Articles for Law Firm

Budget 2023: Significant Emphasis On Capex And Energy Transition Says Cyril Shroff, Managing Partner, Cyril Amarchand Mangaldas

By laying a significant emphasis on Capex and Energy Transition, the FM has provided the foundation for strong anti-cyclical momentum that should enable robust domestic economic growth and help counter the expected global headwinds. The focus on making India future-ready by way of AI labs, Agri-tech, and R&D in healthcare, further boosting Digital Public Infrastructure and holistically expanding physical infrastructure, auger very well for sustained long-term economic growth.

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Unnati Agrawal, Partner, IndusLaw On The Competition (Amendment) Bill, 2022

The Bill reflects the recommendations of the Competition Law Review Committee in 2019 and introduces key changes in merger control as well as anti-trust-related provisions such as deal value thresholds, expedited merger review timelines; settlements and commitments; leniency plus, hub and spoke cartels, etc. The Bill streamlines and updates the Competition Act by providing it with more teeth and flexibility, in line with the changing economic and business reality. In relation to the anti-trust provisions, the Bill addresses the issue that all anti-competitive agreements may not fall within the current pigeon-hole provisions of the Act. It recognises hybrid anti-competitive agreements (such as hub and spoke cartels) and empowers the Competition Commission of India (CCI) to now punish the cartel facilitators also. Additionally, the Bill provides for introduction of settlements and commitments mechanism, which will allow the parties to apply to the CCI to settle/ make commitments in various anti-trust cases. The proposed amendments are a welcome change, which will: (i) ensure swift correction of anti-competitive behaviour and practices in the market; (ii) spare willing and legally compliant companies to face the rigours of an extensive CCI investigation; and (iii) ease the pressure on the CCI’s resources. As such, the Bill provides that the procedure for conducting the commitments or settlements will be laid down in the regulations to be issued under the Act in due course. However, it will be prudent that such regulations also provide clarity on issues such as admission of liability for availing commitment or settlement, etc. The Bill also seeks to bring crucial amendments to the existing merger control regime. Given that many transactions in the digital markets have escaped the CCI's scrutiny owing to the low turnover generated by the target company, the Bill empowers the CCI to review transactions exceeding a certain ‘deal value’ threshold (i.e., (a) where the deal value is in excess of INR 2,000 crore (approx. USD 252 million); and (b) where either party has “substantial business operations in India”) which will bring a number of M&A transactions in the digital market under the CCI’s radar. Since, the proposed ‘deal value’ threshold is fairly low, it will be important to lay down the test to determine ‘substantial business operations in India’ through regulations and/or FAQs. Moreover, to prevent benign transactions from getting scrutinised due to this threshold, the regulations or FAQs should also specify: (i) the sectors / industries to which this threshold will apply; and (ii) methodology for computation of ‘deal value’ (especially in transactions involving non-cash consideration such as share swap). The proposed amendment also specifies that the ‘substantial business operations’ of the ‘parties’ will be considered to review any transaction which meets the deal value threshold. However, international jurisprudence suggests that substantial business operations of only the target is considered. Otherwise, a lot of transactions with no impact on competition in India (as the target's business operations are entirely overseas) will also come under scrutiny, resulting in an unwarranted burden over the regulator. Additionally, to align the Act with the CCI’s decisional practice, the Bill also aims to codify the CCI’s expansive interpretation of ‘control’, which includes the lowest standard of ‘control’, i.e., exercise of ‘material influence’. However, no such corresponding amendment is proposed in the ‘control’ limb of group’s definition. Hence, this may have far reaching consequences for: (i) mapping of overlaps between parties for competition assessment; (ii) computing thresholds for determining notifiability to the CCI; and (iii) availability of the intra-group exemption. Further, in order to ensure a business-friendly approach in line with the Government of India’s motto of ‘ease of doing business’, the Bill seeks to expedite the merger review timelines across the board by reducing the timeline for CCI’s: (i) formation of prima facie view (from 30 working days to 20 calendar days); and (ii) approving a combination (from 210 calendar days to 150 calendar days). While the shortening of timelines may result in speedy approval of transactions, it may increase pressure on the CCI which in turn may result in an added burden on the parties. The Bill also seeks to remove hurdles for transactions involving open market purchases and other transactions undertaken on stock exchanges by exempting them from standstill obligations. However, such exemption is subject to: (i) the transaction being timely notified to the CCI; and (ii) the acquirer not exercising any ownership/ beneficial rights/interest in such shares or securities till CCI’s approval. Conclusively, the Bill is in line with the international best practices and intends to achieve its broader objectives of economic development, protecting the interests of consumers and to ensure freedom of trade in the markets. The Bill has now been referred to the Standing Committee on Finance for further evaluation and asked to submit its report in 3 months. The Standing Committee may seek comments from industry experts, businesses and legal professionals to understand the challenges in various sectors and fine-tune the Bill accordingly. Therefore, it is unclear whether the Standing Committee’s report will be finalised before the winter session of the Parliament.

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Anisha Chand, Partner, Khaitan and Co On Reduced Timelines For Review Of Merger Under Competition (Amendment) Bill

Key Changes Proposed In The Competition Amendment Bill: Deal value test: The CCI will have to precisely define what constitutes substantial business operations. Since different sectors will relate to this expression differently. For eg, for tech platforms, value of operations may lie in the user base or customers located in India, while for an infrastructure company, having plants and equipment itself is valueable even though not operational. Commitment and settlement: a lot will depend on the fine print of the associated regulations that CCI is to come up with. Effect on the compensation claims by persons who have suffered from the anti-competitive will also also have to be seen for parties who have settled the matter. Reduced Timelines: Compressing merger review timelines to 20 days could mean a higher burden on parties to do pre-filing consultations or face repeated questions from the CCI or suffer invalidations.

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Akshayy S. Nanda On Proposed Amendments In Competition Act To Regulate M&A In Digital Economy

The changes proposed in the competition amendment bill are quite significant and far-reaching. One of the driving factors of the amendments proposed is to address concerns in the digital economy. Mergers and acquisitions in the digital economy often escaped scrutiny by the CCI as such transactions were exempt from notification to the competition regulator on account of assets or turnover of the target entity being below specified financial thresholds. The introduction of the deal value threshold would ensure that significant acquisitions in the digital space are scrutinized by the CCI. The intent of the legislature is that only those acquisitions in the digital economy should be notified to the CCI where a party to the transaction has substantial business operations in India. Clarity is awaited from the CCI on what constitutes ‘substantial business operations’ in India. The other issue on which certainty is required is the theory of harm in assessing and analyzing M&A’s in the digital economy as the dynamics of competition in such markets differs from the traditional markets that the CCI has been scrutinizing in the last decade. The existing criteria of assessing M&A’s in the traditional markets may not be relevant or rational in the context of digital markets. The amendments propose to reduce timelines for approval of M&A’s notified to the CCI. On the face of it, such proposal appears to be business friendly. However, such reduced timelines are likely to impose significant burden on the combination department of the CCI and may prove to be counter-productive in the long run. Such reduced timelines are unnecessary considering that the CCI has done a stellar job in the last decade by approving M&A’s within prescribed statutory timelines and in an expedited manner. The bill also proposes to introduce a settlements and commitments mechanism whereby the CCI may accept settlements and commitments from the parties and close investigations quicker. This is beneficial for both the CCI as well as the parties under investigation as it reduces the litigation time and cost. The other significant amendments include provisions for penalizing third parties which may facilitate a cartel such as a ‘hub-and-spoke’ cartel; introduction of a limitation of 3 years; significant increase in maximum penalty for not disclosing facts or giving false information; and, codifying the ‘material influence’ test as the standard for control. Overall, the proposed amendments are significant and are being introduced to further the ‘ease of doing business’ objective of the Government. However, the success of the amendments depend on the regulations to be introduced by the CCI to give effect to these proposed amendments as well as the legal certainty that such regulations would provide to businesses.

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Quote On ITAT order by S. Vasudevan, Executive Partner Lakshmikumaran & Sridharan Attorneys

The ITAT has followed its orders for the earlier years to hold that once the Indian entity has been remunerated on arm’s length basis, no further profit attribution can be made in the hands of the non-resident entity by alleging that the Indian entity constitutes a Permanent Establishment (PE) of the non-resident. Moreover, the ITAT has also followed the Supreme Court ruling in E-funds case to hold that the mere fact the Indian entity is a 100% subsidiary of the non-resident or that the non-resident has outsourced its business entirely to the Indian entity cannot lead to a conclusion that there is a PE.

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"Pre-pack resolution plans are likely to facilitate adherence to the timelines prescribed under the IB Code", says Sonam Chandwani, Managing Partner, KS Legal & Associates

With the Indian economy currently grappling with mounting non-performing assets (NPA) and creditors including banks, financial institutions and other lenders are left high and dry with sluggish recoveries, pre-packs across jurisdictions are known to plug this wide recovery gap. In fact, pre-pack resolution plans are likely to facilitate adherence to the timelines prescribed under the IB Code. With the increase in threshold to 1 crore, numerous operational creditors especially MSMEs were deprived of remedies under the Code. However, the recent introduction of the pre-packaged insolvency framework is likely to support MSMEs – a major contributor to our GDP and employer to a sizeable Indian population. MSMEs have suffered the most during the pandemic and placing a strict timeline of 120 days on the pre-pack model is likely to soothe the distressed MSMEs. Additionally, the Ordinance is likely to provide a cost-effective and faster resolution process for MSMEs under the debtor in possession model, unlike the normal CIRP where it is RP in possession.

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Rajiv Chandak, Partner, Deloitte, India Shares his Take on the Introduction of Prepack Framework

The introduction of the Prepack framework was supposed to coincide with lifting the moratorium on filing fresh cases of Insolvency. Currently, the government has restricted Prepacks provisions for MSME and will extend to other Corporates in some time. Prepacks will help Corporate Debtors to enter into consensual restructuring with lenders and address entire liability side of the Company. The government needs to further augment the NCLT’s infrastructure so that pre-packs can be implemented in time bound manner. The government may consider setting up specific benches looking at Prepack and Insolvency above a certain size to expedite resolution of large cases in time bound manner

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Misha, Partner, Shardul Amarchand Mangaldas & Co Shares a Quick Byte on Pre-Packaged Insolvency Process For MSMEs

This is a much-awaited amendment to the IBC. The intent of the government appears to be to provide for an alternative and efficient resolution mechanism especially for MSME’s by introduction of a new chapter in the statute. This is certainly a welcome step although it was hoped that such a framework available to non-MSME’s as well. The framework of the chapter does not reduce the role and involvement of NCLT’s very significantly - it is hoped that given that this process can be initiated only by the companies with the consent of 66% of its unrelated financial creditors, the disputes are minimal allowing the process to run more efficiently than the normal CIRP.

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