further reaffirmed in ABG Shipyard Ltd  that leave of the appropriate is a sine qua non for the continuation of the proceeding if the company is under liquidation, and thus proceedings against the company become not est.
Furthermore, arguably, this order is in direct conflict to Section 33(5) of IBC and Section 279 of Companies Act, 2013. Section 33 (5) IBC, 2016 envisages that in case of liquidation order is passed, no suit or proceeding shall be instituted against or by a corporate debtor whereas Section 279 CA, 2013 which states that  when a winding-up order is passed, no suits or other legal proceedings shall be instituted against the concerned company. Under IBC, an only liquidator with the prior approval shall institute suit against the corporate debtor, not any other creditor.[2] In Murgan Oil Industries (P.) Ltd. Re,[3] the word “suit” or “proceedings” not restricted to any class of creditors, or plaintiff and, it is wide enough to encompass all to cover all suits and other legal proceedings who-ever may be plaintiffs.

It is imperative that SEBI has also held that ‘adjudication proceedings’ are within the purview of ‘other legal proceedings’ under Section 446 of the Companies Act, 1956.[4] Thus, in no case, SEBI cannot institute or continue any suit or proceedings against the corporate debtor. Contrastingly, under Section 279 of the Companies Act leverages institution or continuation of suits or proceeding with the prior approval of the tribunal. Therefore, the whole purpose of IBC – to prevent the multiplicity of suits in the multiple forums – is questioned by this order.


It is to reiterate or reaffirm that, once the court has taken the assets of a company under its control or has passed an order for its being wound up, it will not be proper to allow proceedings to be started or continued against the company.[5] Thus, the regulatory proceedings by the various regulators would not only hamper the liquidation process but would intrinsically vitiate corporate structure in the market.
Conclusion
In the light of above, the appropriate approval under the Companies act must have taken by SEBI and therefore, it’s profusely against the spirit of the existing laws. This has again posed a serious question on ‘AO power to conduct adjudication proceedings. The regulators have been bestowed power which must be used cautiously and with all due regard to existing norms.





[1] (1972) 1 SCC 438.
[2] Section 33(5), IBC
[3] 1970) 40 Com. Cases 77, 82 (Mad)
[5] Central Bank of India v. Elmot Engineering Co., 1994 AIR 2358; 1994 SCC (4) 159

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Wednesday, January 15, 2020

Splitting CEO’s Duality role: The landscape to independent Board Leadership ?


This article is authored by Shubham Gupta, a 4th year law student at the Institute of Law, Nirma University.

Introduction

In 2019, the Indian financial market has confronted many climacteric corporate issues like IL & FS, DHFL, Tata- Mistry, Infosys, etc. which appeal for a change in dynamics of corporate governance and compliance culture. In this regard, regulators and government bodies relentlessly fosters to adopt better compliance practices across the world. One of such advent interventions, the capital market regulator, SEBI vouched for separation of position of chairman and CEOs/ managing directors – which, in turn would cultivate a corporate democracy.
Separation of position and roles of the chairman of board and CEOs/Managing directors is assumed on the basis that the management look over the affairs of  the company whereas the board supervises the management, on behalf of the shareholders of the company. Essentially, this demand a non-aligned interest between the board and the management to have effective governance and management.


On the recent ruffling into the boards of Indian Listed Companies regarding SEBI’s rules on segregation of roles and position of chairman and executive/managing director- the hotly debated is again into clamour.[1] This article reinvigorates the debate over the dual role of CEOs and analyses the empirical literature available on this subject. In this regard, the author has emphasised two critical theories of corporate governance- agency theory which advocates for the separation of dual role; and stewardship theory which asserts the unity of command in a single person. Lastly, this article suggests the implication on the Indian Financial Market.
SEBI’s LODR Regulations : A breather for Listed Companies ?


In May 2018, The Security and Exchange Board of India (SEBI) brought in an amendment into Regulation 17, SEBI LODR (Listing and Disclosure Requirements), 2015 envisaging a separation of position of chairman and executive/managing directors,[2] with the aim to create an independent board while in the interest of better governance and compliance. This amendment has been captured on the recommendation of Uday Kotak Committee on Corporate Governance,[3] and is effective from to 1st April 2020.


According to new rules, in 2018, SEBI has mandated that the top 500 listed companies (by market capitalization) must ensure that the chairman of the board and executive director are not the same.[4] Until yet 2020, 247 companies have not separated the position of chairman and executive director including RIL, Hindustan Unilever, etc.[5] This breather has been a stumbling stone to instil a better proposal for effective compliance. Behind time, this scenario, of course, ends up the corporations appointing dummy or titular chairman of the board, where CEOs/MDs will continue to exercise unfettered control over with some ineffective independent director on the board. Thus, this proposal may seem not to apply in letter and spirit where independent leadership has been aimed for.
Kotak Committee Recommendations: The power Conflict

Kotak Committee has recommended that a division of power of Chairperson (leader of the board) and CEO (leader of management) would provide effective supervision of the management and better segregation of responsibilities and duties. In most European, British, and Canadian businesses the roles are usually split in an effort to ensure better governance of the company, and in turn, bring higher returns to investors. However, in certain jurisdictions like US, this position is differently debated and corporation have been given discretion to separate the roles.  The power conflict to maintain position is seen to a sparkling debate amongst corporations.
Kotak Committee vogue for following reasons -
a) providing a structural advantage for the board to act independently;
b) reducing excessive concentration of authority in a single individual;
c) clarifying the respective roles of the chairperson and the CEO/MD;
d) ensuring that board tasks are not neglected by a combined chairperson-CEO/MD due to lack of time;
e) increasing the possibility that the chairperson and CEO/MD posts will be assumed by individuals possessing the skills and experience appropriate for those positions;
f) creating a board environment that is more egalitarian and conducive to debate.
Fostering Independence and Transparency – A Popular Opinion  
Aftermath the result of corporate scandals and the financial crisis, the reformers and, the investors have demanded functional independence by separating CEOs and Chairman jobs – while from the parlance of better corporate governance practices. Their argument is braced upon the agency theory which advocates that the CEO performs the management activities of the companies, while Chairman of the board looks into matters on behalf of the shareholders like hiring, compensation, and remuneration, etc., thus require their separation to instill corporate democracy.[6] Corporate democracy is an intertwined thread of management and board, and shareholders where the board supervises the management and report to the shareholders. Therefore, a separation would lead to better monitoring and oversight. If one person occupies both the roles, there would be a conflict of interest.
Besides, boards should ensure that the Chairperson be able to commit sufficient time to carry out his or her duties and responsibilities effectively. The duties and expected workload will vary according to the type, scale and, complexity of the organization. This augments that separation would lead to creating independence and transparency into the affairs of the company. Also, the best corporate governance system discourages the concentration of wealth on a single or a few individuals' hands who are managing the affairs of the company. The Corporate Governance Principles of the Organization for Economic Cooperation and Development (OECD-2015) also promotes the separation of the role of CEO and Chairman which will lead to improving discharging of responsibilities of the board under principle VI – Responsibilities of the Board Item E.[7]

At the outset, in India, where large-scale family-promoters run businesses is to be frowned upon where the transition from generation developed business leadership been witnessed. In India, severe financial irregularities have been observed in family-run businesses like in Satyam Scam. Thus, arguably bestowing power to an individual might lead to no flourishing governance, and maybe the rights of shareholders would have been prejudiced.
Does Separation ensure Independency?
The critics of this concept believe that mere separating a role or position wouldn’t ensure independence, both theoretically and empirically.[8] Arguably, having an independent chair does not necessarily seem to have an independent mindset, and in any case, a wise-CEO would have discussed disagreement with Chairman prior to going into a meeting. This would lead an anomalous result which is to be perceived by separating the roles. In one of the studies conducted in US Companies, despite a large number of separations between the position of CEO and Chairman of the board, it has been observed that only 16% of people have been observed as true independent chairman.[9] Thus, there is a shred of weak evidence[10] that independence and effective governance would increase. However, in total, 13 studies have been conducted, to determine whether separation would lead to independent board leadership and effective governance. Out of 13, ten inclined to show that separation has either positive or no effect on the performance of company or firm,[11] and only two have shown a negative consequence of it.
Admittedly, they have advocated stewardship or administrative theory which argues that the benefits of separating the chairman and CEO roles are not free from any blot and would suffer from a ‘unity of command’ in an individual which is essential for effective management and decision making. It advocates that the person must have clear and unambiguous authority, to which management can effectively report the affairs of the company. The same has been recently relied on by Rishabh Premji, the chairman of Wipro who had requested to remain on the executive position.[12] However, the board of Wipro has stated that ‘We will compile with SEBI Regulations’.
Analysis : Implications of Indian Financial System
According to one of the studies,[13] that apart from the structural attribute of the boards, the behaviour of the boardroom - what actually happens in the boardroom reflects the effectiveness of leadership. Thus, we must focus on behavioural studies of the board, rather a clinging separation between the roles. The specific industry knowledge of separate chairs, their leadership skills, and how they shape board process has received scant attention, and the pay-off must be to incorporate all these factors. The structural attribute of the board like managing dissent, conducive boardroom discussion and facilitating the synergy between board and management must be incorporated in policy or regulations.

In Companies Act, 2013, there is no clear line of segregation of roles and responsibilities of CEO and Chairman and Companies have given leverage to decide the roles and responsibilities according to their framework based on their organizational setup and size of the company. If the CEO-Chairman relationship is strong, which in turn provides company benefits from having twice as much from the talent at the top, each having distinct leadership roles. Combining the roles does have its advantages, such as giving the CEO multiple perspectives on the company as a result of their multiple roles, and empowering them to act with determination. This, however, avows a leeway into CEO’s act  may lead to  a way for corruption and scandal. However, the enduring problem is with the implementation – as Corporation hasn’t implemented it and likely to appoint mere dummy/titular chairman of the board with some ineffective independent director.
In India, the listed companies are being seen to be powered by a single shepherd that i.e. CEO. Corporation may unlikely to implement the law in letter and spirit, which again pose a peppering question: Does Independent Board Leadership exists? Thus, the regulator must seek to create an additional qualification for the appointment of chairman and relationship with the existing CEOs to implement the law in its letter and spirit.
Conclusion
From the standpoint of organizational prosperity, it is pertinent that companies to be managed effectively for long-term, and to create a sustainable value for shareholders. Separating the two positions strengthens the overall integrity of the company and encourages an environment of teamwork, communication and mutual respect.


[7] OECD (2015), G20/OECD Principles of Corporate Governance, OECD Publishing, Paris. http://dx.doi.org/10.1787/9789264236882-en
[8] Roshima H. Said, Zuraini Yaacob, Norasmila Awang, Jurina Ismail, Kamaruzaman Jusoff, “Chief Executive Officer duality and company performance: A case of Malaysian companies,” Interdisciplinary Journal of Contemporary Research in Business, 1(6), 2009, 120-142 at 124.
[9] SpencerStuart, “2009 Spencer Stuart Board Index,” October 2009.
[10] B. Ram Baliga, R. Charles Moyer & Ramesh S. Rao, “CEO Duality and Firm Performance: What’s the Fuss?” Strategic Management Journal, 17, 1996, 41-53.
[11] CEO Duality, Succession, Capabilities and Agency Theory: Commentary and Research Agenda Author(s): Dawn Harris and Constance E. Helfat Source: Strategic Management Journal, Vol. 19, No. 9 (Sep., 1998), pp. 901-904 Published by: Wiley Stable URL: https://www.jstor.org/stable/3094091 Accessed: 06-01-2020 13:08 UTC
[12] Wipro's Rishad Premji may lose executive chairman role due to new rules, Economic Times, Jan 2,  2020.

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