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Twitter and Government’s Ultimate Battle to Uphold Freedom of Expression

By Others No Comments

Social Media – a buzzword in millennial circles and often the recipient of government’s fury. Although the use of social media platforms such as Twitter and Facebook is undeniable for human conversations, all these developments have also contributed to the advancement of democracy and fundamental rights like freedom of expression, movement, trade and profession. However, a single platform cannot become the sole arbiter on fundamentals like freedom of speech, expression and the likes.

As India cracks down on microblogging sites for their noncompliance with India’s newest pursuit to mitigate false information, Twitter finds itself caught in the crossfires. In recent developments in the case, microblogging platform Twitter lost its status as an intermediary platform along with its coveted legal shield for 3rd party content for failure to comply with new IT rules. India’s wrath has been specifically directed towards Twitter as it is the only social media platform among the mainstream platforms that have not adhered to the new laws.

However, it remains to be seen whether this development will leave a permanent scar or be lifted once Twitter adheres to the new digital rules. The government and Twitter have been at loggerheads owing to the latter’s compliance issues pertaining to rules that mandate platforms to increase due diligence and vigilance with respect to objectionable content and be held accountable for the same.

Pursuant to Section 79 of the Information Technology (IT) Act, an intermediary shall not be held legally or otherwise liable for any third party information, data, or communication link made available or hosted on its platform. Simply put, this means that a platform is safe from any legal prosecution brought upon due to the message being transmitted from point A to point B as long as a platform acts just as the messenger and without interfering with its content in any manner.

According to the Indian government, Twitter’s act of defiance has been astounding and the platform which portrays itself as the flag bearer of free speech, choose the path of deliberate defiance when it came to the Intermediary Guidelines. This selective adherence of laws didn’t fit well with the government about its, inter alia, fake news mitigation efforts. In addition to this, Twitter collects data, influences public perception and opinions through algorithms that decide what people will see and listen to. Thus, the platform is known to selectively push content on the basis of user activity, profile, demographic attributes, etc. This has been construed by many as a deliberate manipulation of information flow, albeit under the guise of better user experience, and is considered nothing but colonisation of digital space.

It is common knowledge that several social media platforms may have violated governing legislation under the guise of freedom of speech and expression, thus necessitating a dire need for laws that address the evolving problems pertaining to questionable third-party content on social media platforms. While the Information Technology (Guidelines for Intermediaries and Digital Media Ethics Code) Rules, 2021’ is a “soft-touch oversight” mechanism to deal with issues such as the persistent spread of fake news, abuse of these platforms to share morphed images of women and contents related to revenge porn or to settle corporate rivalries. Evidently, these Rules are neither fool-proof in curbing the root cause of the problem nor keeping up with the changing shades of offences being committed thereon.

The IT Act and Rules, although well-intentioned, do not bring adequate clarity on the responsibilities of intermediaries along with third parties and users. The policy guidelines were introduced to address content that goes directly against guidance on COVID-19 from authoritative sources of global and local public health information. Thus, Twitter was quite emphatically trying to curb misinformation that is too prevalent on microblogging these days. But misinformation labelling isn’t the only topic that has been the Achilles’ heel of the entire matter. The new rules dictate that a company like WhatsApp and Twitter should be able to track down the ‘first originator’ of any objectionable article that the Indian government deems threatening to internal security. It goes without saying that striking a balance between Freedom of speech and penalizing intermediaries for overlooking their responsibilities is the need of the hour!

Who’ll blink first in India’s crypto standoff?

By Economy, Others No Comments

RBI, the Central Bank of India has been in a cold war with the Indian crypto industry. It can be best described as antagonistic and aversive. Being concerned with India’s ability to absorb financial shocks, RBI has time and again tried to unfurl the disadvantages of using cryptocurrencies, however, the industry construed RBIs reaction as hyperbolic! India, among other nations, has been particularly belligerent towards cryptocurrency, so much so, that it had constituted a high-level intermediate committee to report on various issues pertaining to cryptocurrency. The committee had subsequently in 2019, recommended a blanket ban on private cryptocurrencies in India hurling many crypto investors on the wrong side of the law.
The belligerent attitude of Indian authorities towards digital currency has led to banks emphatically distancing themselves from the crypto community, apparently egged on by the RBI. Working along the same lines as the government, in May, the HDFC Bank had sent a rather threatening email to their customers, warning them against virtual currency transactions. It is to be noted that the email had cited an RBI circular that was published on April 6, 2018. The circular had reportedly instructed all of the businesses it regulates to cease any involvement with cryptocurrencies. Additionally, such a stringent activity was also conducted by the State Bank of India. Similarly, several large banks, namely ICICI Bank, the country’s largest private lender too stopped providing services to crypto exchanges. It is to be noted that due to the government’s stringent stand on the contentious matter, several cryptocurrency exchanges have reported difficulties with bank deposits and transfers.

Investors’ Woes 

As it can be anticipated, the banks’ nefarious emails had prompted an uproar among their customers and crypto investors, with many taking to social media to express their discontent. But why are investors raging with anger? Fear of missing out on high, unpalpable profits that crypto trading offers them. According to a research report by Bloomberg, the technical outlook for Bitcoin remains strong with the price of the cryptocurrency all set to surge around 600% to hit the $400,000 level in 2021.
The government’s repugnant attitude throws a question that in contrast to the Indian government are all authorities in India wary of the digital currency? Apparently, not. Recently, the RBI’s circular was struck down by the Supreme Court. The Court contended in its March 2020 ruling that the RBI had failed to provide sufficient proof, and to detail instances of losses arising from crypto transactions, that might merit such a drastic measure as its de facto ban on banks’ involvement with cryptos. Therefore, it can be rightly stated, that to some extent, pressure is being built on the authorities to at least lift its temporary ban on crypto services.

Crypto Endorsers

It is no news that Elon Musk has been an ardent endorser of the cryptocurrency. Where many might presume him to be the crypto guru, many can’t help garb their aversion towards him due to his cryptocurrency manipulation charades that onsets great volatility in the market. It is to be noted, it is due to this very reason, Indian authorities are so averse to the idea of cryptocurrency. The digital currency granting anonymity to criminals for nefarious crimes is considered a safe haven for digital criminals. But more importantly, it is the inefficiency or the inability to track the real perpetrator of the crime that is the sole reason for India debunking the crypto supremacy. Interesting enough, loss of revenue is also a big challenge that the government faces. As it is known, the crypto market is unregulated, thus it is often quite arduous or rather impossible to track payments and hence to generate revenue through transactions.
Additionally, cryptocurrency being a highly volatile market, which might not be running rationally poses a big risk of a financial bubble that is doomed to burst. As it is known, during the pandemic, when consumer and investor confidence was at an all-time low, the crypto market was booming, rather skyrocketing.
In contrast to individuals, various cities like Miami have also tried to pursue cryptocurrency by conducting state-wise crypto fares in order to court crypto investors to the town. With El Salvador becoming the first country in the world to grant legal tender to the contentious digital currency, pressure to flip the coin in favour of crypto is rising. But with irrational behaviour associated with the market and various comments like “Crypto isn’t the real economy” by Elon Musk and not-so endorsing statements by the former US President Donald Trump, who at best, considers Crypto a farce, both the sides of crypto, at the current moment, are evenly balanced.
While countries like South Korea are implementing a legislative framework to regulate Cryptocurrencies and Crypto exchanges, India, on the flip side, is considering imposing an effective ban on “private” digital assets and digital currencies. Further, the Indian government has indicated to table The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 which will effectively ban “private‟ Cryptocurrencies and introduce its own digital currency called Central Bank Digital Currency. Although India’s stance of regulating cryptocurrencies through state-backed CBDCs regulated by the RBI is worrisome, it doesn’t come as a surprise. Going forward, it is imperative to have a dialogue on stakeholder concerns or risk getting smeared in the litigation quicksand thereby leaving crypto traders in dire straits, resulting in uneasiness in the sector which is destined to accelerate to greater heights in India.
The Achilles’ heel in RBI’s approach is the delusion towards the fact that it is possible to ban cryptocurrencies whereas looking at all the other nations’, it is wise to regulate it and mitigate systemic risks vis-à-vis a blanket, yet ineffective ban. A bill regarding banning cryptocurrencies is still in parliament which if approved, will suffice the RBI’s objective however, it will be interesting to see who wins this battle of the contentious crypto war.      

The Second Wave in Need of a Second Economic Stimulus

By Others No Comments

A second wave is creeping back in India and is poised to rage across the country through 2021. This wave constitutes an imminent threat to society, with a potentially immense toll in terms of human lives and catastrophic economic impact, exacerbating the financial woes of millions of Indians. With the peak of the second wave yet to come in the coming months, its impact on all spheres of life across the country could be of varying magnitudes.

In theory, the economy should be the last thing on one’s mind in the wake of such a crisis, however, this health crisis quickly snowballed into a catastrophic economic crisis. It goes without saying that our economic performance is largely dependent on the performance of the health sector and the inoculation programme. 

Some experts believe that businesses are better equipped to deal with the economic repercussions of the second wave. When evaluating the long-term impacts on the economy, it is predicted that the impact should be minimised due to government intervention through several steps to check production loss, especially by MSMEs. Also, companies and consumers have rapidly adjusted to the new normal and the relationship between lower mobility and weak economic activity has been weakening over time, with data ultra-high frequency data for March and early April, released since the renewed lockdowns were announced, corroborating for the same.

How did a health crisis translate to an economic crisis? Why did the spread of the coronavirus bring the global economy to its knees? The answer lies in two methods by which coronavirus stifled economic activities. First, the spread of the virus encouraged social distancing which led to the shutdown of financial markets, corporate offices, businesses and events. Second, the exponential rate at which the virus was spreading, and the heightened uncertainty about how bad the situation could get, led to a flight to safety in consumption and investment among consumers, investors and international trade partners.

Despite fundamental aspects being in order the clutches of the pandemic remain uncharted to a large extent. As a result, many experts believe that the worst is yet to come. Interestingly, the economic decline itself has an adverse effect on health; a reduction in economic activity reduces the circulation of money and, with it, tax revenues. This then results in a reduction of the finances available for the public-health countermeasures which are needed to control the pandemic. It also hits individuals and families, who may see their income plummet catastrophically and thus may not be able to afford the required healthcare. Depleting financial reserves may also make companies close, with consequences for their owners, employees, and suppliers. In all obviousness, this setting would have developed very differently in a setting in which there is a workforce with access to free healthcare and income protection, then in one in which much employment is casual and people must choose whether to go to work when ill or to starve. The increasingly integrated global economy increases the fragility of this situation. 

In order to tide over the second wave, an introduction of additional economic measures is imperative. As a result, such a stimulus must be tailor-made for the most impacted people and businesses. For instance, states with high COVID cases such as Maharashtra, NCR region, Tamil Nadu and Gujarat also account for nearly 45 per cent of employment in MSMEs and 41 per cent of overall MSME credit. Notably, stringent lockdowns in the aforementioned states have pushed thousands of MSMEs on the brink of a closedown or have already shut down. In view of this, the Tamil Nadu government announced a special incentive package to promote MSME investments. Other pandemic-hit states should also follow suit and announce incentives for MSME investments to build supply chains under the Centre’s PLI scheme.

An adverse impact can be seen on retail loans disbursed by banks and NBFCs, wherein a large number of informal loans are disbursed by shadow financers. Hence, an economic package tailor-made for the needs of vendors and small ticket personal loans can be implemented by state governments in conjunction with RBI and the Centre. In addition to this, the RBI window of one-time restructuring of MSME advances should be extended until 31 March 2022. It has been found that MSMEs benefited most from the Centre’s sovereign credit guarantee scheme and so a similar scheme should be announced by states to provide the much-needed liquidity shot to MSMEs.

Furthermore, Maharashtra temporarily reduced stamp duty on real estate to push the demand side upward leading to a marginal revival of the sector. A similar scheme can be announced by states which will revive the real estate sector—one of the largest employers of informal jobs. 

Measures and relaxations offered by the government can be magnanimous, but their effectiveness will be washed out if the inoculation programme remains sluggish. With international financial crises and recessions; unsustainable inequality in income, wealth and across regions; the climate emergency; and the threat of future pandemics, the need has never been greater for balanced economics and systemic change. Therefore, a speedy vaccination programme coupled with balanced measures introduced by the government will be the best antidote to revive demand and restore our national treasury.

Limited VS. Exhaustive Due Diligence

By Others No Comments

The term “due diligence” is not defined in Indian law, but it suggests that a buyer should exercise caution. It is an inquiry or verification of the affairs of a business organization conducted by any individual or other business entity interested in taking over, combining, or investing in that former entity. This is done to prevent foreseeable risks. Every business must conduct legal due diligence and be ready for unwelcome surprises before doing any deal into the mergers & acquisitions. There are many processes involved in due diligence including business due diligence, special due diligence, accounting due diligence, and legal due diligence.  Due diligence looks at the past and current performances of the businesses.

LIMITED VS. EXHAUSTIVE DUE DILIGENCE   

As we talk about limited due diligence, we imply it’s confined to a certain level and focused on certain legal concerns, whereas exhaustive due diligence takes into account, encompasses, and evaluates everything about a corporate organization. While considering a merger or an acquisition transaction, the buyer, acquirer, or investor, as the case may be, will have limited knowledge pertaining to the target company other than what is available in the public domain.

 Due to this, the buyer will appoint legal and financial experts preferably lawyers, chartered accountants, or merchant bankers to conduct an exhaustive due diligence process on its behalf. In an exhaustive due diligence process, a vast amount of information is to be reviewed. The legal due diligence team typically analyses the charter documents, material contracts, employment agreements, and real estate documents. Including corporate compliances, tax compliances, financial documents, insurance contracts, labor law compliances, intellectual property rights, and any litigation proceedings by & against the target company. 

Prospective buyers should gather documentation that reveals the company’s organization the parties need to refrain from the structure. They must also gather information on taxes, strategic fit, intellectual property, material assets, contracts, members, and lawsuits. 

PROS AND CONS

PROS 

  • It aids in the identification and mitigation of the target entity’s risks and responsibilities.
  • It evaluates the value of the target entity.
  • The information acquired following due diligence aids in deciding whether or not the agreement with the target firm is worthwhile.
  • Exhaustive due diligence helps in getting complete or overall information about the target entity.

CONS 

  •  Limited information or inquiry is the main reason for mergers & acquisitions failure.
  • Exhaustive due diligence is a very time-consuming process.
  • Any mistake, omission, or oversight committed at the time of the due diligence process can have adverse effects.

IMPACTS ON INDUSTRY

  • When a business entity confirms a deal without doing due diligence or deal on insufficient due diligence, the damages can be dangerous. 
  •  After merger or acquisition, all financial risks of the target company are transferred to the acquirer company.
  • Once governmental authorities or third parties take action against a targeted firm following a merger or purchase, the acquirer will face substantial legal fights and proceedings even if the acquirer had no involvement in the targeted firm’s non-compliance, fraud, or irregularity. Therefore, strict due diligence and deep investigation into the background of the cases of the targeted company are of paramount importance.

CONCLUSION

A well-executed due diligence process with proper effort is an essential part of a successful M&A deal. Negligence or other improper conduct in this regard will have harmful effects upon the deal of M&A. A failed M&A deal will create serious financial and legal difficulties and damage the reputation of the parties to the deal.

In order to remove any inadequacies in a due diligence process, it is essential that the process is done by people with the necessary skills and competencies. A well-qualified team with a systematic approach will make sure that the risks associated with the deal are identified and are not transmitted to the consumer.

 Therefore, it is essential for the parties to refrain from being overly enthusiastic or emotionally vested in a transaction that can cause the parties to ignore any negative information and cloud their judgment. The next time you engage in an M&A transaction, you’ll know what to do and how to go with your legal due diligence process, which will provide you with a clear picture of your future with the subject firm.

Does our bias against fiscal deficits need rethinking?

By Others No Comments

WHAT IS FISCAL DEFICIT

Fiscal deficits occur when a government spends more money than it receives during a fiscal year. This mismatch, also known as a current account deficit or a budget deficit, is prevalent in today’s governments all over the world.

Over a particular time, a fiscal deficit arises when a government spends more money than it collects in taxes and other sources (excluding debt). To balance the gap between revenue and expenditures, the government borrows, increasing the national debt. In theory, increasing the fiscal deficit might help a slow economy by providing more money to people, allowing them to consume and invest more.

HISTORY OF FISCAL DEFICIT

Many economists, policy analysts, bureaucrats, politicians, and commentators favor the idea of governments running fiscal deficits, though to differing degrees and under different conditions. Deficit spending is also a key instrument in Keynesian macroeconomics, which is named after British economist John Maynard Keynes, who believed that government spending boosted economic activity and that running large deficits might aid a drooping economy.

In 1789, as Secretary of the Treasury, Alexander Hamilton created and implemented the first real American deficit plan. Hamilton saw deficits as a strategy of strengthening government authority, similar to how war bonds helped Great Britain out-finance France during their 18th-century battles. This practice has continued throughout history, with governments borrowing money to wage wars when raising taxes would be insufficient or impossible.

IMPACT OF FISCAL DEFICIT ON ECONOMY

The economic repercussions of budget deficits are disputed by economists and policy experts. Some, including Nobel Laureate Paul Krugman, claim that the government spends too little and that the sluggish recovery from the Great Recession of 2007–2009 is attributable to Congress’ refusal to run larger deficits to boost aggregate demand.

Budget deficits, according to some, inhibit private borrowing, distort capital structures and interest rates, lower net exports, and result in higher taxes, higher inflation, or both.

Until the early twentieth century, most economists and government advisers supported balanced budgets or budget surpluses. The Keynesian revolution and the advent of demand-driven macroeconomics made it politically feasible for governments to spend more than they brought in. As part of a focused fiscal policy, governments could borrow money and increase spending. 

The concept that the economy will return to a natural state of balance was rejected by Keynes. Instead, he contended that once an economic slump occurs, the fear and pessimism that it instills in firms and investors tend to become self-fulfilling, leading to a prolonged period of low economic activity and unemployment. 

In response, Keynes proposed a countercyclical fiscal strategy in which the government engages in deficit spending to compensate for the drop in investment and raise consumer spending to stabilize aggregate demand during periods of economic distress.

IMPACT OF FISCAL DEFICIT ON SHORT TERM

Even when the long-term macroeconomic effect of budget deficits is discussed, the immediate, short-term ramifications receive far less attention. However, the consequences vary depending on the type of insufficiency.

If the deficit emerges as a result of the government’s extra spending programs, such as infrastructure expenditure or business grants, the sectors that have chosen to receive the funds to get a short-term boost in operations and profitability.

There is no need for a stimulus if the deficit is caused by less government revenue, whether as a consequence of tax cuts or a decline in economic activity. While the topic of whether stimulus spending is beneficial is disputed, it certainly improves specific industries in the near run.

POSTIVE SIDE OF DEFIECT

Politicians and policymakers use fiscal deficits to fund popular measures like welfare and public works without raising taxes or cutting expenditures elsewhere in the budget. Fiscal shortfalls foster rent-seeking and politically driven appropriations in this way. Many firms support budget deficits implicitly if it means obtaining government advantages.

Large-scale government debt is not universally viewed as a bad thing. Budget deficits, according to some observers, are worthless because the money is “owed to ourselves.” Even if taken at face value, this is a dubious claim, given foreign creditors routinely acquire government debt instruments, and it ignores several macroeconomic variables that work against deficit spending.

Certain economic theories have broad theoretical support for government deficits, as well as near-unanimous support among elected officials. In the guise of tax cuts, stimulus spending, welfare, public goods, infrastructure, war financing, and environmental protection, both conservative and liberal regimes tend to run large deficits. In the end, voters believe fiscal deficits are a good idea, whether or not they express it explicitly, that to based on their proclivity to demand both expensive government services and low taxes at the same time.

NEGATIVE IMPACT OF DEFICIT

Government budget deficits, on the other hand, have been criticized by many economists throughout the years for crowding out private borrowing, distorting interest rates, supporting non-competitive businesses, and increasing nonmarket actors’ dominance. Nonetheless, since Keynes legitimized budget deficits in the 1930s, government economists have favored them.

Expansionary fiscal policy not only underpins Keynesian anti-recession strategies but also serves as an economic justification for what elected officials are naturally prone to do: spend money with minimal short-term implications.

During recessions, Keynes advocated for running deficits and then fixing budget deficits after the economy recovered. Raising taxes and cutting government services is unpopular even in times of prosperity, so this seldom happens. Governments have a tendency to run deficits year after year, resulting in massive public debt.

FINANCING A DEFICIT

All gaps in the budget must be filled. At initially, this is accomplished by selling government securities such as Treasury bonds (T-bonds). Individuals, corporations, and other governments purchase Treasury bonds and lend money to the government in exchange for the guarantee of future payment.  The first and most obvious effect of government borrowing is that it limits the amount of money available to lend to or invest in other firms. 

This is unavoidably true: a person who lends $5,000 to the government cannot use that same $5,000 to buy private company stocks or bonds. As a result, all deficits have the impact of lowering the economy’s potential capital stock. The concern would be inflation rather than capital decline if the Federal Reserve monetized the debt altogether.

Furthermore, interest rates are directly affected by the selling of government assets to finance the deficit. Because government bonds are regarded as exceptionally secure investments, the interest rates paid on government loans are risk-free investments that practically all other financial products must compete with. 

If government bonds pay 2% interest, other financial assets must provide a higher rate to entice purchasers away from government bonds. This function is utilized when the Federal Reserve uses open market operations to change interest rates within the confines of monetary policy.

FEDERAL LIMITS ON DEFICIT

Despite the fact that government deficits appear to be expanding at an exponential rate and overall debt liabilities have reached stratospheric heights. Even if they aren’t as low as many would want, there are physical, legal, theoretical, and political limits to how far the government’s balance sheet may go into the red.

In practice, the US government’s deficits cannot be covered without recruiting loans. Individuals, corporations, and other governments purchase US bonds and Treasury bills (T-bills) on the open market, agreeing to lend money to the government since they are backed solely by the federal government’s full confidence and credit. As part of its monetary policy procedures, the Federal Reserve buys bonds. There is a serious fear that if the government runs out of willing borrowers, deficits will be constrained and default will become a possibility.

The long-term consequences of complete government debt are both real and dangerous. If interest payments on the debt become unsustainable through traditional tax-and-borrow income streams, the government has three options. They have three choices: cut spending and sell assets to make payments, print money to cover the gap or default on debt commitments.

The second of these alternatives, a too aggressive increase of the money supply, could result in significant inflation, effectively (albeit inexactly) limiting the effectiveness of this technique.

STRATGIES TO REDUCE DEFECIET

Fiscal strategies such as expenditure cutbacks and tax hikes can help countries lower budget deficits by improving economic development. For example, lowering regulations and lowering corporate income taxes are two measures for raising Treasury inflows. These strategies strengthen company confidence and stimulate economic growth, resulting in larger taxable earnings and more income taxes as a result of job growth.

Securities such as Treasury bills and bonds can be used to raise funds to satisfy debt obligations. While this offers a payment channel, it also puts the country’s currency at danger of depreciation, which might lead to hyperinflation.

Lapse of Stay Orders and Judicial Delays: A Constitutional Conundrum

By Corporate Law, Others No Comments

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 stay for longer than 6 months encourages parties to abuse the process of law and move 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 in 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 a change in the way the judicial system works, why is the Supreme Court not bound by its own directive? 

Loan Restructuring Schemes for the Hospitality, Aviation, Travel and Tourism Nexus

By Others No Comments

The enormity of destruction caused by the COVID-19 pandemic appears minimal in comparison to the havoc wreaked by events like 9/11 and the ‘Great recession of 2008’. The COVID-led lockdown has disrupted supply chains, shut shop for many businesses and led to mass unemployment. To further aggravate matters, flight cancellations, vacant hotel rooms, and deserted restaurants, the pandemic has taken a toll on the hospitality industry. The dire state of hospitality can be attributed to its heavy reliance on the aviation, tourism and travel industry making recovery agonizingly difficult during such turbulent times. The industry is staring at plummeting revenues and gasping for survival with travel and tourism coming to a screeching halt on account of the COVID-led lockdown and locals hesitant to venture out of their homes.

In the government’s endeavor to save the ailing industry, it announced the reopening of the country giving hope for a gradual improvement. However, the ascent is subject to the industry’s malleability to embrace state-mandated guidelines – psychologically and monetarily. In a country where alternate accommodation like Guest Houses and unbranded budget hotels constitutes 95% of the hotel industry, implementation of these guidelines may pose a grave challenge. Moreover, luxury hotels with stronger intrinsic value and revenue flows may see a steep rise in maintenance costs and lesser customers willing to pay high accommodation costs in times of austere living.

On the other hand, the Finance Ministry’s economic package thwarted hopes of infusing liquidity into the ailing sector, thus making the existence and revival of hoteliers challenging across heritage, leisure, adventure, and niche verticals. The unfortunate interdependence of the industry on the health of the aviation, hospitality and tourism sectors across the world leaves hoteliers starved for relaxations from the government. However, in anticipation of a domino effect on loan defaults in the industry, 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 nature of the crisis has revealed basic vulnerabilities around the world, most importantly those surrounding borrowers from the hospitality, airline and tourism industry. In the same vein, the Finance Ministry directed Banks to roll out a loan resolution framework with the Loan Moratorium period ending on August 31st and the festive season around the corner. In doing so, the Supreme Court directed 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 strikes a balance between safeguarding the economic value of viable businesses whilst protecting the interest of depositors. Particularly, 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.

Further, the resolution plans to be implemented under the framework may include conversion of any interest accrued, or to be accrued, into another credit facility, or granting of moratorium and/ or rescheduling of repayments, based on an assessment of income streams of the borrower, up to two years. However, on the corporate side, substantial amounts of clean-up, resolution and deleveraging have already taken place in the past, so it is unlikely that the demand for restructuring may subsist. This move may provide a necessary cushion as businesses on the verge of a shutdown are likely to consider one-time credit rebuilding. This way, the rebuilding of real instances of non-performing credits is of great importance, as it unclogs the framework and makes room for survival and growth. However, a tangible position would unearth only when the moratorium ends.

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 is an option many businesses may consider adopting to ensure that it stays competitive and progressive. It goes without saying that a resumption of economic activity is essential, but the vigil on the virus must remain and in doing so Indians are likely to witness decades of unprecedented transformation in near future.

EMI Moratorium: Analysing borrower’s creditworthiness amidst the pandemic

By Labour & Employment, Others No Comments

Financial institutions are focused on risk now, more than ever before. The virus-induced lockdown has raised “Liquidity” and Non-Performing Assets (“NPA”) issues popularizing these 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 from 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 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 benefit. 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 a 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 helping 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 who 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 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 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 on 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.

Equity in Times of Pandemic; Is it Wise to Keep Faith?

By Others No Comments

The pandemic has led private equity in India to step into the current crisis riding a decade-long growth wave in transaction volumes and valuations. The value of some investments and investor confidence has been fairly dampened since the outbreak of the virus which continues to persist yet now. 

The global financial crisis of 2008-09 for instance can be looked up, to provide a few insights into how PE funds might navigate the fallout from the pandemic. If we take history as a guide, many PE funds have been previously seen to cruise through the crisis staying on the sidelines, a little too long, which could lead to missing out on crucial investment opportunities. 

Although there could be a sharp fall in deal-making in the short-term, PE funds are expected to learn from the past as high returns often emerge in times like these and can offset the losses during the downturn. The returns over the next couple of years will depend on how fund managers react over the next 12 months. However, PE firms have massive amounts of unused funds that are readily available at their disposal coupled with money that has been raised but not yet invested. The subsequent expectation is that a large part of this money shall be expected to be earmarked for emerging markets, India being no exception. Private debt funds and special situation funds are more visible in the market and can help provide liquidity to businesses that are experiencing cash crunches, the much-required prerogative currently.

While several investors are holding back until the ramifications of the pandemic become clearer, a few distinct themes are emerging that could shape private deal activity as the new normal evolves which includes:

  • Deferment of deals: Deals are being deferred as investors are speculating the damage of the COVID-19 caused pandemic. While the dealer network is highly robust, deal flow is expected to be slow specifically in the next couple of quarters. The driving factor here to determine the consequences would be the availability of the dry powder with the equity funds.
  • Protecting existing portfolio: The primary goal of funds in the short term will likely be to look after portfolio companies. This would eventually take precedence over the search for new investment opportunities as some portfolio companies may need additional financing amid liquidity concerns owning to the government-enforced long shutdown in the wake of the spreading virus.
  • Difficulty in managing the valuation conflict between buyer and seller: Financial markets have been significantly disrupted across the globe. The pandemic has triggered a rout in the stock markets and market volatility has increased. Although PE investments are generally less volatile than public investments, there might be valuation challenges as sellers may be reluctant to part with assets given the precipitous fall in valuations. This could delay deal activity in certain cases.
  • Availability of leverage for buyout deals: Of late, a higher amount of leverage has been used in buy-out deals. The availability of debt financing from banks could be a challenge and may cause a slowdown in buyout deals. Given the significant amount of available funds, of which a large part is for buyouts alone, deal-making could see an uptick, especially in distressed asset situations.
  • Private debt funds and special situation funds expected to be more active: There is expected to be liquidity pressure on businesses owing to COVID-19 related disruption in demand. PE funds are expected to capitalize on this opportunity through innovative solutions such as debt restructuring and bridge financing.
  • Increase in private investment in public equity (PIPE) transactions: As valuations in public markets decline, PIPE transactions are expected to pick up as PE funds take positions in quality assets at significantly cheaper valuations.
  • Sector expertise will become more critical than ever: PE funds are expected to focus on sectoral themes with pharmaceuticals, technology, digital, and healthcare expected to drive interest whereas the revival of sectors such as financial services, real estate, and non-essential consumer goods and services may take some time. It will remain difficult to form an investment thesis for sectors such as aviation, travel, tourism, and hospitality.
  • Expected change in scope of due diligence: the current crisis highlights the importance of factoring in multiple scenarios and modeling unpredictable disruption in due diligence. Hence, the scope of due diligence will change significantly over the near term.

In light of these circumstances, PE funds will need to respond swiftly and strategically to the new business normal and drive transformation for companies. The pandemic has brought about an extraordinary combination of quality assets going cheap and investors being cash-rich. The funds that can find the right investment opportunities in this difficult time will not only emerge stronger but also generate significant returns in the coming years.

India strengthening insider trading laws at last

By Corporate Law, Others No Comments

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 Arthur Levitt, Chairman of the US Securities Exchange Commission (SEC), viewed it as one with no place in any 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, the legal regime, including the enforcement mechanism relating to its prevention, remains in a nascent stage. The Securities and Exchange Board of India (SEBI), Prohibition of Insider Trading Regulations, 2015 (PIT Regulations) prohibit insider trading while in possession of Unpublished Price Sensitive Information (UPSI) subject to certain exceptions. Rule four of the PIT Regulations contains provisions apropos trading when in possession of UPSI. Trades carried out by a person who has UPSI would be presumed to have been motivated by the knowledge and awareness of such information and they 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 committed on public shareholders, who expect unbiased management of the company’s operations in their interest. The 2020 amendments to the PIT Regulations aim at bolstering the level of compliance and mitigating the defects plaguing them. Prior to the amendment, there was considerable confusion with respect to the handling of UPSI by intermediaries. Notwithstanding the FAQs released by the 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 not amenable to additions. This prohibited reasonable expansion of the same to include transactions of a like nature. Lastly, there was also the issue of 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, the SEBI had mandated every listed entity, intermediary and fiduciary to maintain a structured digital database, which would have the name and PAN details of a person with whom the UPSI was shared. This was done to ensure that there was a trail of information whenever the SEBI needed to investigate the sharing of UPSI. Now, through an amendment in July, the SEBI has mandated that the nature of the UPSI and the details of the person sharing it must also be recorded in the database. Moreover, 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 relatives as it can be reasonably expected that they possess UPSI. However, through another notification in July, the SEBI allowed the selling of promoters’ holding by way of OFS and exercising RE during the period of closure of the trading window.

The 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 bourses and any amount recovered from the defaulter shall be deposited in the Investor Protection and Education Fund.

Analysis and impact: The primary benefit of the amendment that mandated a structured digital database is reduced information asymmetry while the SEBI investigates matters of insider trading. In cases relating to it, distinguishing the insider who conveyed the UPSI, in any case, turns out to be progressively significant for narrowing down expected guilty parties and to follow the data trail. This was one of the pertinent issues in the ongoing “WhatsApp spill” case wherein after extensive investigations, the SEBI had punished certain people for spilling data identified to be price-sensitive. However, since WhatsApp messages are typically ensured through end-to-end encryption, the SEBI could not efficiently recognize the entities involved in the trade, thus setting an alarmingly low standard of proof in such cases. It is hoped that the new, organized and structured digital database may help and forestall such cases. The second amendment that cuts a special exception to the trading window is in the light of the ongoing endeavors by the SEBI to facilitate easy routes of raising capital. This is much needed and will give more chances to listed entities to raise fast capital. Lastly, the mandatory announcing of infringement of the code of conduct would make a more strong system of compliance.

 Regulatory solutions: With each of these amendments, while the SEBI has chalked out additional responsibilities for intermediaries and fiduciaries, as well as streamlined its regulatory powers with bourses, 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.

The requirement of maintaining an enhanced digital database is in line with the SEBI’s probe and surveillance procedure. However, it may lead to particular operational challenges and issues for the listed firm, 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.

Market conduct regulation is poised at a critical threshold in India, where a combination of nuanced laws and efficient enforcement can indeed be transformative. 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.

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