All Posts By

kslegal-admin

Aug 31
Love0
insider trading laws

Strengthening Insider Trading Laws in Times of Extended Deadlines and Compliance Relaxations

By Corporate Law, Others No Comments

Strengthening Insider Trading Laws

“There is no other kind of trading in India, but the insider variety,” remarked a former president of the Bombay Stock Exchange (“BSE”) in 1992, whereas Mr. Arthur Levitt, Chairman of the Securities Exchange Commission (“SEC”) viewed insider trading as one with utterly no place in any fair-minded law-abiding economy. Between these ends of the spectrum lies the debate on insider trading.

Although India was not late in recognizing the detrimental impact of insider trading on the rights of shareholders, corporate governance, and financial markets at large, the legal regime including the enforcement mechanism relating to the prevention of insider trading remains in nascent stages. The Securities And Exchange Board Of India (Prohibition Of Insider Trading) Regulations, 2015 (“PIT Regulations”) prohibit insider trading while in possession of Unpublished Price Sensitive Information (“UPSI”) subject to certain exceptions.

Regulation 4 of the PIT Regulations contains provisions apropos trading when in possession of UPSI. Trades carried out by a person who has had UPSI would be presumed to have been motivated by the knowledge and awareness of such information in his possession and shall be held guilty of insider trading.

Simply put, any abuse of position or power by insiders for personal benefits, monetary or otherwise, is a fraud on the public shareholders who anticipate unbiased management of the company’s operations in the interests of its shareholders. The 2020 amendments to the PIT Regulations aim at bolstering the level of compliance with the Regulations. In doing so, it mitigates the defects that were plaguing the Regulations.

Prior to the amendment, there was considerable confusion with respect to the handling of UPSI by intermediaries. Notwithstanding the FAQs released by SEBI to address the same, specific details regarding the maintenance of the digital database by such entities continued to remain shrouded in uncertainty.

Further, the list of transactions under Schedule B of the Regulations exempting them from trading window restrictions was un-amenable to additions. This prohibited reasonable expansion of the same to include transactions of like nature. Lastly, there was also an issue of a lack of adherence to the code of conduct under the PIT Regulations.

Recent Amendments to Insider Trading

Through a previous amendment that came into effect on April 1, 2019, SEBI had mandated every listed entity, intermediary, and fiduciary to maintain a structured digital database. This database would have all the details, including the name and PAN details of a person with whom UPSI is shared. This was done to ensure that there was a trail of the information whenever SEBI needed to investigate matters of sharing of UPSI.

Now through the amendment notified on July 17, SEBI has mandated that the nature of the UPSI and the details of the person sharing such UPSI must also be recorded in the database. Moreover, the amendments also provide that maintaining such a database has to be done internally and cannot be outsourced. The database should store data for the previous eight years at any given time.

The second most notable amendment is that the trading window restrictions would no more apply to ‘offer for sale (OFS) and ‘Rights Entitlement’ (RE). Schedule B of the PIT Regulations mandates that there should be a closure of the trading window for designated people and their immediate relatives.

It can be reasonably expected that they possess UPSI, and therefore such persons should not be permitted to trade in securities to which such UPSI relates to that instance. However, through its circular dated July 23, SEBI has also allowed the selling of promoters’ holding by way of OFS and exercising to RE during the period of closure of the trading window.

Through another circular on July 23, SEBI also specified that listed entities, intermediaries, and fiduciaries are now mandated to promptly and voluntarily report any Code of Conduct violation under the PIT Regulations in the prescribed format to the stock exchanges, and any amount recovered from the defaulter shall be deposited in the Investor Protection and Education Fund.

Analysis and impacts of the amendments

The primary benefit of the amendment that mandated a structured digital database is reduced information asymmetry while SEBI investigates matters of insider trading. In cases relating to insider trading, distinguishing the insider who conveyed the UPSI, in any case, turns out to be progressively significant for narrowing down expected guilty parties and following the trail of data.

This was one of the pertinent issues in the ongoing ‘WhatsApp spill’ case wherein after long investigations, SEBI had as of late punished certain people for spilling data identified to be price-sensitive on the famous texting application. Strikingly, since WhatsApp messages are typically ensured through end-to-end encryption, in the previously mentioned case, SEBI could not efficiently recognize the entities involved in the trade, thus setting an alarmingly low standard of proof in such cases. It is trusted that the new organized and structured digital database may help and forestall such cases later on.

The second amendment that cuts a special exception to the trading window is in the light of the ongoing endeavors by SEBI to facilitate the easy routes of raising capital, this is a needed move and will give more chances to listed entities to raise fast capital for viably working for their organizations, particularly during the progressing pandemic. Lastly, the mandatory announcing of infringement of the code of conduct would make a more strong system of compliance.

Conclusion

With each of these amendments, while SEBI has chalked out additional responsibilities for intermediaries and fiduciaries, as well as streamlined its regulatory powers with stock exchanges, the overall impact on the market hygiene remains to be seen. While there seem to be concerned regarding the degree and extent of control that may be exercised by stock exchanges over unlisted entities, the same will depend on the successful implementation of the PIT Amendment and issuance of further clarifications and circulars by SEBI.

As noted above, the requirement of maintaining an enhanced digital database is in line with SEBI’s investigation and surveillance procedure. However, the same may lead to particular operational challenges and issues for the listed company, intermediary or fiduciary, because in addition to maintaining more data for a more extended period, the entity is no longer permitted to outsource the task of keeping the database to a third party.

Market conduct regulation is poised at a critical threshold in India, where a combination of nuanced laws and efficient enforcement can indeed be transformative for our markets. When understood in their true spirit, these amendments are capable of engendering a behavioral shift across corporates, their board, and other key stakeholders, in terms of how we balance commercial interests with accountability for information access.

As the market practice evolves on this, one can only hope that we can achieve that fine yet firm balance, amply aided by even-handed regulatory practices and judicial momentum.

 

Tags: insider trading, insider trading laws, insider trading compliance, extended deadline for taxes 2021, tax deadline extended

Aug 30
Love0
balance sheet

Will our Balance Sheet Reflect a Picture Different From The Harsh Reality of Mounting NPA’s?

By Banking, Others No Comments

Reflection of Balance Sheet

Circumstances such as the present pandemic have compelled the country and its business to pivot or risk being perished in this country-wide overhaul. The virus-induced lockdown has raised “Liquidity” and Non-Performing Assets (“NPA”) issues popularizing the buzzwords in financial circles and beyond.

Anticipating a domino effect on loan defaults amongst small to medium-sized businesses, the Finance Ministry in conjoined efforts with Regulators and the Reserve Bank of India (RBI), introduced numerous measures for the maintenance of equilibrium between the market forces of demand and supply during the pandemic.

One of the preliminary measures taken by the Ministry was the suspension of Sections 7 and 9 of the IBC, followed by a moratorium on loan payments until August 31. While this move was appreciated by Corporate Borrowers at the outset, a closer look at the policies revealed deep financial woes in the long run.

Consequently, the embargo may pause the economic ripple effect on businesses for some time, but does not discount or waive off payment liabilities due to losses that occurred under the pretext of COVID-19; however the increase in threshold value to Rs. 1 crore for initiation of insolvency leaves out a massive chunk of small to medium businesses having debts lesser than 1 crore leaving them limited options of traditional litigation, which are time-consuming and expensive.

Further, relaxations in compliance requirements, an extension of the ITR filing deadline to November 30th along with deferred interest payments in relation to the loan moratorium are myopic and are likely to create issues in long term for all stakeholders. These measures are collectively aimed at keeping businesses afloat while testing the resilience of financial institutions by offering relaxations – a necessary cushion.

Loan-loss provisioning for NPAs as mandated by the newly introduced amendments has seriously eroded the capital base of several banks, limiting their ability to make further loans. There is general consensus that the state of Indian banking is among the biggest challenges facing the country in accelerating investments, growth, and sustainability. 

A cherry on the cake for defaulting Corporate Borrowers was last week’s Supreme Court’s ruling which stated that Default will not result in NPA until further orders. In view of this, the accounts which were not declared NPA till August 31 shall not be declared NPA till further orders.

RBI’s circular dated 27th March 2020 was considered to be ultra vires to the extent that it was charging interest on the loan amount and also charging interest on interest (compound interest) on the deferred loans during the moratorium period. In light of this,` all pertinent decisions cannot be left to individual banks and the Supreme Court stated that clarification on interest upon interest will have to be obtained.

The main purpose of the moratorium was to provide a sigh of relief to those in distress and not as a weapon or an opportunity for those already defaulting on payment of their loan amounts. This pandemic created hardships for the borrowers, especially individual borrowers, and also obstruction in “right to life” as guaranteed by Article 21 of the Constitution of India. Also charging compounding interest during the moratorium period in the wake of the COVID-19 pandemic had no merit as such as held by the apex court. 

Non-recognition of NPAs until the end of this year will certainly distort the harsh reality of mounting NPAs in the country and the increasing burden on financial institutions. With the shadow financing industry already struggling with funds in light of recent crises such as the IL&FS fiasco, COVID-19 has further jeopardized the survival of the sector at large. At this juncture, it is necessary to implement an all-encompassing framework supporting the demand and supply side of the economy so as to avoid any potential systemic risks to the financial sector and accordingly take corrective steps.

As the nation awaits orders from the apex court, there is a dire need for the RBI to develop better mechanisms for monitoring macro-prudential indicators, especially to watch out for credit bubbles. Over the medium term, a simple indicator would be a rate of credit growth that is way out of line with the trend rate of growth of credit or with the broad growth rate of the economy. This way, the economic ripple effects throughout the country can be traced and mitigated at the source to avoid further damage. 

The pandemic has drastically reduced the Indian GDP by 23 percent ruling out a waiver of interest on bank loans during the moratorium period for all borrowers providing a suggestion for long-term rescheduling. Any “ex post facto” change in terms and conditions of the moratorium favoring those who availed of it over those who made the extra effort of repaying would be grossly inequitable and patently unfair for those who did not avail of the benefits of the moratorium initially or gave it up subsequently.

With the scales of economic relief mostly tipped in favor of small-scale borrowers, it further paves way for banks to restructure loans. In fact, NBFCs have requested RBI to allow them one-time restructuring of all loans till March 2021, as their borrowers are facing funding issues amid the pandemic.

This is a preferred move for financial institutions as there won’t be any buyers in a cash-strapped economy, even if impacted companies are taken to bankruptcy courts. So it is wise of financial institutions to work out a restructuring package without calling for a change in ownership while allowing the loans to remain ‘standard’.

However, misuse of previous restructuring frameworks by promoters has made the RBI wary of approving any such rejig with existing promoters at the helm. Bankers are mindful that any proposal has to have strong checks and balances to ensure it is not misused.

Despite these measures, a formidable overhand of NPAs may linger long after the COVID-19 pandemic dust is settled. Restructuring of loans is a static relief formula and may derail the debt rehabilitation process. Subsequently, this shall defer NPA recognition, as it did a few years ago, however restructuring may rose tint balance sheets for a few months but the risk of an impending credit bubble burst is a high possibility of a custom policy to sustain the economy is not implemented in a timely manner. 

 

Tags: classified balance sheet, balance sheet accounts, income statement and balance sheet, balance sheet of a company, balance sheet

Aug 30
Love0
central banking framework, economic slowdown

Limitations to The Central Banking Framework Amidst The Pandemic

By Banking, Others No Comments

Limitations to The Central Banking Framework

Now, more than ever, central banks are focused on risk. And, as COVID-19 evolves, they are increasingly recognizing that the rebuilding phase offers a unique opportunity to encourage action on the agenda of survival until the COVID-19 dust settles. The acute phase of COVID-19 has drawn central banks’ attention towards a crisis that was earlier restricted to some states and regions, to a global economic crisis riddled with challenges.

The nature of the crisis has revealed basic vulnerabilities around the world, which are a combination of debt and leverage, intra- financial multiplication and securitization, pathological structural developments in individual economies, and unsustainable asymmetries in global capital accumulation, creating imbalances in trade, investment, and consumption dynamics. 

The Reserve Bank of India (RBI), along with the Monetary Policy Committee (MPC) has been taking a series of measures over the past few months to cope with an economic slowdown and address the effects of the Covid-19 pandemic. Their actions, though guided by multiple considerations such as inflation and growth management, debt and currency management, have exposed the limitations and contradictions in the central banking framework in India.

The monetary policy laid down by the RBI involves the management of money supply and interest rates. The primary objective of the monetary policy is to maintain price stability while keeping growth in mind. The Reserve Bank of India (RBI) Act, 1934, was amended in May 2016 to provide a statutory basis for the implementation of a flexible inflation targeting framework. 

The monetary policy committee in their current monetary policy is guided to maintain an inflation rate of 4 plus/minus 2 percent. The main concern that arises is if the MPC should be working on the growth considerations or the short-term inflation concerns. Since February last year, the monetary policy committee has attached primacy to reviving the growth and lowering the benchmark repo rate.

However, in the recent August policy, the MPC decided to maintain the status quo. This decision was driven due to the elevated inflation rates which continue to average above the inflation-targeting framework.

There is no doubt that there is considerable uncertainty over the trajectory of inflation. The current inflation is majority driven by the supply chain dislocations owing to the lockdowns. There is uncertainty if Covid-19 will be inflationary in the short-run or will it be deflationary in the medium-term due to the falling demand or will it remain inflationary in the medium-term due to the supply disruptions overweighing the fall in demand.

The current inflation is also a result of the evident growing disconnect between the wholesale price index (WPI) and consumer price index (CPI). Since April this year, the WPI has been declining whereas the CPI has elevated, which indicates that there is excess supply and low demand on the wholesale level but excess demand and low supply on the consumer level. This implies that the rise in retail inflation will be short term and it will begin to lower as the disruptions diminish.

The refusal to provide any firm projection of future inflation is also a concern. The MPC’s mandate is to deliver stable inflation over a long period of time and not just a few months. However, it appears as if it is more concerned about elevated inflation in the short run.

We can argue about the inefficacy of the monetary policy and the limited options before the committee but is this argument is more driven by the absence of policy levers available to the committee other than the repo rate. While there is considerable uncertainty over the economic conditions but surely the committee is basing their decisions on certain future economic expectations. These should be made available to the public.

RBI Governor Shakuntala Das, in an event, said, “Monetary policy has its own limits. Structural reforms and fiscal measures may have to be continued and further activated to provide a durable push and boost growth.” He also added that one of the major challenges for the central banks is the assessment of the current economic situation and that the precise estimation of key parameters such as potential output and precise output gaps on a real-time basis is a challenging task, although they are crucial for the conduct of the monetary policy.  

Various inherent contradictions between the MPC’s operations and RBI’s management functions have also been brought forward due to this economic crisis. The Reserve Bank of India is responsible for the smooth functioning of the government’s borrowing program.

The RBI has taken up various interventions known as Operation twist, which involves buying longer-dated government bonds while simultaneously selling shorter-dated securities of an equivalent amount, pushing down long-term government security yields, and exerting upward pressure on short-term yields. This created a contradiction between MPC and RBI as in doing so, the RBI ended up doing the exact opposite of what MPC was trying to achieve by cutting short-term rates.

Another contradiction arose when RBI started intervening in the currency market to prevent the rupee from appreciating which constrained its ability to conduct open market operations to increase the liquidity injections into the economy.

At the one end, the central bank is bound to an inflation target. Yet, at this juncture, there is a strong argument to look past the current spurt in inflation and test the limits of both conventional and unconventional monetary policy. On the other end, while it may want to intervene to prevent the rupee’s appreciation, in doing so, its debt management functions have run up against its currency management functions. 

A growing number of central banks and banking supervisors are starting to work together to progress a global approach and agenda. In doing so, the central banks need to develop a clear strategy for the way forward. A monetary policy needs to be forward-looking. Given the slowdown in the economy and that the transmission of rate cuts takes time, there is a need for further monetary policy easing.

This will also be helpful as uncertainty remains over COVID-19 having a deflationary or inflationary impact on the Indian economy in the medium run. While the temptation to adopt aggressive measures may be high, crossing the traditional boundaries between fiscal and monetary policies, but are feasible for central banks in advanced economies with high credibility stemming from a long track record of stability-oriented policies. Thus this strong medicine should only be taken with extreme care.

Best Banking & Finance Law Firm Mumbai

Tags: limitations to the central, limitations to the central banking framework, central banking framework, central bank framework amidst the pandemic, central bank framework

Aug 30
Love0
the second wave

Analysing Individual Borrowers’ Creditworthiness Amidst The Pandemic

By Others No Comments

Analysing Individual Borrowers’ Creditworthiness

Financial institutions are focused on risk, now more than ever before. Circumstances such as the present pandemic have compelled the country and its business to pivot or risk being perished in this country-wide overhaul. The virus-induced lockdown has raised “Liquidity” and Non-Performing Assets (“NPA”) issues popularizing the buzzwords in financial circles and beyond.

Anticipating a domino effect on loan defaults amongst small to medium-sized businesses, the Finance Ministry in conjoined efforts with Regulators and the Reserve Bank of India (RBI), introduced numerous measures for the maintenance of equilibrium between the market forces of demand and supply during the pandemic.

With the widespread prevalence of the COVID-19 pandemic, they are increasingly recognizing that the rebuilding phase offers a unique opportunity to encourage action on the agenda of survival until the COVID-19 dust settles. The acute phase of COVID-19 has drawn central banks’ attention towards a crisis that was earlier restricted to some states and regions, to a global economic crisis riddled with challenges. The nature of the crisis has revealed basic vulnerabilities around the world, most importantly those surrounding individual borrowers. 

The Finance Ministry directed Banks to roll out a loans resolution framework with the Loan Moratorium period ending on August 31st and the festive season around the corner. In doing that the Supreme Court directed that while Banks are free to restructure loans, they cannot penalize individual borrowers availing moratorium benefits.

The apex court held that charging interest on deferred EMI payments under the moratorium scheme during the COVID-19 pandemic would amount to paying interest on interest which is against “the basic canons of finance” and unfair to those who repaid loans as per schedule.

RBI’s move to restructure personal loans accord this benefit to consumer credit, education loans, loans for creation or housing loans pursuant to a central bank notification. Specifically, the relief may include “rescheduling of payments, conversion of any interest accrued, or to be accrued, into another credit facility, or, granting of the moratorium, based on an assessment of income streams of the borrower, subject to a maximum of two years”; however the exact contours of the resolution plan have not been clearly laid out and remain undecided.

The primary objective of this move at help borrowers on the pretext of mass unemployment, pay cuts, and lay-offs in light of the world’s strictest lockdown, thereby paralyzing economic activity. So a 2-year moratorium that RBI has now permitted under such restructuring proves to be a blessing in disguise for people experiencing cash crunch during the pandemic.

Clearly, it will boost households facing a cash crunch — especially those who lost their jobs or small businesses that are on the verge of a shutdown. RBI has moved consistently and quickly since the start of the pandemic to calm markets, to provide liquidity, and, now, these steps should go some distance in giving relief to the distressed liquidity-starved household.

However, each household should be wary of using this facility. At the outset, a loan moratorium was aimed at helping those in distress and was not meant to be used as an opportunity for the pre-existing defaulters of loan payments. At the other end of the spectrum, the moratorium extension is likely to provide a negative credit outlook for financial intermediaries in the shadow financing industry like Housing Finance Companies and Non-Banking Financial Companies. Invariably, the deferment of EMIs will have an adverse impact on the cash flows of these financial institutions and test their resilience during the depressionary forces emanating from the COVID-19 pandemic.

Despite the slew of measures announced by the RBI and government to alleviate liquidity woes of financial institutions, these measures may have less impact in the short to medium term, but the operative word being “defer” of loan installments, and not a complete waiver or discount thereof should be of prime importance in the personal finance industry and be availed only if absolutely required.

A growing number of central banks and banking supervisors are starting to work together to progress a global approach and agenda. In doing so, the central banks need to develop a clear strategy for the way forward. A monetary policy needs to be forward-looking. Given the slowdown in the economy and that the transmission of rate cuts takes time, there is a need for further monetary policy easing.

This will also be helpful as uncertainty remains over COVID-19 having a deflationary or inflationary impact on the Indian economy in the medium run. While the temptation to adopt aggressive measures may be high, crossing the traditional boundaries between fiscal and monetary policies, but are feasible for central banks in advanced economies with high credibility stemming from a long track record of stability-oriented policies. Thus this strong medicine should only be taken with extreme care.

 

Tags: creditworthiness, credit worthy, credit worthiness of a customer, individual borrowers, credit worthiness of borrower, credit worthiness of a company

Aug 27
Love0
economic stimulus packages

India’s Economic Stimulus Packages: A Saving Grace For MSMEs or Lopsided Solution to a Larger Fiscal Problem?

By Economy, Labour & Employment, Others No Comments

India’s Economic Stimulus Packages: A saving grace for MSMEs

The COVID-19 pandemic has hurled some of the world’s most intrinsically strong economies into a financial abyss, and India is no exception to that. India’s economy was on its way south due to low investments, weak domestic demand, and falling exports before the onset of the pandemic. The pandemic exacerbated operational and financial constraints in terms of a decrease in working capital, unavailability of raw materials, and labor crunch due to mass migration. Evidently, MSMEs have faced a disproportionate impact of COVID-19 and the concomitant economic downturn.

With over 11 crore persons employed in the MSME sector, the Finance Ministry has, on numerous occasions, introduced a number of measures to detangle MSMEs from financial gridlocks during the crisis. In doing so, the government announced an economic stimulus package of Rs 20 lakh crore for reviving COVID afflicted MSME businesses.

Subsequently, the government revealed an array of initiatives for MSMEs, including Rs. 3 lakh crore worth of collateral-free automatic loans for businesses, Rs. 20,000 crore subordinated debt for stressed MSMEs, a Fund of Funds for equity infusion of Rs 50,000 crore followed by a revision in the MSME definition to widen the quantum of beneficiaries under the aforesaid government initiatives. Collectively, these supply-side measures are aimed at providing buoyancy to MSMEs and accelerating growth despite the current economic gloom.

At the surface, the quantum of economic packages aggregating to nearly Rs. 6 lakh crore are indicative of a fast-drying Indian treasury, however, some experts believe that the amount of money actually spent by the government could be far lower, at anywhere between Rs 16,500 crore to Rs 55,000 crore. This is because most measures are credit-focused or aimed at solving liquidity concerns of MSMEs and the NBFC sectors.

By promoting the financial institutions to lend more, none of these announcements actually involve the government spending a great deal in this financial year. However, with no end in sight to the pandemic, the resilience of financial institutions is likely to be tested over time and the numbers may vary greatly with the prolonged subsistence of the pandemic-induced lockdown.

The real requirement at this stage is to figure out the finest ways for MSMEs to stay afloat and paddle through the crisis with the least impact. A one-time economic reform can provide a preliminary push to MSMEs, but survival and growth are largely dependent on the individual borrower’s capacity to bounce back to normality. F

urther, the RBI-approved loan moratorium option for businesses provides temporary relief, however, interest on outstanding loan amounts continues to accrue during the moratorium period and further exacerbates the financial woes of distressed MSMEs in the long run.

The Brazilian government has announced part-payment of salaries of MSME employees, while Canada and New Zealand have offered wage subsidies. However, the Indian government has not announced any wage support or subsidy package to incentivize MSME employers to retain employees during this crisis although the government has directed businesses to continue paying wages in a timely manner without deductions.

Thus, it is evident that the recently introduced reforms overlook the woes of the workforce employed in the MSME sector and are not adequately addressed therein. While the recently introduced reforms do not directly provide wage support, the secondary beneficiaries of government measures are people employed in the MSME sector, who can be relatively at ease with the potential accelerated growth of MSMEs in the post-COVID era.

It is undisputed that GST and demonetization have tested the resilience of MSMEs in the last couple of years. Although the financial disruption induced by the COVID-19 pandemic is a larger threat, MSMEs are diversifying their product portfolio to paddle through the crisis and accelerate business growth.

Naturally, the collective effect of the measures introduced by the government to provide access to funding will enable numerous MSMEs to keep their heads above the water muddled with financial gridlocks on account of COVID-19. While the pièce de résistance of the Finance Ministry’s economic package was its push for micro, small and medium enterprises (MSMEs), its benefits may percolate into various interlaced industries and benefit the economy at large.

 

Tags: india economic stimulus, fiscal problem, fiscal stimulus, stimulus package india, global stimulus packages, economic stimulus packages, economic stimulus package india

Aug 27
Love0
prevention of sexual harassment

Re-Thinking Human Resources (HR) Post-COVID-19: Addressing Cybersecurity Risks and Prevention of Sexual Harassment (PoSH) Concerns During WFH

By Labour & Employment, Others No Comments

Cybersecurity Risks and Prevention of Sexual Harassment

The nationwide disruption led to one of the largest Work From Home (“WFH”) experiments in the world thereby making it the new “normal” amidst the pandemic. Since workplaces moved into people’s homes, an uncharted territory for companies to regulate their employees, the bigger question is what exactly constitutes these concerns?

Across the globe, this novel working style has been plagued with issues that largely remain unaddressed such as cybersecurity, work ethics, and sexual harassment at workplaces. This nebulous situation may impact companies in the long run and so organizations are required to make long-term adjustments to adapt working practices and culture until the COVID-19 dust settles. 

Cybersecurity Risks

With every institution shifting to digital space, companies have been steadily witnessing a rise in cyber-attacks, frauds, and crime that can seriously and negatively affect the already ailing business enterprise. With the lack of IT expertise and data security protocols, employees working from home are particularly vulnerable to phishing scams due to human errors and allow hackers easier access to the network’s traffic.

However, proprietary confidential data and information pertaining to businesses are being accessed from such unsecured laptops and desktops, thereby leading to increased exposure to phishing, email scams, and ransomware attacks by cybercriminals. Managers are in dire straits to reassess the legal, technical, and personal dimensions of the cyber-security threats to their data, and proactively evaluate loss prevention processes.

The combination of flawed technology and human errors makes WFH a cybersecurity concern. there is a need to develop good cyber-security habits to reduce associated risks amidst the mass digitization of businesses.

The present data protection regime namely, the Information Technology Act, 2000 and Information Technology (Reasonable Security Practices and Procedures and Sensitive Personal Data or Information) Rules, 2011, fail to protect the individual interest in today’s time thus making it imperative for businesses and employees to strengthen data security protocols and etiquettes.

Using personal email on the laptops/computers authorized by the organization can create data thefts and raise concerns. This is because emails from unknown sources may pose a threat to the data downloaded and transferred from these emails. Therefore, it is mandatory to use only the emails provided by the organization while handling any sensitive data. The workplace should make it mandatory for the employees to either use the systems provided by the organization or one that has been approved by the organization.

All these systems, then, must necessarily have a pre-installed and authentic anti-virus program (either at the cost of the organization or otherwise) to avoid any loss of data or third-party malware to access sensitive data. Thus, stakeholders involved must ensure highly secure working platforms for employees, create awareness of good security habits, conduct due diligence and be vigilant, so as to quick action to salvage any loss.

Preventing Sexual Harassment at Work (From Home)

It goes without saying that employees must adhere to the organization’s code of conduct and sexual harassment policies irrespective of the place of work. This raised a pertinent question – whether the Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013 (“POSH Act”) is applicable to harassment occurring through an online platform.

The legislation was enacted as a comprehensive one to provide a safe, secure and enabling environment, free from sexual harassment. Another question that arises is even if the harassment is recognized, are there any legal remedies available to the victims of sexual harassment online while the courts have partially shut down? 

Firstly, Section 2(o) of the Act defines “workplace” in an inclusive and non-exhaustive manner which under its sub-clause (vi) includes ‘a dwelling place or a house. Although, the spirit of the Act refers to the domestic servants and helpers who are employed in a dwelling place or a house when it means that the workplace includes a dwelling place or a house.

However, given the unprecedented situation, and on the application of the literal rule of interpretation, the meaning of workplace shall also encompass Work From Home for most job roles thereby broadening the definition of a workplace from the traditional ‘registered office’ to ‘any place visited by the employee arising out of or during the course of employment including their dwelling place or house. 

What accurately consists of sexual harassment online has been defined in section 2(n) of the Act, which is yet another non-exhaustive and inclusive clause defining “sexual harassment”, which deals with the expressed or implied unwelcome acts or behavior demanding or requesting sexual favors, making sexually colored remarks, showing pornography and any other unwelcome verbal or non-verbal conduct of sexual nature, respectively.

This was reiterated in the case of Jahid Ali vs.Union of India & Ors. in 2017, wherein the Delhi High Court considered sexually colored messages over the mobile phone, as sexual harassment of a woman under the POSH Act.  

Finally, how does one tackle the situation? Organizations must maintain the robustness of ethics and rigor on the PoSH agenda to ensure that the value system and execution of policies remain true to intent. Employees must be advised on where to draw the line between work and private life and establish their own liability as employers. The problem arises when the woman has to explain the situation to HR, and virtually it becomes a minefield for them to either risk their employment in an already sensitive environment where people are laid off from their jobs every day.

Government intervention is essential in strengthening the POSH Act when sexual harassment has been pushed down in priorities of companies, who are more focused on rebuilding themselves in a crumbling economy. In the view above, the employer and employee are two sides of the same coin who must sail together during this difficult storm of Covid-19.

 

Tags: human resources, prevention of sexual harassment, cybersecurity risks, prevention of harassment at workplace, human resource management

Aug 27
Love0
Stay Orders and Judicial Delays

Lapse of Stay Orders and Judicial Delays: A Constitutional Conundrum

By Corporate Law, Others No Comments

Lapse of Stay Orders and Judicial Delays

The constitutional predicament of the Supreme Court’s direction in the case of Asian Resurfacing of Road Agency v. Central Bureau of Investigation (“Asian Resurfacing”) assumes significance because of the controversial dictum regarding stay orders. The direction in its essence is that any order that stays civil or criminal proceedings will now lapse every six months unless it is clarified by an exception of a speaking order.

The major grievance is that every order which is passed by the High Courts while exercising its jurisdiction under Article 227 of the Constitution and Section 482 of the Criminal Procedure Code, is virtually annulled with the passage of time.

The decision comes into existence due to the indefinite delays that occur because of stay orders granted by the High Courts, which leads to judicial delays and denies the fundamental right to speedy justice. The Apex Court has observed that proceedings are adjourned sine die i.e. without a future date being fixed or arranged, on account of stay. Even after the stay is vacated, intimation is not received, and proceedings are not taken up.

The concern is that during criminal trials, a stay order delays the efficacy of the Rule of Law and the justice system. The power to grant indefinite stays demands accountability and therefore the trial court should react by fixing a date for the trial to commence immediately after the expiry of the stay. Trial proceedings will, by default, begin after the period of stay is over. In the case where a stay order has been granted on an extension, it must show that the case was of such exceptional nature that continuing the stay was more important than having the trial finalized.

The High Court may exercise powers to issue writs for infractions of all legal rights, and also has the power of superintendence over all “subordinate courts,” a power absent in the Supreme Court as it was never intended to supervise subordinate courts or the High Courts.  

In the case of Tirupati Balaji Developers (P) Ltd v. the State of Bihar, the Supreme Court recognized that despite having appellate powers, the current directive ordered by the Supreme Court takes a precarious position since the High Court cannot be limited in its exercise of power by any restrictions placed on it by the Supreme Court unless the Supreme Court interprets a statute or the Constitution and prescribes it as a matter of law, which is not the case in the directions issued for Asian Resurfacing.

There are two perspectives to this: firstly, the directive does not annul “every order” of the High Court merely with the passage of time. It only causes those orders that “stay the trial proceedings of courts below” to lapse with the passage of time, wherein even those orders can be extended as per the High Court’s own discretion on a case-to-case basis.

If this is considered supervisory or unconstitutional, then Appellate Courts will be left with the little prerogative to safeguard the basic rules of fair procedure. Secondly, the directive itself is not applicable to the interim order granted by the Supreme Court as reiterated in the case of Fazalullah Khan v. M. Akbar Contractor.

It is clear that the demand for justice to be disbursed and a trial to be completed in 6 months is a necessity given the incessant judicial delays and indefinite freezes on criminal cases. Staying trial proceedings for 6 months must be made a thing of the past and should not be stayed for 6 months or more, save in exceptional circumstances.

Allowing trial proceedings to have stayed for longer than 6 months encourages parties to abuse the process of law and move to an appellate court merely to stall a trial that has an inevitable conclusion. Legal procedures, the appointment of judges, and judicial vacancies all contribute equally to judicial delay, the rot has spread far and wide creating systemic delays in the entire judicial procedure.

Although courts will be bound to welcome the judgment in letter and spirit, some pressing questions remain unanswered. It is unclear why the Supreme Court provided “directions” to the High Courts now when it has been cautious in issuing such directions in the past? Further, if the primary motive was curbing the judicial delays and ushering in a change in the way the judicial system works, why is the Supreme Court not bound by its own directive? 

 

Tags: judicial delays, constitutional conundrum, criminal procedure code, criminal proceedings, judicial procedure, stay orders

Aug 26
Love0
amazon future group

Amazon Future Group Reliance Retail: The Many Twists and Turns That Lie Ahead

By Others No Comments

The Twists of Amazon Future Group and Reliance Retail

The mercury is set to rise as the world’s wealthiest men contest to grab a larger bite from India’s retail market. Things started heating up in August 2020 when Mukesh Ambani’s Reliance Retail stated its intention to acquire the retail, wholesale, logistics, and warehousing operations of Future Group for Rs. 24,713 crores, which prompted Amazon to issue a legal notice to Future Group alleging breach of contractual terms and thereafter obtained an interim stay on Future Group’s deal at the Singapore International Arbitration Centre (SIAC).

The interim award passed in favor of Amazon.com prevents Future Group from selling its assets to Reliance Retail by about 90 days. However, on being informed about the Award, Reliance Retail, India’s largest retail chain stated that its deal to acquire Future Group’s assets for a whopping $3.4 billion is fully enforceable under the Indian law and intends to enforce its rights and complete the transaction in terms of the scheme and agreement with Future group “without any delay.”

On the flip side, Amazon indirectly bought a 3.6% stake in Future Retail by acquiring a 49% stake in Future Coupons, a promoter entity of Future Retail. The deal provided Amazon with a call option effectively giving the American e-commerce giant the first right to refusal on the purchase of more stakes in Future Retail Ltd. if it’s decided to consider selling any shares in it.

Creating further aberrations for Reliance’s aspirations of owning a huge stake in Future Group’s Retail business is the non-compete clause. Specifically, pursuant to the non-compete clause in the 2019 agreement, Amazon listed RIL among 30-odd entities with which Future Group was barred from entering into any share-sale agreement without Amazon’s consent.

Although SIAC’s award has accorded some immediate relief to Amazon, both Reliance and Future Group’s resolve to execute the deal is an indication that they are not bound by the SIAC, a non-profit body that provides an alternative method of dispute resolution arising from cross-border transactions involving foreign companies. The SIAC settles cases privately and confidentially outside the traditional court system and customarily, a SIAC order cannot be enforced in India until ratified by an Indian court thus weakening Amazon’s legal move to stall the deal.

In light of the existing laws, such high-value transactions do not require each and every shareholder to sign such a Purchase Agreement. This way minority shareholders like Amazon do not possess the ability to delay the deal. Furthermore, Future Retail was not a party to the agreement between Amazon and Future Coupons, therefore the objection does not fare.

In this case, minority shareholders like Amazon Inc. may be required to ride along regardless of whether or not they agree with the deal terms. In the past, courts have overruled frivolous attempts by minority shareholders having minuscule holding in the company to defer or stall such transactions.

The most obvious option available to the Future Group is challenging the stay in Singapore. Future Group may invoke Section 34 of the Arbitration and Conciliation Act, 1996 which provides for limited grounds to challenge an arbitral award. However, one setback is that Section 34 provides only for setting aside an arbitral award and makes no mention of applications for setting aside emergency orders of interim nature.

Once the Arbitral Tribunal is established, the interim orders can be placed before it and challenged. However, if the Future Group chooses to not wait for the Arbitral Tribunal, it can challenge the applicability and enforceability of the interim directions in an Indian High Court.

Alternatively, Future Group could also wait for Amazon to move courts. The conventional understanding of the Arbitration and Conciliation Act, 1996 dictates that to enforce any award, Amazon will have to launch enforcement proceedings in an Indian High Court. Given the lack of recognition and enforcement of an emergency arbitrator’s directions, Future Group is likely to execute the deal with full force, while considering an appeal when the Arbitral Panel is constituted or contests the same.

With Amazon Inc 1 and Future Group 0, and Future Group’s declining market capitalization and inability to manage its debts and losses on account of the pandemic, the legal tussle between Bezos, Biyani, and Ambani will inevitably erode shareholder value, at least in the short term as the case drags on. It would be interesting to note how the course of legal action/s adopted by Future Group in the near future is likely to determine the fate of retail in India.

 

Tags: amazon and future group, reliance amazon future retail, reliance future deal, amazon reliance future retail news, amazon future group, reliance future group deal, amazon future retail news

Aug 26
Love0
hospitality sector

Hospitality Sector Laments: A Pitch-Black Friday Despite Reopening of Industry

By Hospitality No Comments

Hospitality Sector Laments: A Pitch-Black Friday

The virus-induced lockdown and social distancing norms incinerated the revenues and survival of the travel, tourism, and hospitality industry. Mass unemployment, business disruptions, and vacant hotel rooms have further aggravated the woes of the hospitality industry. On a business level, the impact of the crisis has percolated across verticals from luxury to niche and budget market players jeopardizing their survival in these turbulent times.

The redemption of the crippled hospitality sector is contingent upon people and their urge to socialize, which has been thwarted on account of the pandemic thereby hurling the sector into an unfathomable abyss of debt and losses. In addition to this, the sector’s dependency on the aviation, tourism, and travel industry makes its recovery agonizingly difficult.

To ease the wounds of the sector, the government introduced an array of economic packages such as providing a loan moratorium, relaxation in tax and corporate compliances, etc. to ease the burden of cumbersome paperwork and processes at a time when business operations have been adversely affected. The packages and relaxations ushered in a glimmer of hope during the industry-wide gloom, however, recovery at the grassroots level may take longer than anticipated, leaving numerous industry players in the lurch.

In RBI’s endeavor to provide interim relief, it announced a loan moratorium on interest and principal repayment for three months extendable to six months for the hospitality sector thus providing immediate but short-term relief to survive the pandemic. The Hotel Association of India requested the government and RBI to extend the moratorium on interest and repayment of principal for the entirety of the Fiscal Year 2021 till 31st March.

It is an industry-wide belief that such an extension would ease short-term financial trenches, however, a pressing issue is whether the industry can take flight while balancing the costs incurred for safety measures and economic survival in the long term.

However, with the conclusion of the moratorium period, the Finance Ministry introduced a one-time debt restructuring package for ailing businesses sitting on large debt piles. This measure is another short-term infusion shot by the government aimed at keeping businesses afloat, however in a capital- and labor-intensive industry such as hospitality with high fixed costs and payrolls, this may provide a breather for many players.

In principle, this measure appears equitable; however, in practice, hotel and restaurant owners have experienced procedural roadblocks in availing of the one-time restructuring facility due to reservations and non-cooperation by banks. Therefore, intervention by the government and RBI is pertinent to ensure fair and equitable implementation of the scheme and penalize institutions that ride against the spirit of the scheme.

Thus, it goes without saying that the slew of measures announced by the RBI and government to alleviate liquidity woes of financial institutions, may have a lesser impact in the short term, but a one-time credit rebuilding framework, if implemented properly, may become an attractive option for businesses who intend to stay competitive and progressive in these difficult times.

In particular, financial support from the government is imperative for MSME entities such as bed & breakfast, hostels, pubs, cafés, restaurants, bistros, and beach bars to name a few, which are vulnerable and worst hit by the change in general. Therefore, infusing adequate liquidity and relaxations into smaller businesses may help mitigate the impact of change caused due to supply chain disruptions and reduced consumer confidence and demand.

The ineffectiveness of government measures is likely to adversely impact the industry at large. Although the hospitality industry has demonstrated resilience through heavy discounts, constant innovation, cost reduction, and adoption of technology to survive the pandemic – physically and financially, many MSME players may not see light at the end of the COVID-19 tunnel.

While larger players struggle to make profits, emerging concepts such as homestays in remote locations, Work-from-Hotel, emotional and psychological retreats, cloud kitchens, etc. offered by the industry players may help them re-establish a consumer base and stay relevant even today. It goes without saying that a resumption of economic activity is essential, but its success hinges upon the right implementation of government measures and relaxations along with liberal governance on the finances of the hospitality sector while maintaining a strong vigil on the virus. 

 

Tags: hospitality industry, tourism and hospitality industry, hospitality business, hotel hospitality, hospitality sector, hospitality service, the hospitality industry

Aug 25
Love0
consolidation in banking sector

An Analysis of Consolidation in Banking Sector in India

By Banking No Comments

Consolidation in Banking Sector in India

“The Indian banking system could be better off if some public sector banks are consolidated to have fewer but healthier entities, as it would help in dealing with the problem of stressed assets”.
– Urjit Patel, Former RBI Governor

Recently, the 93-year-old lender, Lakshmi Vilas Bank (LVB) made it to the list of recent financial sector failures. After several quarters of waning financials, the lender was placed under a moratorium and is set to be merged with DBS Bank India. While bank failures are not a novel occurrence, the material size and quick succession of financial institutions going under the bus are worrisome.

In the past few years, investors have witnessed the failure of IL&FS, DHFL, Yes Bank, PMC Bank, and now Lakshmi Vilas Bank. IDBI Bank, was on the brink of a collapse by Life Insurance Corporation’s (LIC) capital infusion, thereby taking over a majority stake in the bank. While IDBI Bank’s case maybe is inconsequential in size as compared to India’s financial sector but bank failures, put together, throw up some important lessons for the Reserve Bank of India and the country’s financial sector at large.

While there exist two types of bank consolidations – voluntary and forced, the latter is widely prevalent across continents. Globally, the prime driving force for voluntary bank consolidation activity is a stiff competition that puts focus on synergy, growth and operational efficiency, and profitability. The merger of ING Vysya Bank, having a strong presence in South India, with Kotak Mahindra Bank having a stronghold across West and North India driven by synergy and demonstrated clear economic logic.

However, the latter type of bank consolidation is viewed from the perspective of the resolution of a weak bank and the “too big to fail” principle followed by the authorities. As a result, such mergers and acquisitions have facilitated corporate restructuring leading to the emergence of large banking and non-banking financial institutions both in – size and might. 

Section 45 of the Banking Regulation Act, 1949 empowers the Reserve Bank of India (RBI) to make a scheme of reconstruction or amalgamation of a bank with another bank if it is in the depositors’ interest or in the public interest, or in the interest of the banking system as a whole. The operation of the weak bank may be kept under a moratorium for a certain period of time to ensure smooth implementation of the scheme.

Many private sector banks have been merged with other private sector banks or the PSBs under this mechanism. The recently forced matrimony between the Indian arm of the Singapore lender, DBS, and Lakshmi Vilas Bank is a salient example of the applicability of this provision since the onset of the COVID-19 pandemic. Resultantly, LVB will cease to exist and its deposits will appear on the books of the India unit of DBS Group Holdings Ltd., Singapore’s biggest bank.

In hindsight, this approach is a cleaner solution as opposed to the handling of the Punjab & Maharashtra Co-operative Bank Ltd. (PMC) implosion, whose loan book was associated with a bankrupt developer, and more than a year later, the larger PMC depositors remain trapped under RBI’s orders. In another instance of a messy bailout, authorities permanently wrote down $1.2 billion of Yes Bank’s liabilities, wherein the complete loss was borne by Tier 1 bondholders and relied upon State Bank of India for capital infusion.

Such past instances are indicative of the authorities’ past refusal to give a decent burial to a failed institution. However, regulations and notifications passed on account of COVID-19 provide for a convenient regulatory cover to delay recognition of stressed assets, and therefore, the success of such bank consolidations may not be known until March 2022.

Banks as a whole have exhibited sluggish performance followed by an increase in Non-Performing Assets (NPAs) in recent years. As a result, such consolidation or merger of financial institutions can help them ride off troughs with relative ease and bring Indian banks into competition with global banking giants. In the case of DBS-LVB, DBS being Singapore’s largest lender is well-capitalized and has deeper expertise to handle large credits and large NPA, provided the consolidation is well-calibrated and based on sound economic logic.

On the flip side, the merger of a weak bank (here, LVB) with a strong bank (here, DBS) may lead to a weaker merged entity in the event the merger process is handled inadequately. Issues inflicting the weaker bank such as higher NPAs and capital shortages may get transmitted to the stronger banks due to unduly haste or a mechanical merger process. Moreover, the existence of large-sized stressed banks may lead to systemic implications as the governments almost always bail out banks that are “too big to fail” using taxpayers’ monies.

Finally, in view of the above, the RBI must act preemptively when a financial institution has weakened beyond repair. For instance, in the case of Lakshmi Vilas Bank, its books revealed the need for a rescue for over a year, however; the institution was left high and dry to the point of complete capital erosion.

Therefore, the RBI’s decision to broaden the search beyond a “national team” is a good sign and indicates that the regulator wants control of banking assets to be in strong hands. While such forced mergers may be detrimental to the wealth of bidder banks, time shall reveal whether the DBS-LVB merger is fair and equitable to both banks involved in the merger. 

 

Tags: consolidation in the banking industry, consolidation in the banking sector, consolidation in banking sector, banking sector consolidation, financial sector failures