Law Firms NewsNews

Sahil Shah has joined Khaitan & Co as a Counsel in the Investment Funds Practice Group practices at our Mumbai office.

Sahil has over 16 years of experience in Investment Funds, Private Equity, Venture Capital and Real Estate transactions. He has completed his Bachelor of Laws from the Government Law College, Mumbai and got admitted in the Bombay Incorporated Law Society as a qualified Solicitor.

He specialises in Investment Funds with specific focus on assisting Indian and foreign fund managers in setting up AIFs in India, as well as assisting Indian and foreign institutional investors in their investments into Indian AIFs. He also focuses on Venture Capital and Private Equity transactions.

Executive Director, Human Resources at Khaitan & Co – Amar Sinhji welcoming him to the Firm said, “Sahil will be a great addition to our Firm and specifically in helping deepen and scale up our Investment Funds Practice. We are truly delighted to have him on board and warmly welcome him to our Khaitan & Co Family!”

Law Firms NewsNews

Khaitan & Co advises Google International LLC in its investment in Desiderata Impact Ventures Private Limited.

NO HEADINGS DETAILS
1. Sector Consumer lending, Fintech
2. Announcement Date 27-Jun-2022
3. Name of Client Google Inc.
4. Investor Details GOOGLE INTERNATIONAL LLC | USA
5. Target Details DESIDERATA IMPACT VENTURES PRIVATE LIMITED | India
6. Deal Description Advised Google International LLC in its investment in Desiderata Impact Ventures Private Limited, as the company raised a USD 40 million Series C round which also included Creation Investments and Tiger Global.
7. Total Consideration USD 40 million
8. Team Members The core team consisted of Nikhil Narayanan (Partner), Siddharth Marwah (Principal Associate)
9. Role of Firm Reviewing, commenting and negotiating the transaction documents. Assisting in signing and closing of the transaction.
Law Firms NewsNews

NO HEADINGS DETAILS
1. Sector Automobiles and Components
2. Announcement Date 5-July-2022
3. Completion Date 1 July 2022
4. Name of Client Endurance Technologies Limited
5. Buyer Details Endurance Technologies Limited | India
6. Target Details Maxwell Energy Systems Private Limited | India
7. Deal Description Advised Endurance Technologies Limited on their 100% acquisition of Maxwell Energy Systems Private Limited in a staggered manner.
8. Total Consideration INR 308 crore (USD 40 million)
9. Team Members The transaction was led by Prasenjit Chakravarti (Partner) with assistance from Nitish Goel (Partner), Sanjana Bhatnagar (Principal Associate) and Dhairya Kumar Garg (Associate)
10. Role of Firm Conducting a legal due diligence on Maxwell Energy Systems Private Limited; prepared a note for the client on the FEMA related issues in the proposed transaction; drafting, reviewing, commenting and negotiating the transaction documents; and assisting in signing and closing of the transaction.
11. Financial Advisors Axis Capital Limited (for the Target company) and Deloitte Touche Tohmatsu India LLP (for Endurance Technologies Limited)
12. Other legal advisors if any Mehta & Padamsey (for the Target company and the sellers)
Khaitan
Law Firms NewsNews

Khaitan & Co acts as Legal Counsel to the Inox Green Energy Services Ltd. and Inox Wind Limited as to Indian Law in relation to the initial public offering of equity shares of the Company.

 

NO HEADINGS DETAILS
1. Sector Wind Energy
2. Announcement Date 17-Jun-2022
3. Completion Date
4. Name of Client Inox Green Energy Services Limited and Inox Wind Limited
5. Deal Description Acted as Legal Counsel to the Inox Green Energy Services Limited (the “Company”) and Inox Wind Limited (the “Selling Shareholder”) as to Indian Law in relation to the initial public offering of equity shares of the Company comprising of a fresh issue of equity shares aggregating up to INR 3,700 million by the Company and an offer for sale of equity shares by the Selling Shareholder aggregating up to INR 3,700 million.
6. Total Consideration INR 7400 million (USD 100 million)
7. Team Members The core team consisted of  Madhur Kohli (Partner), Chirayu Chandani (Partner), Drishti Barar (Senior Associate), Anshul Mordia (Associate), Hrithik Khurana (Associate), Sarjana Das (Associate)
8. Role of Firm Legal Counsel to the Company and the Selling Shareholder as to Indian Law
9. Financial Advisors Book Running Lead Managers- Edelweiss Financial Services Limited, DAM Capital Advisors Limited (Formerly IDFC Securities Limited), Equirus Capital Private Limited, IDBI Capital Markets & Securities Limited and Systematix Corporate Services Limited
10. Auditors Statutory Auditors- Dewan P.N. Chopra & Co
11. Other legal advisors if any with names of Lead Lawyers Legal Counsel to the BRLMs as to Indian Law- Trilegal (Richa Choudhary) and International Legal Counsel to the BRLMs-Linklaters Singapore Pte. Limited (Amit Singh)
12. Unique Feature of Transaction Inox Green Energy Services Limited is one of the major wind power operation and maintenance service providers within India which was incorporated in 2012. It is engaged in the business of providing long-term operation and maintenance services (“O&M Services”) for wind projects, specifically the provision of O&M Services for wind turbine generators and common infrastructural facilities. It is a subsidiary of Inox Wind Limited and is a part of the Inox GFL group of companies. Upon being listed, it will be among the first few listed companies in India which are engaged only in the O&M services business.
Experts CornerKhaitan & Co

“Electric vehicles” (EVs) has been the buzz word over the past few years – and rightfully so. A closer look at this sector would reveal that the most fundamental piece in the EV jigsaw puzzle is battery technology. The existence of easily accessible and widespread network of charging infrastructure in whatsoever form, becomes essential to the large-scale adoption of electric mobility. Even the national finance policy vide the 2022 Union Budget proposed the roll out of a policy on battery swapping – which would, of course, lead to several innovative business models in the battery technology space.

 

What is battery-as-a-service?

Battery-as-a-service (BaaS) allows customer to lease batteries separately from the vehicle, so that customers do not have to purchase the battery upfront along with the vehicle. The BaaS model envisages leasing of the battery from a charging infrastructure company and swapping the battery in swapping stations for a recharged battery every time the battery gets discharged. The said leasing is offered as a service and akin to “software as a service”, “banking as a service” and “infrastructure as a service” which has been prevalent in other industries.

 

Advantages of BaaS model

From a customer perspective, BaaS is an asset-light, low-cost and a fast-on-its-feet model which allows the customer to instantly swap the battery – as opposed to a fixed charging station where charging batteries is time consuming and the charging infrastructure is cost-intensive. Owing to the BaaS model, the upfront costs of the EVs may go down significantly – as an illustration for two-wheelers, the costs may easily go down up to 20%.

From the BaaS provider’s perspective, the model brings down the cost of setting up a retail charging station and attendant infrastructure. Further, the BaaS provider does not require setting up of infrastructure by itself but can expand its network by collaborating with entities having widespread networks of agents and charging infrastructure, much like how banks use business correspondents to expand their banking services to the unbanked and underbanked. Of course, in BaaS, the discharged batteries will have to be recharged for next exchange and to that extent, business-to-business level charging infrastructure will be required.

 

Necessary ecosystem

It is well understood that the BaaS model not only helps in faster adoption of EV technology, but it also addresses the lack of EV charging infrastructure in the country. A typical BaaS ecosystem includes following players:

  • Battery and EV manufacturers: The BaaS ecosystem is heavily dependent on the manufacturing of batteries (including research and development for advancements in battery technology). EV manufacturers are next in the chain, where they rely on battery manufacturers to power their EVs, which are then sold to customers.
  • Network operators: A network operator facilitates and provides customers with charging solutions (charging stations/battery swapping infrastructure) for their EVs in the form of BaaS. The key player in the BaaS model is the network operator. India has seen a rise in network operators such as Sun Mobility, Jio-bp, Charge+Zone who have set up charging and battery swapping stations in places such as petrol pumps or even in standalone stations, albeit at a small scale.
  • Operation and maintenance (O&M) services providers: At times, it may not be possible for the network operator to operate EV charging or battery swapping stations by itself. Accordingly, the network operators may enter into arrangements with O&M service providers who are engaged in developing and operating EV charging infrastructure. Irrespective of the BaaS model adopted, arrangements with O&Ms become essential to ensuring seamless operation and maintenance of charging/swapping stations on behalf of the network operator and to provide allied services.
  • Customers: Last but not the least, successful operation of the BaaS model requires adoption by customers of such a model, which includes retail customers or institutional customers such as fleet operators/big logistics or delivery companies. Also, the effective onboarding and role of customers in this ecosystem is facilitated by mobile applications which help in providing details of the nearest battery swapping station, availability of fully-charged batteries and other critical data points relevant for growth and evolution of this industry.

 

Prevalent types of BaaS models

While BaaS is a concept in itself, there are different models which are prevalent in the industry. Few such models are set out below:

  • The battery manufacturer acts as a network operator and offers swapping services to customers. For instance, Sun Mobility’s smart batteries, which can be swapped at its quick interchange stations and are interoperable across 2-wheelers and 3-wheelers from different EV manufacturers.
  • The EV manufacturer (after having procured batteries from battery manufacturers) acts as a network operator and offer swapping services to customers. For instance, Bounce Infinity, which manufactures the EV as well as sets up battery swapping stations.
  • The network operator contracts with battery manufacturers (for purchase or leasing of batteries) and EV manufacturers, and offers swapping services to end-use customers (directly or through O&Ms). Reliance Industries and UK BP Plc joint venture (operating under the brand name “Jio-bp”) participates in similar model.

 

The industry is still developing, and several new collaboration avenues will come up some of which may shape up the growth journey of BaaS for good.

 

Contractual nuances in the BaaS model

A comprehensive BaaS model requires contractual arrangements with a combination of one or more of the abovementioned players, whether on a bilateral basis or otherwise. Contracts with retail outlets and space providers, power generation companies, customers, network operators, battery manufacturers (to procure batteries for storage in battery swapping stations), EV manufacturers (to offer swapping facility to customers) and O&Ms are essential to develop the battery swapping ecosystem. The terms and conditions of such contracts are often not standard and are tailor-made to suit the commercial nuances of the specific BaaS model. The commercials for each arrangement differ depending upon the involvement, experience and role of the players participating. Also, it becomes important to clarify, among other things, at least the rights and obligations of parties, exclusivity status, minimum user commitment and allocation of risks (such as in relation to damaged battery, charge level warranty and non-return of battery or accidents, etc.).

 

Key challenge vis-à-vis standardisation and interoperability

While there are numerous benefits of BaaS as a model contributing to the adoption of EVs, there are certain inherent set of challenges, which primarily stem from the fact that EVs and the battery requirements of EVs currently in the market, are not standardised. In this context, an analogy can be drawn with cell phone removable batteries which could be replaced to extend the life of the cell phone battery. But since battery specifications vary from brand to brand, hypothetically speaking, a user could not use battery of Brand A in a cell phone of Brand B. Similarly, if an EV user signs up with a particular network operator to swap batteries, such EV user can avail battery-related services from the outlets of just that particular network operator. This is unlike petrol pumps for internal combustion engine vehicles.

 

It is largely in a bid to be competitive and differentiate themselves, that EV and battery manufacturers worldwide have been using different standards for design of their products, based on factors like financial resources, technological sophistication and research and development capabilities, and this has a trickle-down effect on the battery requirements. Considering the number of battery and EV manufacturers, it is difficult to expect that the charging solution for EVs can be easily and quickly standardised.

 

However, for the BaaS model to function effectively and become a real option for EV users, it will be crucial that there is battery standardisation across EVs as well as interoperability (i.e. the ability to use the same battery in different types of EVs). To revolutionise the BaaS model, a strong collaboration between all the players is a must-have and will help solve the issue of interoperability.

 

Other Challenges

BaaS is more convenient for smaller EVs and the industry players and innovation teams will have to find solutions for use of BaaS for heavy EVs like trucks, transport vehicles, etc.

One of the teething issues in respect of EVs has been the safety concerns, especially considering the fire incidents and EVs catching fire over product issues. Accordingly, research and innovation in battery-related technology is required to make BaaS as a durable and safer option.

Availability of raw material and components for battery manufacturing poses another issue, given the paucity of core resources, and if not paucity, then cost, ready and local availability. Currently, there is great amount of dependency on import. All of this impacts the cost of investment and manufacturing, which acts as an inhibitor to market entry for battery manufacturers, which is the starting point of the BaaS ecosystem.

 

Future of BaaS model in India

A lot more clarity and incentives are likely to be introduced in the government’s battery swapping policy, which is aimed at providing guidelines on interoperability standards. Sources indicate that the proposed policy will be released in the next couple of months and will introduce BaaS and battery leasing concepts for 2-wheelers and 3-wheelers, and also help address issues such as high upfront costs and battery range concerns.

While the mechanics of interoperable standards actually being achieved is yet to be seen, we are hopeful that the policy will spur several developments like standardisation of vehicle components to adapt to such interoperability standards and setting up of greater network of battery swapping stations across the country with less real estate.


† Partner, Khaitan & Co.

†† Principal Associate, Khaitan & Co.

††† Associate, Khaitan & Co.

Law Firms NewsNews

Khaitan & Co advises Inventys Research Company Private Limited as a common counsel in relation to investment.

 

NO HEADINGS DETAILS
1. Sector Agro Chemicals
2. Announcement Date 11-Apr-2022
3. Completion Date  
4. Name of Client Inventys Research Company Pvt Ltd
5. Investor Details Arpit Khandelwal (representing Plutus Wealth Management LLP) and India Inflection Opportunity Fund | India
6. Investee Details Inventys Research Company Private Limited | India
7. Deal Description Advised, as a common counsel, in relation to investment in Inventys Research Company Private Limited, a company engaged in the business of research, manufacture and supply of agro and pharma actives, electronic chemicals, specialty chemicals, etc. by (a) Arpit Khandelwal, via primary subscription of securities for ~INR 225 Crores, and (b) India Inflection Opportunity Fund, via secondary acquisition of securities for ~INR 30 Crores
8. Total Consideration INR 225 crore  (USD 33 million)
9. Team Members The core team consisted of Kartick Maheshwari (Partner), Tanu Banerjee (Partner), Amulya Sharma (Senior Associate), Akriti  Sirsalewala (Associate), Divya Patil (Associate)
10. Role of Firm Common counsel
Law Firms NewsNews

Pathkind Diagnostics Private Limited | Sale of minority shareholding to India Business Excellence Fund IV

NO HEADINGS DETAILS
1. Sector Pharmaceuticals manufacturing sector
2. Announcement Date 25-May-2022
3. Completion Date 25-May-2022
4. Name of Client Pathkind Diagnostics Private Limited
5. Transferor Details Pathkind Diagnostics Private Limited |India
6. Investee Details India Business Excellence Fund-IV | India
7. Deal Description Advised Pathkind Diagnostics Private Limited (“Pathkind”, one of the leading companies in India in diagnostic and lab testing services, providing access to superior quality diagnostics services) and its promoters in relation to investment by India Business Excellence Fund IV (a fund managed and advised by MO Alternate Investment Advisors Private Limited) in Pathkind, for a consideration of upto INR 194.4 crore. The deal structure involved the investment been structured into two tranches and a subscription and shareholders agreement between the parties.
8. Total Consideration INR 194.4 crore (USD 25 million)
9. Team Members The core team consisted of Bharat Anand (Partner), Pashupati Nath (Partner), Mukul Aggarwal (Principal Associate) and Yashodhara Chauhan (Associate) with assistance from the following:

Diligence, preparation of disclosure letter, assistance in employment and tax related issues and closing: Abhinav Chandan (Partner), Indruj Rai (Partner), Abhinav Rastogi (Counsel), Kevin Peter (Principal Associate), Abhiroop De (Senior Associate), Swati Garg (Senior Associate), Ananya Bhat (Senior Associate), Archika Dudhwewala (Senior Associate), Sarthak Parnami (Senior Associate), Divya Kumar (Associate), Kartavya Gogna (Para-legals / Trainees)

10. Role of Firm Khaitan & Co advised on the transaction structuring as well as drafting, negotiation, and finalisation of the transaction documents, including the share purchase and subscription agreement, shareholders agreement.
Conference/Seminars/LecturesLaw School News

The Internship & Placement Cell of the University School of Law and Legal Studies, Guru Gobind Singh Indraprastha University, Delhi is organizing a lecture series on different career opportunities for law students. The series aims to provide students with some exposure to the various avenues that they can pursue as a legal practitioner, with key insights regarding the practicalities of such a career. Through these talks, the Cell hopes to empower students with knowledge gained through years of experience.

The first lecture of the series “Dispute Resolution Practice in Law Firms” will be taken by Ms. Divya Chaturvedi, a Partner at Khaitan & Co. and an alumnus of USLLS. Ms. Chaturvedi will be speaking on Saturday, June 18, 2022, at 11:00 AM.

The session is open to students from all law colleges and participants will be allowed to interact with the speaker. Interested students must register at:

HERE 

About the Organizers

USLLS has ranked 12th in the National Institutional Ranking Framework’s 2021 Rankings (Law) and is one of the premier law schools located in Delhi. The I&P Cell is a student-cum-faculty initiative of the law school, which seeks to secure internship and placement opportunities for USLLS students and undertakes several activities for facilitating professional development of the students.

Experts CornerKhaitan & Co

Introduction 

In furtherance of Press Note No. 3 (2020 Series) (PN 3) which announced a critical change to the consolidated foreign direct investment policy to curb opportunistic takeover of stressed and strategic assets, or Indian entities in light of the impact of COVID-19 Pandemic, on 1-6-2022, the Ministry of Corporate Affairs (MCA) has notified amendments to the Companies (Appointment and Qualification of Directors) Rules, 2014 (Rules), by way of the Companies (Appointment and Qualification of Directors) Amendment Rules, 2022 (2022 Amendment).

The 2022 Amendment has extended the change brought in by PN 3 to individuals who are nationals of a country which shares land border with India and who may occupy directorship positions of a company incorporated in India (Indian entity). Pursuant to the 2022 Amendment, every individual who is a national of a country which shares a land border with India [neighbouring national(s)] is now required to obtain a prior security clearance from the Ministry of Home Affairs, if such neighbouring national seeks to obtain a director identification number (DIN) or to be appointed as a director of an Indian entity.

Additionally, every individual seeking to be appointed on the board of an Indian entity is now required to give a declaration to such Indian entity as to whether or not such individual is required to obtain a security clearance from the Ministry of Home Affairs.

Analysis

PN 3 had introduced certain protectionist measures against investments from countries sharing land borders with India. In view of the PN 3 restrictions, approval of the Government is required for both primary and secondary investments by non-resident entities from, or entities whose beneficial owners belong to, countries sharing land borders with India. Now, with the 2022 Amendment, an additional layer of checks and balances has been added requiring even neighbouring nationals seeking to be appointed as directors to obtain a security clearance from the Ministry of Home Affairs.

It is pertinent to note that even to apply for a directors identification number (DIN), the neighbouring nationals are required to attach such security clearance along with the prescribed Form DIR-3.

 

Additionally, the security clearance is also required to be attached by the neighbouring nationals at the time of issuing the consent in Form DIR-2 to be appointed as a director in an Indian entity. Furthermore, every individual seeking to be appointed as a director on the board of any Indian entity is now required to provide a self-declaration, both in Form DIR-2 and Form DIR-3 stating whether or not such individual is required to obtain such security clearance.

 

The amendment only refers to new appointments of neighbouring nationals as directors of Indian entities on a going forward basis and is silent about existing neighbouring nationals who are already directors on the board of an Indian entity or existing neighbouring nationals holding DIN. Notwithstanding this limited grandfathering, one consequence could be that reappointment of existing directors after the end of their existing term would also be hit by the requirements set out under the 2022 Amendment and create uncertainty both from a timing and eligibility perspective.

Comments

PN 3 was issued in the backdrop of the COVID-19 Pandemic with the primary intent being to stem any opportunistic attempts to take control of Indian firms which have been affected by COVID-19.

 

While the investment ecosystem is already grappling with the ramifications of PN 3, including extended deal timelines and uncertainty on the ambit of beneficial ownership, with the advent of these new developments pursuant to the 2022 Amendment, the volume of applications from such neighbouring nationals is expected to further rise exponentially.  These developments will now further increase timelines where such nationals are seeking to be appointed on the board of Indian entities. It remains to be seen whether such security clearances are forthcoming or not. This will also create challenges for existing entities set up in the pre-PN 3 regime.

 

In view of the above, we believe parties (both parties seeking to nominate individuals and investee entities) should seek appropriate legal counsel to mitigate any unwarranted hiccups in deal closures due to statutory frameworks.


† Moin Ladha, Partner in the Corporate and Commercial Practice Group in the Mumbai office.

†† Kevin Shah, Principal Associate in the Corporate and Commercial Practice Group in the Mumbai office.

††† Tanish Prabhakar, Associate in the Corporate and Commercial Practice Group in the Mumbai office.

Experts CornerKhaitan & Co

Introduction

The Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 (EPF Act) is a socio-beneficial welfare legislation intended to provide adequate social security to member employees in their old age and infirmity. The EPF Act is mandatorily applicable to every establishment employing 20 or more employees (covered establishment/employer) and the EPF Act and the Employees’ Provident Funds Scheme, 1952 (EPF Scheme), together envisage contributory provident fund (PF fund). The PF fund is regulated and managed by Employees’ Provident Fund Organisation (EPFO); a statutory body constituted by the Central Government.

 

The EPF Act and EPF Scheme encompass within their scope all the employees in a covered establishment that were previously members of the PF fund or new member employees drawing “monthly pay” (inclusive of basic wages, dearness allowance, retaining allowances and other ordinarily payable allowances) of up to INR 15,000 (eligible employees/employee). Under the scheme of law, all the eligible employees mandatorily contribute 12% of their “monthly pay”, and an equal contribution is compulsorily made by the covered establishments for all its eligible employees. While the entire contribution by the employee goes towards the PF fund, only 3.67% of the contributions by the covered establishment go towards the PF fund and the balance 8.33% of the said contribution goes to the employees’ pension fund.

 

The EPF Act is a unique substantive law, with a social welfare goal, providing within itself means and procedure for its enforcement. (Ref. Bank of India v. Provident Fund Commr.[1]) One such provision is Section 7-A of the EPF Act, which empowers the Provident Fund Commissioner (PF Commissioners), appointed by the EPFO, to initiate an inquiry for determination of any deficit in the contributions remitted by any establishment under the provisions of the EPF Act. Pertinently, neither the EPF Act nor any of its schemes have laid down any procedure for holding these inquiries. Accordingly, practically, the PF Commissioners are following different yardsticks for initiating inquiries under Section 7-A of the Act. As a matter of fact, in many cases, inquiries are being initiated for wholly insufficient and untenable grounds causing general resentment amongst the employers on the one hand and prolonged pendency of the inquiries on the other.

 

Considering the wide powers conferred on the PF Commissioners under this provision and the draconian financial and reputational impact the orders have on businesses of covered establishments and establishments exempted from the EPF Scheme, it has become imperative that there is some regulation of the inquiries so that establishments are not subjected to harassment of a fishing and roving inquiry.

Scope and Power of the PF Commissioners

Section 7-A of the EPF Act vests the PF Commissioner with powers similar to that of a civil court i.e. enforcement of the attendance of any person or examination of the person on oath, discovery and inspection of documents, receipt of evidence on affidavit, and issuance of commissions for the examination of the witness. The scope of this section is extensive to protect the interest of the employees in various instances. The PF Commissioners can initiate an inquiry into the matters including but not limited to:

(a) cases where a dispute arises regarding the applicability of the EPF Act to an establishment;

(b) cases involving the determination of the amount due from any covered establishment under the EPF Act, and the schemes framed thereunder;

(c) cases involving the determination of entitlement of an employee for the membership; and

(d) cases involving breach of any of the provisions of exempted provident fund trust.

 

Given the exercise of quasi-judicial powers by the PF Commissioners under Section 7-A of the EPF Act, the PF Commissioners are required to act reasonably, fairly and in accordance with the principles of natural justice while conducting an inquiry thereunder. However, in recent years, in the absence of any yardstick or statutorily mandated procedure to conduct such inquiries, there has been a sharp rise in fishing and roving inquiries by the PF Commissioners against covered establishments and also establishments exempted from the EPF Scheme which has consequently led to a sharp rise in litigation arising from the orders passed under Section 7-A of the EPF Act.

 

Set out below are some common instances of possible misuse and misapplication of the inquiry provisions under the EPF Act.

  • Initiation of inquiries without identification of beneficiaries

 

The avowed object of Section 7-A of the EPF Act is to ensure that the eligible employees are not deprived of their social security benefits. Thus, the contributions remitted under the EPF Act, or any dues recovered pursuant to any inquiry under Section 7-A thereof, is not for the benefit of the Central or the State Government; rather it is a collection for the benefit of the specific eligible employees. Given the same, it becomes imminent that the PF Commissioners necessarily identify the employees for whose benefit the dues are being assessed in an inquiry initiated against a covered establishment. A corollary to this is that unless the beneficiaries of the dues assessed by the PF authorities are identified, any amounts collected pursuant to a proceeding under Section 7-A would not benefit the eligible employees and therefore, fail to serve the purpose of the EPF Act.

 

In this background, the Supreme Court of India had opined in H.P. State Forest Corpn. v. Regl. Provident Fund Commr.[2], that amounts due from the employer will be determined only with respect to those employees who are identifiable and whose entitlement can be proved on evidence, and in the event the record is not available, it would not be obliged to explain its loss or any adverse inference on this score.

 

Similarly, the High Courts across the country have repeatedly held that the determination of employees’ provident fund dues without identification of beneficiaries by the authorities will not be tenable. In Regl. Provident Fund Commr. v. Faridabad Thermal Power Station[3], the Punjab and Haryana High Court has held that:

(a) An order passed under Section 7-A of the EPF Act is not sustainable if the employees’ provident fund contributions, etc. have been determined without identification of actual beneficiaries.

(b) In case the authority under Section 7-A of the EPF Act passes an order, determining the employees’ provident fund contributions to be remitted by the employer without identification of beneficiaries, it would not be appropriate.

(c) In case the authority under Section 7-A of the EPF Act fails to exercise the modes prescribed by law to identify the actual beneficiaries, it would be construed that the order passed is without application of mind and not sustainable.

To the same effect, in Provident Fund Commr. v. Nand Lal and Co.[4], a Division Bench of the Patna High Court held that assessment of the dues is payable under the EPF Act is for the benefit of the identified individuals. The court further held that assessment under Section 7-A of the EPF Act should not be confused with an assessment of tax. These are provident fund dues that are to accrue to an individual and not a tax, and not an amount payable to the PF Commissioner. Unless the nature of employment and the names of employees are identified with certainty, the assessment cannot be said to be in accordance with the law.

 

This position that there shall be no assessment without identifying the individual members in whose account the fund is to be credited has also been acknowledged by the Central Provident Fund Commissioner in its guideline/circular bearing Reference No. 7(1) 2012/RCs and Review Meeting/345 dated 30-11-2012 regarding “guidance of quasi-judicial proceedings under Section 7-A, ‘the determination of money due from employers’ of the Employees Provident Fund and Miscellaneous Provisions Act, 1952”.  Although the said guideline/circular has been kept in abeyance vide EPFO’s subsequent circular bearing number 7(1)2012/RCs Review Meeting/21224 dated 18-12-2012, the principle is well established and followed in general.

 

In view of the above, in the absence of the identification of beneficiaries, liability cannot be saddled upon an establishment in the name of compliance or enforcement of the law. The PF Commissioners have to mandatorily identify the actual beneficiaries before the assessment and collection of dues. However, despite this settled position of law, in most cases the PF Commissioners are conducting inquiries and compelling employers to pay dues for the faceless, nameless, or non-identifiable workers. Resultantly, in such cases, the amounts collected by the PF Commissioners never reach the beneficiaries concerned thereby frustrating the whole objective of Section 7-A of the EPF Act.

  • Conducting inquiries without application of mind

 

The inquiry proceeding before the PF Commissioners under Section 7-A of the EPF Act is a quasi-judicial proceeding and the fundamental principles of natural justice are intrinsic to such proceedings. A bare reference to Section 7-A of the EPF Act makes it clear that determination under the said section is a liability on the part of the covered establishment for which drastic action can be taken, like in a certificate proceeding. Hence, it is incumbent upon the PF Commissioners to exercise their powers independently, fairly and justly without being prejudiced by any submissions/contentions raised by the Provident Fund Inspectors (PF Inspectors) in their report. In Glamour v. Regl. Providend Fund Commr.[5], a Single Judge Bench of the Delhi High Court observed that the investigation made by the Inspector, or the report submitted by him was no substitute for quasi-judicial inquiry envisaged by Section 7-A. In an appeal filed against this case (Regl. Provident Fund Commr. v. Glamour Proprietor Seth Hassaram & Sons[6]), the Division Bench of the Delhi High Court confirmed the views of the Single Bench.

 

However, in practice, it is often seen that the PF Commissioners conduct inquiries in a preconceived and mechanical manner while ignoring submissions made by the covered establishment under inquiry, thereby disregarding the principles of natural justice. Such fishing and roving inquiries have also been acknowledged by the EPFO, which has time and again reiterated in its guidelines (ref. guideline/circular bearing Reference No. 7(1)2012/RCs Review Meeting dated 6-8-2014; guideline/circular bearing Reference No. /110001/4/3(71)MIS.C/2013/DI/Vol II/ dated 8-2-2016; and guideline/circular bearing Reference No. C-11/20/76/Misc./2020/CBE/TN/1027 dated 14-2-2020) that the existence of a prima face case is necessary before the initiation of inquiry under Section 7-A of the EPF Act. Notwithstanding the same, both at the stage of the initiation of an inquiry, as also at subsequent stages till the final assessment, the PF Commissioners have a tendency to mechanically refer and rely upon the report(s) submitted by the PF Inspectors rather than assess the existence of a prima facie case against the covered establishment and subsequently, the veracity of the allegations raised thereunder, causing severe hardship to the employers against whom such proceedings are initiated.

 

  • Initiation of inquiry for a bygone period

 

The EPF Act does not prescribe any period of limitation for initiation of inquiry under Section 7-A or a period within which the said inquiry is to be completed. Even though it is a well-settled position of law that when a statute does not prescribe a period of limitation, the authorities must take action within a reasonable period of time, there have been instances where Section 7-A inquiries have been initiated against the covered establishment for periods going as far as eight to fifteen years. While the EPFO also has issued clarification, vide its circular bearing Reference No. C-11/20/76/Misc./2020/CBE/TN/1027 dated 14-2-2020, that any initiation of proceedings for period beyond 5 years without evidence of such prolonged default would be legally untenable, the PF Commissioners continue to initiate inquiries against the employers for the bygone periods, without any evidence of the prolonged period of default.

 

In this context, it is pertinent to highlight that as per the provisions of the Companies Act, 2013, a company is required to maintain and preserve its books of accounts only for 8 years immediately preceding a financial year. In view of the same, when an inquiry is initiated for a period beyond 8 years, the covered establishment is unable to produce the relevant records and is invariably fastened with penal consequences on the ground of non-production of the documents. While this issue has been highlighted by the employers time and again, the same has been ignored by the PF Commissioners on the ground that EPF Act does not prescribe a period of limitation for initiating inquiries under Section 7-A of the Act.

 

On 29-9-2020, the Central Government enacted the Code on Social Security, 2020 (Code) to amend and consolidate the existing labour laws relating to the social security with the object of providing social security benefits to all the employees and workers irrespective of belonging to the organised and unorganised sectors. When enforced, the Code will repeal and re-enact 9 central labour legislations relating to the social security, including the EPF Act. The Code has introduced a statutory limitation period of 5 years for recovery for such proceedings, which is in consonance with the limitation period prescribed under Section 45-A of the Employees’ State Insurance Act, 1948. The introduction of a limitation period of 5 years for initiating an inquiry akin to the one under Section 7-A is surely a welcome move that will provide better clarity on the issue and huge relief to the employers.

 

  • Initiating inquiries against the principal employer when contractors have independent employees’ provident fund codes

Many employers outsource business processes of their establishment to contractors and engage workers in connection with the work of the establishment by or through contractors. As per the scheme of the EPF Act, the contractors are allotted an independent employees’ provident fund code (PF Code) and on allotment of the same are recognised as an “establishment” by the EPFO.

 

It is a settled position of law that contractors having separate PF Codes are independent employers and the establishment cannot be considered as principal employer for such contractors. Accordingly, if the relevant authorities seek details as to the payment of contributions or arrears payable by such contractors, the duty of the owner of the establishment is limited to only providing the list of contractors to the relevant authorities. This position has been set out in numerous cases including Food Corporation of India v. Provident Fund Commr.[7]Pardeep Kumar v. Presiding Officer[8]Group 4 Securitas Guarding Ltd. v. Employees Provident Fund Appellate Tribunal[9]Madurai District Central Cooperative Bank Ltd. v. Employees’ Provident Fund Organisation[10]Calcutta Constructions Co. v. Regl. Provident Fund Commr.[11]; and Regl. Provident Fund Commr. v. Ropar Thermal Plant[12]. In these cases, it has been held “with respect to the contractors, who are registered with the Provident Fund Department, having the independent code number, they are to be treated as independent employer”.

 

In view of the above settled position of law, the authorities cannot treat the employers (engaging such contractor’s workers) to be a “principal employer” for the purposes of the contractors having an independent PF Code or be held liable for purported non-payment of dues under the EPF Act. It is also practically not possible nor feasible for the establishment to keep track of all the personnel deputed to work by a contractor engaged. Further, such deployment of personnel by a contractor is subject to constant change and the discretion of contractor. In general practice, a principal employer has neither any knowledge nor any records of the actual number of workmen/contract labours deployed by such individual contractors for rendering the services or executing the work in terms of the work order. For instance, the principal employer may require certain work to be completed, in a certain manner and by a certain time. In such a scenario, the number of personnel deputed and selection of personnel would be at the discretion of the contractor and the principal employer for whose benefit the work is being carried out cannot reasonably be expected to make employees’ provident fund contributions on their behalf.

 

However, despite this settled position of law, it is generally seen that when the contractors default in depositing the contribution of their workmen or delay in depositing the same, the authorities initiate inquiry against the employer (and not the contractor) and fasten liability by treating them as the principal employer. In fact, it is in line with this practice that the EPFO has recently, vide its circular bearing Reference No. C-I/3(28) 2016/7A&14B/Pt./7212 and dated 27-4-2022, issued a “standard draft informed letter instructing the principal employer to declare the contractors on the EPFO’s unified portal for employees” wherein the EPFO has observed that even if contractors engaged by an employer have separate PF Codes, the employer will be treated as “principal employer” and the overall responsibility for ensuring the compliance under EPF Act will lie with the employer. The said circular has been issued in contravention of the above settled position of law that contractors having separate PF Codes are independent employers and the establishment cannot be considered as principal employer for such contractors.

 

  • Initiating inquiries without establishing the existence of an employer-employee relationship between the covered establishment and casual workers

In the case of the vendors/contractors who do not have PF Code, the primary obligation is on the covered establishment to contribute employees’ provident fund in respect of workers who are engaged by vendors/contractors in connection with the work of the establishment and recover the amounts from the invoices of the contractors. However, in case it can be shown that the vendors/contractors have executed only a “contract for services” (and not a “contract of service”) with the workers for work which is neither regular nor in connection with the work/business of the establishment, it can be contended that such engagement does not establish an employer-employee relationship between the establishment and casual workers.

 

Hence, before the assessment of any liability, the authorities must first establish the existence of employer-employee relationship between establishment and casual workers. It is a settled position of law that the relevant factors to be considered for determining the question of employer-employee are: (a) who the appointing authority is; (b) who the pay master is; (c) who can dismiss; (d) the extent of control and supervision; and (e) how long alternative service lasts i.e. whether the ultimate authority over the man in the performance of his work resides in the employer so that he is subject to the latter’s order and direction (New Street Textiles Ltd. v. Union of India[13]). In view of the same, the authorities should appreciate and/or take into consideration the facts of the case and assess whether the establishment in any way (either directly or indirectly) exercises any control and supervision over such casual workers who are engaged on a non-exclusive basis and are providing services to other organisations also.

 

However, it is generally seen that the authorities initiate inquiries against the employers without establishing the existence of an employer-employee relationship between the establishment and the casual workers.

 

  • Blanket application of judgment Vivekananda Vidyamandir

 

In the recent past, there was a lack of clarity as to the legal position on the inclusion of special allowance within the ambit of wages for calculation of employees’ provident fund contribution and the divergent views had resulted in ambiguity amongst stakeholders including the employers, employees and the provident fund authorities. In this context, vide Regl. Provident Fund Commr. v. Vivekananda Vidyamandir[14] (Vivekananda Vidyamandir), the Supreme Court clarified the longstanding question of whether special allowances paid by an establishment to its employees would fall within the expression “basic wages” under Section 2(b)(ii) read with Section 6 of the EPF Act for computation of deduction towards employees’ provident fund. It was held that the crucial test is one of universality and “special allowances” which are uniformly, necessarily and ordinarily paid to all employees (generally or in a particular category) can be treated as part of “basic wages” for the purpose of computing provident fund contribution under the EPF Act.

 

Pursuant to the judgment, given the lack of clarity concerning the retrospective or prospective effect of the judgment of Vivekananda Vidyamandir[15], several PF Commissioners launched fishing and roving inquiries and issued inspection notices to employees proposing inspection of records of the previous years for ascertaining the wage structure as well as the allowances which may have been excluded from “basic wages”. Subsequently, a review petition was also filed against the judgment in Vivekananda Vidyamandir[16] which was dismissed by the Supreme Court on 28-8-2019.

 

Due to immense confusion caused post the judgment, on 28-8-2019, the EPFO issued a notice (bearing number C-I/1(33)2019/Vivekananda Vidyamandir/717) directing the curbing of unwarranted roving inquiries being initiated by authorities pursuant to a clarification issued by Vivekananda Vidyamandir[17] judgment regarding the ambit of “basic wages” under the EPF Act. The EPFO directed that all notices issued without any prima facie evidence to avoid EPF liability should not be pursued any further. Any investigation/inspection required to be initiated will require prior permission of the Central Analysis and International Unit (CAIU) and such inspection will be for cases having a credible basis that the employer has prima facie engaged in avoidance of liability under the EPF Act. Furthermore, all PF authorities were directed to adhere to the administrative guidelines pertaining to initiation of proceedings upon a prima facie and credible evidence of arbitrary splitting of basic wages. The said direction specifically stated, “there is no reason or justification to initiate roving inquiries into the wage structure of the complying establishments on the surmise that certain allowances in the nature of basic wages may not have been treated as part of pay for EPF contributions”.

 

Even though the EPFO in the notice dated 28-8-2019 has categorically stated that there is no reason or justification to initiate such roving inquiries into the wage structure of compliant establishments, the authorities continue to issue notices to the employers proposing inspection of their records of the previous years, solely for the purpose of determining allowances which may have been part of “basic wages” of the employees and had been excluded.

 

It is significant to state that the clarification provided by the Supreme Court in Vivekananda Vidyamandir[18] matter is in the nature of a change in law and in such context, strictly speaking, the authority cannot direct the employers to unilaterally bear the burden of such contribution. Even if the authority imposes liability to make contributions in respect of such previously excluded allowances in proceedings under Section 7-A of the EPF Act, the burden has to be shared by both the employer and the employee. Given that there is no provision under the EPF Act that allows for retrospective recovery of dues from the employee of an establishment, such large deductions cannot be made from the salaries of employees. Further, an employer has no right to deduct the contribution from the future wages payable to the employees, as has also been held by the Supreme Court in District Exhibitors Assn. v. Union of India[19] . Therefore, an employer cannot single-handedly make contributions to the authority. In the event any differential contribution is sought to be recovered from the principal employer, the same shall constitute undue hardship as was held in Shri Mahila Griha Udyog Lijjat Papad v. Union of India[20] . In view of the same, such inquiries initiated and conducted by PF Commissioners may be argued to be arbitrary and contrary to the settled position of law.

 


The Need for Regulation


The previous sections make it apparent that in many instances, the authorities tend to initiate fishing and roving inquiries against employers causing a deleterious impact on their pecuniary interests without benefiting the employees. In order to curb such inquiries, firstly, it is indispensable to bring a change at the grassroot level. It must be ingrained in the PF Inspectors, carrying out audits for exempted trust funds and inspections for unexempted trust funds, that an assessment under Section 7-A is different from the assessment of tax so that frivolous proceedings under Section 7-A of the EPF Act can be curbed at the preliminary stage of the issuance of a show-cause notice itself. Secondly, given that PF Commissioners are clothed with trappings similar to that of a court, they should act reasonably and fairly.  As a quasi-judicial authority, the PF Commissioners must assess the veracity of the allegations raised by the PF Inspectors in their report rather than mechanically relying on the reports submitted by a PF Inspector to help ensure that unwarranted Section 7-A proceedings can be avoided while still protecting the interests of the eligible employees in genuine cases. Further, the issue of lack of identifiability of the employees in respect of whom dues are being assessed is at large, and more so in cases where the inquiries are initiated for periods prior to 3-4 years. Moreover, the authorities, in view of the settled position of law, should not fasten liability on principal employers when contractors have independent PF Codes. Lastly, the authorities must assess the relationship between the establishment and the casual workers before initiating inquiry against the employer. While the Code on Social Security, 2020 appears to have recognised and addressed the issue of limitation, the other practical issues highlighted above in the present article require further regulation and more importantly, change in the approach/mindset of the PF Inspectors and the PF Commissioners from treating the EPF Act as a taxing statute to that of a socio-benevolent legislation intended to benefit the actual beneficiaries.

 


† Partner, Khaitan & Co.

†† Senior Associate, Khaitan & Co.

††† Associate, Khaitan & Co.

[1] 2005 SCC OnLine Ker 658 : (2006) 2 KLJ  135.

[2] (2008) 5 SCC 756 : 2008 LLR 980.

[3] 2015 SCC OnLine P&H 20497 : 2015 LLR 269.

[4] 2016 SCC Online Pat 2402.

[5] 1974 SCC OnLine Del 224 : 1975 Lab IC 954.

[6] 1981 SCC OnLine Del  220 : 1982 Lab IC 1787.

[7] (1990) 1 SCC 68 : 1990 LLR 64.

[8] 2015 SCC OnLine P&H 20678 : 2015 LLR 726.

[9] 2011 SCC OnLine Del 4010 : 2012 LLR 22.

[10] 2011 SCC OnLine Mad 1350 :2015 LLR 635.

[11] 2015 SCC OnLine P&H 20665 : 2015 LLR 1023.

[12] 2012 SCC OnLine P&H 22038 : 2013 LLR 243.

[13] 1974 SCC OnLine Ker 120 : 1975 KLT 426.

[14] (2020) 17 SCC 643.

[15] (2020) 17 SCC 643.

[16] (2020) 17 SCC 643.

[17] (2020) 17 SCC 643.

[18] (2020) 17 SCC 643.

[19] (1991) 3 SCC 119 : AIR 1991 SC 1381.

[20] (1999) 6 SCC 38 : (2000) 84 FLR 155.


Views expressed in this article are strictly personal and do not constitute legal/professional advice of Khaitan & Co. For any further queries or follow up, please contact us at editors@khaitanco.com.

Experts CornerKhaitan & Co

“There’s one issue that will define the contours of this century more dramatically than any other, and that is the urgent and growing threat of a changing climate.”

Barrack Obama

A common consensus seems to be rapidly emerging around the world that hydrogen will play a decisive factor if we were to attain the goals set out in the Paris Agreement, 2015 — of achieving net zero carbon emissions by 2050 to limit the global warming below 2 degrees celsius above pre-industrial levels. The phrase “hydrogen economy” is not a new concept. Currently, hydrogen is primarily utilised in the refining and chemical sectors and mostly produced from fossils, attributing for 6% of global natural gas use and 2% of coal consumption and is the primary cause for 830 MtCO2 of annual CO2 emissions[1]. In order to reduce the costs for producing and using clean hydrogen with carbon capture, usage and storage technologies, scaling the production of clean hydrogen will play a massive role.[2]

It is abundantly transparent that hydrogen energy presents diverse benefits over other power sources including:

  1. clean energy source for sustaining zero carbon energy programmes;
  2. abundance in source;
  3. diminishes carbon footprints;
  4. almost zero emissions; and
  5. usage in the automotive industry.

Therefore, the immediate need to capitalise the potential of low-carbon hydrogen and use it for a comprehensive range of applications as a feasible surrogate to liquid and fossil fuels cannot be overstated.

Hydrogen is generally categorised in accordance with the way it is produced and is catalogued by colour. Some of the colours of hydrogen rainbow are listed below[3]:

  1. Blue – Blue hydrogen is generated using methane gas, but the carbon is captured and
  2. Brown/Black – Brown/black hydrogen is extracted from fossil fuels out which mainly it is coal.
  3. Turquoise – Turquoise hydrogen is produced by a process known as “methane pyrolysis” to produce hydrogen and solid carbon.
  4. Grey – Grey hydrogen is the most common form and is generated through steam reformation of natural gas or methane.
  5. Green – Green hydrogen is produced by electrolysis using electricity generated by renewable sources such as wind energy and solar energy.
  6. Pink – Pink hydrogen is generated via electrolysis using electricity generated from nuclear power.
  7. Purple – Purple hydrogen is made using nuclear power and heat through combined chemo thermal electrolysis splitting of water.
  8. White – White hydrogen is naturally occurring geological hydrogen found in underground deposits and produced through fracking.
  9. Yellow – Yellow hydrogen is produced by electrolysis using solar power.

Many experts believe that distinct legal mechanisms will have to be administered in connection with production and usage of hydrogen production, depending on numerous factors such as the manner in which it is produced or if the production is using renewable or non-renewable energy.

India’s regulatory framework

Recent global incidents of uncommon wildfires, droughts and floods and immense apprehensions about changing climatic conditions have prompted even a developing country like India to contemplate a swift shift towards sustainability and aggrandise its sustainable goals by dint of policy framework.

The Ministry of New and Renewable Energy (MNRE) pioneered its first hydrogen and fuel cell roadmap in the year 2006[4] and MNRE has always considered “hydrogen” as its vision towards a sustainable future. However, the framework around “hydrogen” related policies was never formulated in a specific legislation. For example, renewable energy resources are regulated by MNRE, usage of pipelines to transport fuel and like products are governed by the Ministry of Petroleum and Natural Gas. Lately, amendments in the Oilfield (Regulation and Development) Act, 1984 were suggested by the Ministry of Petroleum and Natural Gas Oilfields (Regulation and Development) Amendment Bill, 2021[5] dated 15-6-2021 wherein hydrogen was included in the definition of “mineral oils” in order to facilitate the Government to permit a licence for its exploration and production. Scenarios like this has led for a push for an aerodynamic legislation which governs the framework in relation to hydrogen.

The National Hydrogen Mission (NHM) was launched on 15-8-2021 with the objective to make India a global hub for green hydrogen production and export. The NHM aims to enable production of 5 million tonnes of green hydrogen by 2030 and the related development of renewable energy capacity. As a positive step in the direction envisaged by NHM, on 17-2-2022, the Ministry of Power announced the green hydrogen policy (GHP).[6]

Green Hydrogen Policy (GHP)

Some of the salient features of GHP inter alia include:

  1. Production and development of green hydrogen as well as green ammonia.
  2. Waiver of inter-State transmission charges for a period of 25 years if the projects are commissioned before 25-6-2025.
  3. Banking shall be permitted for a period of 30 days for renewable energy used for making green hydrogen and green ammonia and the charges in relation to the same will be as per the charges fixed by the State Electricity Regulatory Commission, which shall not be more than the cost differential between the average tariff of renewable energy bought by the distribution company in the previous year and the average market clearing price in day ahead market during the month in which the renewable energy is banked.
  4. Distribution companies are also authorised to acquire and supply renewable energy to the manufacturers of green hydrogen and green ammonia which shall only be charged at the cost of such procurement including wheeling charges and a small margin as may be determined by the State Commission.
  5. Allotment of land in renewable energy parks for manufacturing green hydrogen/green ammonia. Further, it also permits manufacturers of green hydrogen/green ammonia to set up bunkers near ports for storage of green ammonia for export/use by shipping, at applicable charges.
  6. Additionally, MNRE will establish a single portal for all statutory clearances and permissions required for manufacture, transport, storage and distribution of green hydrogen/green ammonia and such agencies/authorities are time-bound to clear such clearances/permissions, preferably within 30 days from the date of application.

Challenges faced by the Hydrogen Sector

One of the foremost obstacles faced by the hydrogen sector is that the production of low-carbon hydrogen is still in the embryo phase in commercial terms. As there is minuscule commercial scale at the present, low-carbon hydrogen production is not a commercially feasible substitute. Another challenge is that there is no resolute hydrogen legislation in place in most of the countries and dedicated framework governing manufacture, usage, storage and transport of hydrogen needs to be put forth in order to facilitate growth.

 

Hydrogen projects are expected to play a colossal role in decarbonising our energy usage and working towards a clean and sustainable future. National strategies and efficacious public-private partnerships will be essential to nail the big fish and to warrant assured success.

India, by announcing the GHP has taken a step in the right direction towards attaining energy sufficiency using clean and renewable sources of energy. Further, MNRE is supporting industrial, academic and research institutions to tackle the obstacles in production of hydrogen from renewable energy sources, its safe and efficient storage, and its usage for energy and transport applications. MNRE has extended substantial support to R&D in this field resulting in development and demonstration of internal combustion engines, two wheelers, three wheelers, and minibuses that run on hydrogen fuel. India has already set up two hydrogen refuelling stations at Indian Oil R&D Centre, Faridabad and National Institute of Solar Energy, Gurugram.[7]

While it is paramount that India accelerates in the field of development and manufacturing of hydrogen technologies, it will also be fundamental for other countries to progress towards the same goal. In the words of Christine Lagarde, Managing Director of the International Monetary Fund, “Climate Change is a collective endeavour, it is collective accountability, and it may not be too late.” The only hope to achieve the targets set at Paris Agreement is to massively scale the manufacturing and deployment of hydrogen technologies which will result in significant reductions in the cost thereby making utilisation of hydrogen as an indisputable substitute to fossil fuels.


† Partner, Khaitan & Co.

†† Associate, Khaitan & Co.

[1] See HERE.

[2] See HERE .

[3] See HERE .

[4] See HERE.

[5] See HERE .

[6] See HERE.

[7] See HERE .

Experts CornerKhaitan & Co

The Joint Parliamentary Committee (JPC) recently submitted its report to the Parliament on the Personal Data Protection Bill, 2019[1] . With that, the JPC also presented a revised bill i.e. the Data Protection Bill, 2021 (Bill). This was after a deliberation of almost 2 years by the JPC, during which time the businesses and civil society were all getting anxious on the outcome of such a long deliberation period. It is undeniable that at this hour, India needs a comprehensive data protection legislation if it aims to harness the growth of digital economy. The draft Bill is expected to be laid down before the Parliament for its passage soon, but in its existing form there are a number of uncertainties on key issues. This article is an attempt to set out a brief analysis of the hits and misses of the JPC and the way forward for businesses.

Hits and misses

Non-personal data – Half legislation? The JPC has included non-personal data within the purview of the Bill. It recommends that as soon as the provisions to regulate non-personal data are finalised, there may be a separate regulation on non-personal data in the Data Protection Act. The inclusion of non-personal data at this stage is perhaps a bit premature for India especially for the business ecosystem here. Businesses have been shaken with the news and are grappling to understand the nuances of this inclusion. A better solution in this regard could be to have a single regulator (i.e. the Data Protection Authority) which could be the regulator for the presently crafted personal data protection law and, subsequently, also the regulator for the non-personal data law that is to be crafted in future.

Clarity on implementation – Much needed: Business organisations will now have a period of 24 months from the date of enforcement of the law for transitioning. This provides them the much-needed room to realign their internal practices and policies.

Cross-border data transfers and localisation – A right approach? The JPC has recommended that the Data Protection Authority should ensure consultation with the Central Government for granting approval to the cross-border transfer of sensitive personal data either through contract or an intra-group scheme or transfers for specific purposes. Additionally, such contract or an intra-group scheme should not be approved if it is against “public” or “State” policy. It is likely that the process for approval of cross-borders transfers will become cumbersome with the involvement of the Central Government. Further, the JPC has recommended that the Central Government should ensure that a mirror copy of the sensitive personal data and critical personal data stored abroad is brought back to India. While the thrust on localisation in the absence of adequate infrastructure in India may hurt businesses of all stature, it may prove to be beneficial in the longer run.

Processing children’s personal data: The JPC has accorded due importance to protection of children’s privacy in the digital world. It has recommended that a data fiduciary (akin to data controller) must verify the age of the child and obtain the consent of child’s parent or guardian. It also recommends that a data fiduciary should inform the child 3 months before attaining majority (i.e. 18 years) for providing fresh consent. Further, in terms of the Bill, all data fiduciaries are now barred from profiling, tracking, behaviourally monitoring children and their data, or targeting advertisements at children, or processing any personal data that can cause significant harm to the child. As a consequence, all data fiduciaries, irrespective of their level of engagement with children or children’s offerings will have to verify the age of its users and it has the potential to age gate the internet. Additionally, children-centric businesses will have to devote considerable resources towards ensuring compliance with the Bill.

Social media platforms – Legitimate concern, wrong place: To counter problems like prevalence of fake accounts, propagating hate speech, etc., the JPC has recommended that social media platforms must set up an office in India and they will be held accountable for the content they host from unverified accounts. This may be considered by social media platforms as a hindrance to the safe harbour provisions that are prevalent today. While the concern relating to social media may be well founded, however the JPC may not have taken the correct approach to address this concern in a data protection law.

There are several other recommendations that the JPC has proposed, which are improvements to the previous iteration of the Bill. In its previous iteration, the Bill mirrored a broad consensus on the key issues concerned with regulation of personal data. However, the JPC has opened the floodgates for businesses with the inclusion of aspects such as non-personal data, social media regulations and other non-contextual issues, in what was expected to lay down a basic framework for regulation of personal data. Despite all these hits and misses, businesses are now eagerly looking forward to the last mile that is to be covered by the Bill. It is expected that this umbrella legislation on data protection would soon be debated in the Parliament and rolled out as a landmark global gold standard law.


Partner, Khaitan & Co.

[1]See HERE

Experts CornerKhaitan & Co

Introduction

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) is an act “to regulate securitisation and reconstruction of financial assets and enforcement of security interest and to provide for a central database of security interests created on property rights, and for matters connected herewith or incidental thereto”. As per Section 13(2) of the SARFAESI Act, where any borrower, who is under a liability to a secured creditor makes any default in repayment of secured debt or any instalment thereof, and his account in respect of such debt is classified by the secured creditor as a non-performing asset, then the secured creditor may require the borrower by notice in writing to discharge in full his liabilities to the secured creditor within 60 (sixty) days from the date of the notice, failing which, the secured creditor shall be entitled to exercise all or any of the rights to take possession of the secured assets under Section 13(4) of the SARFAESI Act and sell the same without the intervention of the court.

 

With that background, we aim to analyse whether the auction-purchasers can purchase the secured asset from the secured creditors under SARFAESI Act and the Security Interest (Enforcement) Rules, 2002 (SARFAESI Rules) (collectively “SARFAESI”) free from encumbrance including those arising out of pending statutory dues.

 

Priority of dues: An analysis

 

With the introduction of the SARFAESI Act, several banks contended that given the non obstante clause in Section 35, the banks being the secured creditors will have priority over the State’s first charge. However, the Supreme Court in Central Bank of India v. State of Kerala[1] clarified that SARFAESI Act does not provide for first charge to the secured debts due to banks and State sales tax law which are creating first charge in favour of the State shall prevail. Further, the Supreme Court in Dena Bank v. Bhikhabhai Prabhudas Parekh & Co.[2] has held that the crown debts have priority over secured debts only if a statute gives such priority to its dues. Above stated, we understand that the position of law was that if State law provides for priority to statutory dues that shall prevail over secured debts of the banks.

 

However, with the insertion of Section 26-E via the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016 (amending Act), the above discussed position underwent a change and now any security created and recorded with the Central Registry3 is accorded statutory priority in accordance with Section 26-E of the SARFAESI Act. The text of Section 26-E of the SARFAESI Act (Section 26-E) reads as under:

 

26-E. Priority to secured creditors.— Notwithstanding anything contained in any other law for the time being in force, after the registration of security interest, the debts due to any secured creditor shall be paid in priority over all other debts and all revenues, taxes, cesses and other rates payable to the Central Government or State Government or local authority.

Explanation.— For the purposes of this section, it is hereby clarified that on or after the commencement of the Insolvency and Bankruptcy Code, 2016 (31 of 2016), in cases where insolvency or bankruptcy proceedings are pending in respect of secured assets of the borrower, priority to secured creditors in payment of debt shall be subject to the provisions of that Code.[3]

Various litigations came before different courts on the interpretation of Section 26-E and brought forth certain pressing common questions. To understand the current position, we shall be discussing certain important judgments below and presenting our analysis:

(i) If a State tax act also has a non -obstante clause, will Section 26-E prevail over it?

a) The Gujarat High Court in Kalupur Commercial Cooperative Bank Ltd State of Gujarat[4] (Kalupur) has dealt with the non obstante clause in detail while analysing whether Section 26-E which is a part of the central legislation would prevail over Section 48 of the Gujarat Value Added Tax Act, 2003 (GVAT), a State Act. It referred to the decisions of the Supreme Court in Kumaon Motor Owners’ Union Ltd v. State of U.P.[5] (Kumaon Motor) and Solidaire India Ltd. v. Fairgrowth Financial Services Ltd.[6] (Solidare).

 

The Supreme Court in Kumaon Motor[7] had discerned three principles in case of conflict between the provisions of two statutes viz:

  • If there is a conflict between the provisions of two statutes and nothing is repugnant, the provisions in the later statute would prevail;.
  • While resolving such conflict, the court must look into the object behind the two statutes. In other words, what is to be looked at is what necessitated the legislature to enact a particular provision later in point in time, which may be in conflict with the provisions of earlier statute.
  • The court must look into the language of the provisions. If the language of a particular provision is found to be more emphatic, the same would be indicative of the intention of the legislature that the same shall prevail over other statutes.

 

The Supreme Court in Solidare[8] stated that the principles of law discernible are that, if there is a conflict between two special legislations, the later must prevail. The simple reasoning is that at the time of enactment of the later statute, the legislature could be said to be aware of the earlier legislation and its non obstante clause. If the legislature still confers the later enactment with a non obstante clause, it means that the legislature wanted that enactment to prevail.

 

Having discussed the above, the Gujarat High Court, in Kalupur[9], noted that Section 48 of GVAT “would come into play only when the liability is finally assessed and the amount becomes due and payable”. Basis the above, it came to the conclusion that priority shall be that of the bank under Section 26-E and not of the State.

(b) The Nagpur Bench of the Bombay High Court in Union Bank of India v. State of Maharashtra[10] analysed the language of Section 37(1) of the Maharashtra Value Added Tax Act, 2002 (reproduced below) and ruled that though it begins with a non obstante clause, it is made subject to any provisions of the central legislation dealing with the issue in question. Hence, Section 26-E shall prevail.

    1. Notwithstanding anything contained in any contract to the contrary, but subject to any provision regarding creation of first charge in any Central Act for the time being in force, any amount of tax, penalty, interest, sum forfeited, fine or any other sum payable by a dealer or any other person under this Act, shall be the first charge on the property of the dealer or, as the case may be, person.

 

Similar view was also recently taken by the Division Bench of the Bombay High Court in SBI v. State of Maharashtra[11] (SBI judgment).

 

We further note that recently in Punjab National Bank v. Union of India[12], Supreme Court while dealing with the issue of whether the dues of the Excise Department would have priority over the dues of the secured creditors under Section 11-E to the Central Excise Act (which provides for first charge on the property of the defaulter for recovery), held that since Section 35 of the SARFAESI Act gives it an overriding effect on all other laws, the property shall be subject to the SARFAESI Act. Thus, the right of a secured creditor cannot be hampered and the State’s right to recover debts would prevail over other creditors only in cases where such creditors are unsecured.

 

(ii) Is the auction-purchaser liable to pay off the statutory dues?

(a) The Andhra Pradesh High Court in SBI v. CTO[13] (CTO case) held that the debts advanced by banks/financial institutions have precedence over the statutory dues of the government authorities. Accordingly, any secured asset sold by such bank or financial institution to any purchaser cannot be denied registration due to pending statutory dues and the banks are not entitled to withhold the sale certificate pursuant to the auction held. Further, it was clarified that if any balance of sale consideration amount is available post satisfaction of dues towards the banks, it shall be adjusted towards the dues, if any, of the department concerned.

(b) Similarly, the Gujarat High Court in Kalupur[14] set aside the attachment orders passed under the Section 48 of GVAT and held that as per Section 26-E, the bank/financial institutions had first charge over the mortgaged property. It is pertinent to note that despite the existence of the attachment orders, the Gujarat High Court validated sale of the mortgaged properties conducted by the bank and categorically stated that:

 

  1. 78. It is further clarified that the excess, if any, shall be adjusted towards the dues of the State under the Value Added Tax, 2005 Act. It is further declared that the respondents cannot proceed against the purchasers of the properties sold under the SARFAESI Act.

 

Further, in CTO case[15], as discussed above, the Andhra Pradesh High Court has held that the secured asset sold to any purchaser cannot be denied registration due to pending statutory dues and the banks are not entitled to withhold the sale certificate pursuant to the auction held. In SBI v. State of A.P.[16] and Pridhvi Asset Reconstruction and Securitisation Co. Ltd. v. State of A.P.[17], orders similar to the CTO case[18] were passed.

 

In SBI v. State of Maharashtra[19], the Bombay High Court have taken a similar view with regard to the registration of the sale certificate as upheld in the CTO case[20] i.e. the registration of sale certificate cannot be denied on account of pending statutory dues. This case has also highlighted that a Registrar does not have a quasi-judicial power and is only expected to ensure that the documents to be registered is accompanied by supporting documents.

 

However, having discussed the above position, it is pertinent to look at the judgment recently passed by the Supreme Court of India in Kotak Mahindra Bank Ltd. v. District Industries Centre[21] (Kotak case), disposing of the special leave petition that arose out of the order passed by the Bombay High Court in Medineutrina (P) Ltd. v. District Industries Centre[22] (Medineutrina case). The position taken by the Supreme Court in this case goes contrary to what has been established till now and hence needs a detailed mention.

 

In Medineutrina case[23], the petitioner was the auction-purchaser of the immovable property which was attached and auctioned by Punjab National Bank (PNB), under the SARFAESI Act. However, as certain statutory dues were due to the Sales Tax Department, PNB was not transferring the property in favour of the petitioner until such payment.  The petitioner thus came before the Bombay High Court challenging such non-transfer and additionally, relief was claimed against PNB to issue a no-objection certificate and to issue a fresh sale certificate, free from all encumbrances in favour of the petitioner. The petitioner also contended that there was the absence of notice, and it had no prior knowledge of such an encumbrance.

 

The Bombay High Court on the above set of facts dismissed the reliefs claimed by the petitioner and held that the petitioner was liable to pay the pending sale tax dues on the secured asset even if there was absence of any notice or prior knowledge of such encumbrance. It further ruled contrary to the principle established by the Supreme Court in the case of Ahmedabad Municipal Corpn. of the City of Ahmedabad v. Haji Abdulgafur Haji Hussenbhai[24] that a charge may not be enforced against a transferee if it had no notice of the same unless the requirement of such notice has been waived by law. This was held by following the reasoning that the above position would hold only when a charge is created under Section 100 of the Transfer of Property Act, 1882 in terms of which charge is not on the property. It further referred to AI Champdany Industries Ltd. v. Official Liquidator[25], wherein the Supreme Court had differentiated between an encumbrance as understood in the general parlance and an encumbrance which is a charge on the property and runs with the property.

 

In this regard, Bombay High Court observed that[26]:

  1. 34. … It goes without saying that when a statutory charge is created on the property, the same would go with the property and would follow the property, in whosoever’s hands the property goes.
  1. Thus the notice of such a statutory charge on the property, is always presumed in law, to one and all and none can claim ignorance of the same.
  1. As Section 37(1) of the Maharashtra Value Added Tax Act, 2002, creates a charge on the property, a successful auction-purchaser, thus would hold the property, upon which a statutory charge has been created, subject to such charge and the property would thus continue to be liable for any statutory charges created upon it, even in the hands of such auction-purchaser, though for non-disclosure of such charge by the secured creditor, the auction-purchaser may sue the secured creditor and have such redress, as may be permissible in law. This is more so for the reason that the priority given in Section 26-E of the SARFAESI Act, to the banks, which is a secured creditor, would only mean that it is first in que for recovery of its debts by sale of the property, which is a security interest, the other creditors being relegated to second place and so on, in the order of their preference as per law and contract, if any, as the case may be. Thus the dues under Section 37(1) of the MVAT Act, 2002, being a statutory charge on the property, would also be recoverable by sale of the property, and that puts a liability upon the auction-purchaser, who, in case he wants an encumbrance free title, will have to clear such dues.

 

Aggrieved by the same, the above decision in the Medineutrina case[27] was challenged before the Supreme Court of India.

 

The Supreme Court vide its order[28] dated 18-11-2021, disposed of the special leave petition, and upheld the decision of the Bombay High Court by noting that the agreement pursuant to which the auction-purchaser purchased the immovable property specifically stated that the auction-purchaser shall bear all statutory dues inter alia other dues and having agreed to these stipulations, auction-purchaser cannot shy away from the obligation. The specific portion of the agreement is reproduced below:

“It is not necessary for us to examine the other aspects dealt with by the High Court in the impugned judgment. For, the agreement executed by the petitioner pursuant to which the auction was concluded in favour of the petitioner reads thus:

  1. All statutory dues/attendant charges/other dues, including registration charges, stamp duty, taxes, any other known, unknown liability, expenses, property tax, any other dues of the Government or anybody in respect of properties/assets sold, shall have to be borne by the purchaser…. ”

 

Further, the fact that the State has the first charge on the property concerning statutory dues, the auction-purchaser cannot resile from the liability to discharge the same. Additionally, the Supreme Court acceded to the request that once such statutory dues have been paid, a fresh sale certificate shall be issued which shall note that the immovable property has been transferred free from all known encumbrances.

 

Conundrum around enforcement of Section 26-E

 

We further deem it necessary to discuss the conundrum around the enforcement of Section 26-E. We note that the amending Act did not come into force all at once but in parts. While certain sections including Section 31-B, Recovery of Debts and Bankruptcy Act, 1993 (RDB Act) (Section 31-B) came into force on 1-9-2016; Section 26-E was brought into force much later, from 24-1-2020 vide Notification No. 4133 dated 26-12-2019. However, we observe that various judgments viz, Union Bank of India v. State of Maharashtra[29] and Medineutrina case[30] have been ruled on the premise that Section 26-E came into force on 1-9-2016.

 

However, the Gujarat High Court in Kalupur[31] which was decided on 23-9-2019, took into consideration the fact that Section 26-E was not yet enforced and had observed the below:

  1. While it is true that the bank has taken over the possession of the assets of the defaulter under the SARFAESI Act and not under the RDB Act, Section 31-B of the RDB Act, being a substantive provision giving priority to the “secured creditors”, the same will be applicable irrespective of the procedure through which the recovery is sought to be made. This is particularly because Section 2(l-a) of the RDB Act defines the phrase “secured creditors” to have the same meaning as assigned to it under the SARFAESI Act. Moreover, Section 37 of the SARFAESI Act clearly provides that the provisions of the SARFAESI Act shall be in addition to and not in derogation of inter alia the RDB Act. As such, the SARFAESI Act was enacted only with the intention of allowing faster recovery of debts to the secured credits without intervention of the court. This is apparent from the Statement of Objects and Reasons of the SARFAESI Act. Thus, an interpretation that, while the secured creditors will have priority in case they proceed under the RDB Act they will not have such priority if they proceed under the SARFAESI Act, will lead to an absurd situation and, in fact, would frustrate the object of the SARFAESI Act which is to enable fast recovery to the secured creditors.

 

58 . The insertion of Section 31-B of the RDB Act will give priority to the secured creditors even over the subsisting charges under other laws on the date of the implementation of the new provision i.e. 1-9-2016. The Supreme Court, in State of M.P. v. State Bank of Indore[32], has held that a provision creating first charge over the property would operate over all charges that may be in force.

 

The text of Section 31-B is reproduced below for ease of reference:

31-B. Priority to secured creditors.— Notwithstanding anything contained in any other law for the time being in force, the rights of secured creditors to realise secured debts due and payable to them by sale of assets over which security interest is created, shall have priority and shall be paid in priority over all other debts and Government dues including revenues, taxes, cesses and rates due to the Central Government, State Government or local authority.

 

Following this reasoning given in Kalupur[33], Bombay High Court in SBI judgment[34] has recently ordered that even if Section 26-E was effective only prospectively from 24-1-2020 and thus not applicable to the facts at hand as they were prior in time, that would not make any difference; as Section 31-B itself would be sufficient to give priority to a secured creditor over the statutory dues.

 

Similarly, the Division Bench of the Bombay High Court in Axis Bank Ltd. v. State of Maharashtra[35] quashed and set aside the impugned notices issued by the Assistant Commissioner of Sales Tax after taking into consideration Section 529-A of the Companies Act, 1956 while also noting the statutory recognition of priority claim of the secured creditor in view of the amendment brought into effect by virtue of introduction of Section 26-E providing for priority to secured creditor over all other debts and all taxes, cess and other rates payable to Central Government or the State Government or the local authority while stating that the applicability of provisions of Section 31-B is pari materia to Section 26-E.

A similar view has been upheld by various High Courts in ASREC (India) Ltd. v. State of Maharashtra[36], GMG Engineers & Contractor (P) Ltd. v. State of Rajasthan[37], Bank of Baroda v. CST[38], and Commr. v. Indian Overseas Bank[39].

 

Analysis and conclusion

We understand from the above discussion that there is plethora of judgments that have dealt with subject-matter regarding priority of claims of secured creditor over the statutory dues. Post introduction of Section 26-E, it is now a settled position that the dues of the secured creditor will stand in priority.

 

We however note that, in terms of liability to pay statutory dues, the decision of the Supreme Court in the Kotak case[40] has caused ripples to an otherwise settled position that the statutory dues are to be paid from the excess of auction amount and that the sale certificate cannot be withheld on such statutory dues being pending. The Supreme Court in Kotak case[41] held that the auction-purchaser cannot resile from the liability to pay statutory dues and a sale certificate free from all encumbrances can be issued only once such dues have been cleared.

 

We, however, would like to point to the fact that the above decision seems to be very case specific as the auction-purchaser had specifically agreed to such payment liability under the auction agreement and cannot be seen as laying down the law that an auction-purchaser is liable to pay statutory dues in the absence of a contractual arrangement specifically stating so.

 

Further, we note that many judgments have been passed considering that Section 26-E came into force on 1-9-2016, which as discussed above is not the correct factual position. However, certain courts have rightly acknowledged the correct position and have reasoned priority of secured creditors in line with Kalupur[42] judgment, that is:

  • Section 31-B came into force on 1-9-2016;
  • Section 37 of the SARFAESI Act clearly provides that the provisions of the SARFAESI Act shall be in addition to, and not in derogation of inter alia the RDB Act and as such the SARFAESI Act was enacted only with the intention of allowing faster recovery of debts to secured creditors without the intervention of the court;
  • The definition of secured creditors is the same in both RDB Act and SARFAESI Act; and
  • An interpretation that, while the secured creditors will have priority in case they proceed under the RDB Act and that they will not have such priority if they proceed under the SARFAESI Act, will lead to an absurd situation and, in fact, would frustrate the object of the SARFAESI Act which is to enable fast recovery to the secured creditors.

 

Taking into consideration the above and ruling of Supreme Court in State of M.P. v. State Bank of Indore[43], we understand that the priority of secured creditors can be said to have been established from coming into force of Section 31-B.


† Partner, Khaitan & Co.

††  Associate, Khaitan & Co.

††† Associate, Khaitan & Co.

[1] (2009) 4 SCC 94.

[2] (2000) 5 SCC 694.

[3] Central Registry means the registry set up or cause to be set up under S. 20(1) of the SARFAESI Act.

[4] 2019 SCC OnLine Guj 1892

[5] AIR 1966 SC 785.

[6] (2001) 3 SCC 71.

[7] AIR 1966 SC 785.

[8] (2001) 3 SCC 71.

[9] 2019 SCC OnLine Guj 1892

[10] 2021 SCC OnLine Bom 6070.

[11] 2020 SCC OnLine Bom 4190.

[12] 2022 SCC OnLine SC 227.

[13] 2021 SCC OnLine AP 343 : AIR 2021 AP 87.

[14] 2019 SCC OnLine Guj 1892

[15] 2022 SCC OnLine SC 227.

[16] 2021 SCC OnLine AP 168 : AIR 2021 AP 108.

[17] 2020 SCC OnLine AP 1936 : (2021) 3 ALT 104.

[18] 2022 SCC OnLine SC 227.

[19] 2021 SCC OnLine Bom 2568.

[20] 2022 SCC OnLine SC 227.

[21] SLP (C) Diary No. 8269 of 2021, order dated 18-11-2021 (SC).

[22] 2021 SCC OnLine Bom 222 : (2021) 5 Mah LJ 402.

[23] 2021 SCC OnLine Bom 222 : (2021) 5 Mah LJ 402.

[24] (1971) 1 SCC 757.

[25] (2009) 4 SCC 486.

[26] 2021 SCC OnLine Bom 222 : (2021) 5 Mah LJ 402.)

[27] 2021 SCC OnLine Bom 222 : (2021) 5 Mah LJ 402.

[28] SLP (C) Diary No. 8269 of 2021, order dated 18-11-2021 (SC).

[29] 2021 SCC OnLine Bom 6070.

[30] 2021 SCC OnLine Bom 222 : (2021) 5 Mah LJ 402.

[31] 2019 SCC OnLine Guj 1892 : (2019) 156 SCL 668.

[32] (2002) 10 SCC 441

[33] 2019 SCC OnLine Guj 1892 : (2019) 156 SCL 668.

[34] 2020 SCC OnLine Bom 4190.

[35] 2017 SCC OnLine Bom 274 : (2017) 3 AIR Bom R 305.

[36] 2019 SCC OnLine Bom 5480 : (2020) 6 AIR Bom R 561.

[37] S.B. Civil Writ Petition No. 6872 of 2017, decided on 5-7-2017.

[38] 2018 SCC OnLine MP 1667 : (2018) 55 GSTR 210.

[39] 2016 SCC OnLine Mad 10030 : (2017) 1 Mad LJ 769.

[40] SLP (C) Diary No. 8269 of 2021, order dated 18-11-2021.

[41] SLP (C) Diary No. 8269 of 2021, order dated 18-11-2021.

[42] 2019 SCC OnLine Guj 1892 : (2019) 156 SCL 668 .

[43] (2002) 10 SCC 441.

Experts CornerKhaitan & Co

Overview

The Indian Government recently announced its intention to open the Indian space sector to FDI. This article analyses the implications of allowing FDI in space and gives an overview of the Indian space regime.

 

Introduction

India is one of the few nations in the world to dominate the space arena. For a developing nation, India has achieved a great feat in exploring outer space. Despite being a space faring nation, India accounts for only 2% of the global space economy. India’s achievements in the space sector fall short behind countries like US and China which hold a greater contribution in the $447 billion dollar global space economy. The reason for India holding only a small share in the global space economy stems from the Indian space sector being primarily Government controlled.

 

Indian space program was started in the 1960s and has revolutionised the space domain through its national space agency ISRO (Indian Space Research Organisation) which functions under the aegis of Indian Department of Space. For more than 5 (five) decades under Department of Space administration, ISRO has functioned as both an operator and regulator of space activities. This consolidation of complete control over Indian space sector in the hands of statutory bodies has impeded participation from private players. Cognizant about the importance of collaboration with private foreign players, the Indian Government recently announced its intention to open the Indian space sector to foreign direct investment.

 

Overview of Indian Space Sector

As mentioned above, the Indian space sector has been predominantly Government operated. Under the umbrella of Department of Space and ISRO, private players never got the opportunity to fully participate and spearhead space activities. While ISRO has had a long-standing relationship with numerous private players, their role has always been limited to being a vendor, subcontractor, or supplier for ISRO and this constraint on private collaboration has severely inhibited the growth of the Indian space domain.

 

In the year 2020, the Indian space sector welcomed its first set of major reforms to boost private sector participation. As part of these reforms a new body, namely, IN-SPACe (Indian National Space Promotion and Authorisation Centre) was created to regulate and promote private sector participation in space activities.

 

IN-SPACe is contemplated to be the main interface for collaboration between Government and private actors. The private players have responded well to these new government initiatives of providing a level playing field in a once closed off sector. As of 2022, about 75 (seventy-five) startups have registered on the government portal with novel ideas to take the Indian space sector to newer heights. IN-SPACe will enable private players to be more than a vendor and provide them with the option to build and launch space objects, set up base at Department of Space premises, utilise ISRO facilities and infrastructure and develop new space infrastructure for ISRO.

 

Despite the government’s encouragement towards private participation, the issue remains that there has been a lack of foreign investment to augment the Indian space economy. Foreign investors have been on fence about investing in Government monopolised Indian space sector. The conflict of interest with ISRO as a competitor had perpetuated apprehension in minds of foreign investors who could not see a way ahead to reap the benefits of the Indian space program initiatives.

 

FDI in Space

Presently, FDI in space is allowed under government route only for satellite establishment and operations. Further, FDI in space is approved by the Government on a case-by-case basis and often this approval takes years. However, witnessing the change in approach of the Indian Government towards private players involvement, foreign companies have expressed interest in investing in this space.  Soon after opening the Indian space sector to private actors, the next step has been to seek foreign direct investment. ISRO officials have called for introduction of a new FDI policy to engage with foreign firms and make the Indian space sector accessible to both domestic and foreign players.

 

In February 2022, the Indian Minister of Space informed the Indian Parliament about the government’s intention to allow FDI in space. While currently FDI is limited to satellite making operations, we can expect the new FDI policy to attract investment in other space activities as well. As per ISRO officials this new FDI approach would enable foreign companies to set up base in India and utilise ISRO facilities for undertaking a diverse range of space activities. While we are yet to see the exact sectoral guidelines that the Government will impose on FDI but as per ISRO Chairman the sectors that were previously closed off to FDI will be opened up to forge mutually beneficial relationship between Government and private players.

 

To ensure effective collaboration between Indian and foreign players, IN-SPACe would be the agency in charge for facilitating foreign investment in space sector and will provide a one-stop interface for foreign players to enter Indian space market. For a foreign investor, investing in Indian space domain presents numerous benefits:

  • Cost-effective: The operating costs of setting up base and launching space vehicles in India is comparatively much less compared to its counterparts like NASA. Nothing illustrates the economical nature of Indian space endeavours better than the words of the Indian Prime Minister Narendra Modi on the Indian mission to Mars costing less than the whole budget of the Hollywood movie Gravity.
  • Exceptional success rate: ISRO is the 6th (sixth) largest space agency in the world and holds an exceptional success rate. India has made a name for itself by successful launch of about 342 (three hundred and forty-two) foreign satellites from over 34 (thirty-four) countries.
  • Innovative equipment: ISRO holds the cutting edge equipments and is also in process to launching SSLV (small satellite launch vehicle) in partnership with private companies. This will provide a greater avenue for foreign players to form partnerships with the Indian space sector.
  • Liberalised space sector: Over the years, ISRO has forged strong relationships with numerous industrial ventures that will be beneficial to foreign players who wish to set up base in India.

Draft Space Activities Bill

As India tries to meet the rising commercial needs of its Indian space program it must balance this against its international obligations to ensure safe and peaceful use of outer space. Regulation of space activities comes under the ambit of international law and to solidify the obligation of sovereign States the UN Committee on Peaceful Use of Outer Space (UNCOPUOS) obligates the State parties to execute domestic space legislations to govern space activities.

 

Pursuant to this, India is in the process of passing a Space Activities Bill that will provide a conducive environment for private participation and lay down a strong regulatory framework for managing space activities. It is proposed the Space Activities Bill will provide guidelines for attracting FDI and regulating private sector participation. The 2017 draft of the Bill provides for a licence mechanism for undertaking commercial space activities. As per the Bill, the Indian Government on an application made by an entity stipulating the proposed commercial space activity will be issued a licence. Based on this, domestic and foreign private players can apply for a licence and undertake commercial space activities on ISRO’s playground.

 

Conclusion

In conclusion, with India having one of the best space programs in the world, the move to allow FDI in space will make India a bigger player in the global space economy. FDI in space will allow foreign players with a window to venture into the India space domain, this will contribute to Indian national and foreign reserves, promote technology transfer and research innovations. Further, the introduction of Indian Space Activities Bill will give greater clarity to private players on how to be an integral part of the space sector.

 

Lastly, at the 72nd International Astronautical Congress held in 2021, the ISRO Chairman emphasised on the government’s intention to create a favourable environment for foreign investment and suggested foreign participants to start investing in India. Therefore, the time is now ripe for foreign enterprises to penetrate and establish a presence in the Indian space market.


† Partner, Khaitan & Co.

†† Counsel, Khaitan & Co.

††† Associate, Khaitan & Co.

 

Experts CornerKhaitan & Co

With the advent of the Draft Mediation Bill, 2021, there is a growing interest to understand the functioning of private institutional mediation. It is important to know that besides the popular court annexed mediation programmes, India also has ad hoc private mediators and institutions offering private mediation services. Hundreds of hours have been spent on creating awareness through webinars and workshops, and you would be surprised to learn that private mediators are still misunderstood for money recovery agents, liquidators, investigators, and many other false identities.

 

Additionally, there is a misplaced fact that private mediation is only limited to pre-litigation mediation or mediations held before a case is filed in court. This is not accurate – as many High Court and Supreme Court Judges are referring disputing parties to private mediation centres. Many of these referrals are either initiated under Section 89 of the Code of Civil Procedure, 1908 (CPC), or before appointing the arbitrator under Section 11 of the Arbitration and Conciliation Act, 1996 (Arbitration Act).

 

The draft Bill on mediation as per reports, is likely to be introduced in Parliament this winter session and we sense that it will be passed into a legislation before the year end. There are plenty of provisions in the draft bill that recognise the roles and responsibilities of private “mediation service providers”; however, this article highlights existing provisions to bust some unfounded myths surrounding private mediation in India, in the pre-legislation era.


Myth: Participating in private mediation means waiving the right to future legal action in court


Fact: Private mediation is a voluntary process. The ultimate goal is to assist the parties in reaching an amicable settlement through dialogue and interaction. If mediation is not successful (parties are unable to arrive at a mutually acceptable solution), parties have the choice to approach the courts to exercise their legal rights and remedies. There is no law in India that prohibits disputing parties from approaching any court because they participated in mediation. In fact, the proposed mediation law [Section 6(1)] strongly advocates for parties taking all possible measures to settle disputes before filing a case in court.

 

As of November 2021, parties can initiate litigation and then pause proceedings to explore mediation, wherein the Judge can refer parties to mediation under Section 89 CPC.

 


Myth: Private mediation is an anti-lawyer practice; legal counsels are not welcome


Fact: Lawyers, who have a dynamic litigation or arbitration practice, continue to play a crucial role in mediation — though, a fundamentally different one. When approached by a client, lawyers orient the client on mediation as an option among other dispute resolution mechanisms. Lawyers assist in identifying the most suitable mediator for the case, bringing to focus relevant documentation and decision-makers, breaking down the complex dispute and streamlining the issues to enhance a fast-track resolution through mediation. Lawyers advise their clients in setting out their expectations, approach, demands and concessions during the mediation process. Of course, any settlement arrived at, during mediation, will also need to be vetted and drafted into a settlement agreement. Although, there is no obligation for parties to bring a lawyer to the mediation table, mediators encourage parties to have sound legal counsel before making and accepting offers.

 


Myth: A private mediation settlement is not recognised by courts, if parties dishonour terms


Fact: A mediation conducted without the reference/supervision/monitoring of the court can be termed as a private mediation. In India, although there is no dedicated legal framework or legislation governing private mediation or settlements reached through private mediation, there are enough legislations already in place giving validity to a mediated settlement reached through a private mediation process.

 

Very often, private commercial mediation in India leans on the procedural framework of conciliation and is governed by Part III of the Arbitration Act. A settlement agreement arrived at through this mechanism is enforceable as a conciliator’s award under Section 74, provided the procedure prescribed under the Arbitration Act is followed.

 

Alternatively, if the parties enter into a privately mediated settlement agreement during the arbitral proceedings, then under Section 30(4) of the Arbitration Act, the settlement agreement is granted the status of an arbitral award which can be enforced under Section 36 of the Arbitration Act.

 

Further, to encourage parties to mediate and settle the disputes, Section 12-A(5) of the Commercial Courts Act, 2015, was introduced. As a step further, it provides that the settlement arrived at under Section 12-A shall have the same status and effect as if it is an arbitral award on agreed terms under Section 30(4) of the Arbitration Act, which can be enforced under Section 36 of the Arbitration Act.

 

Further, an agreement arrived at through private mediation enjoys the same status and enforceability of a “contract” as defined in Section 2(h) of the Contract Act, 1872 i.e. “an agreement enforceable by law”. Thus, if a private mediation settlement agreement satisfies the threshold of being a legally enforceable contract, then the terms of the same can be enforced by seeking recourse to the relevant provisions of the Contract Act.

 


Myth: Private mediators are not recognised by court since they are not trained by the court


Fact: In private mediation, parties mutually agree to appoint a neutral third party as a mediator, based on their trust and comfort levels. Till date, there is no legal requirement that the appointed private mediator should be trained by the court programme — there is no such condition in the Draft Mediation Bill, 2021 too. In private mediation, parties generally appoint a mediator as per the terms stipulated in their contractual mediation clause or upon mutual terms. Once the dispute is resolved, parties enter into a binding settlement agreement. As long as the agreement entered is with the consent of parties and is legally enforceable, the qualifications and accreditations of the mediator have no bearing on the “recognisability” of the settlement.

 

Nevertheless, parties and lawyers are advised to do thorough research, obtaining clarity on their training, background, experience, cultural orientation, etc., before appointing a mediator. Ideally, and as per well-recognised and respected international standards, private mediators should have at the very least completed a 40-hour training by a reputed institute. Private mediators need not be lawyers and may include business and management leaders, teachers, doctors, architects, engineers, artists, social workers, counsellors or any other professionals.

 


Myth: Businesses and corporations must file a court case before considering mediation


Fact: Institution of any action before court is not a precondition to go for mediation. Mediation can be pursued at any time — soon after the disagreement has erupted, after negotiations between the parties have stalled, before filing in court or even after the matter has been pending in court. If the legal agreement between the parties mandates mediation, it would be pursued before a court filing. If not, parties may mutually agree at any time to refer their dispute to be resolved by mediation under the rules formulated by a mediation institution of their choice.

 


Myth: There is no scope for private mediation once arbitration proceedings begin


Fact: Section 30 of the Arbitration Act, which governs the alternate dispute resolution clauses in India, states that the Arbitral Tribunal, with the consent of the parties, may use mediation or conciliation or other procedures at any time during the arbitral proceedings to encourage settlement. This provision gives impetus to settlement by mutual agreement of parties and does not make it incompatible with an arbitration agreement. In the event that the parties settle the disputes during the arbitral proceedings, the Arbitral Tribunal would terminate the proceedings; and if requested by the parties, and not objected by the Arbitral Tribunal, record the settlement terms in the form of an arbitral award on agreed terms.

Of late, courts have referred parties to private mediation while appointing an arbitrator under Section 11 of the Arbitration Act, just innovating an arb-med structure in the Indian justice delivery system.

 


Myth: Mediation settlement agreements are necessarily stored in a depository and registered with the court, as per law.


Fact: A mediation settlement agreement arrived at in a pre-litigation scenario remains completely confidential and is not privy to anyone outside the parties, lawyers and mediators. The common practice by most private mediators and mediation institutes is not to sign on the mediation settlement agreement (even as a witness) as it is completely agreement made by the parties and the mediator has no authority over such an agreement. No outside party can get access to even the knowledge if a mediation has taken place, lest receive information on the mediation settlement agreement.

 

In mediation settlement agreements arising out of a court proceeding or arbitral proceedings, parties may by consent file the same with the arbitrator and request the arbitrator to take the same on record and pass an award in terms thereof or request the Tribunal to just make reference to the mediation settlement agreement and state that as the arbitration is settled in terms of the mediation settlement agreement, the proceedings stand terminated. As regards the court, a similar process may be followed by consent of parties where the court may be informed of and shown the mediation settlement agreement and requested to dispose of the proceedings in terms of the same. Parties may request the court to refer to the same but may not file the same in the court. If filed in the court, a request may be made to the court to place the agreement in a sealed envelope due to the nature of its confidentiality.


† Raj Panchmatia is a Partner in the Dispute Resolution practice group at Khaitan & Co. He has rich experience in the field of dispute resolution and commercial litigation, both at the domestic and international fora.

†† Jonathan Rodrigues leads the Corporate Relations vertical at CAMP Mediation.

Experts CornerKhaitan & Co

Indian tax law is routinely amended by the Parliament. While well-reasoned amendments serve as a tool to rectify lacunae in the existing law, retrospective amendments are inherently controversial.

 

Retrospective amendments introduced in 2012 enabled the Government to tax gains on certain transactions from 1-4-1961. The tax net was widened to include share transfers of foreign entities deriving substantial value from assets in India (also colloquially referred to as “indirect transfer”). Against this backdrop, there was widespread apprehension on the possible negative impact of capital inflows in an emerging economy like ours.

 

Fast forward to today, the Government has passed a separate amendment[1] (2021 Act) in the Income Tax Act to nullify the retrospectivity in the law on offshore indirect transfers undertaken prior to 28-5-2012. Accordingly, orders raising demand on account of retrospective charge would stand nullified where the taxpayers agree to withdraw all pending litigation and waive their rights in all forums (including international arbitrations). As part of such trade-off, the Indian Government will refund all taxes collected on account of such retrospective application of law.

 


Background


Offshore indirect transfers took center stage during the Vodafone[2] controversy wherein the  Supreme Court unequivocally held that Indian domestic tax law (at the time) did not permit taxing an offshore indirect transfer. However, the legislature expressed that the Supreme Court judgment was   inconsistent with the legislative intent of the then existing provisions under Indian tax law (as acknowledged by the Statement of Objects and Reasons of the Bill of 2021 Act). Subsequently, the Parliament retrospectively amended the statute to “clarify” that an offshore indirect transfer in India has always been deemed to be a taxable event.

 

In some other parts of the world too, Revenue Authorities have sought to tax offshore indirect transfers (such as Bharti Airtel’s acquisition of Zain Telecom in Africa and purchase of Petrotech by Ecopetrol in Peru). From a source country perspective, transferring source country’s assets through indirect share transfers at an offshore level is nothing but an effective “transfer” of assets in the source country. The source country naturally wants its share of the pie and claims tax on proportionate gains attributable to value derived from the assets located in the source country.


Ensuing disputes and arbitrations


The need to undertake concrete measures to address the negative effect on foreign investor sentiment was evident almost immediately. An Expert Committee chaired by Dr Parthasarathi Shome in 2012 made a case for the amendments to be made effective prospectively[3]. However, despite successive changes of Governments, the amendments stayed in the statute.

 

According to Government’s own data, tax demands were raised in 17 cases involving indirect transfers undertaken prior to 2012. Out of the above, two cases were stayed by the High Courts and bilateral investment treaties (BITs) with UK and the Netherlands were invoked in other four. In the past few months, Arbitral Tribunals ruled in favour of the taxpayers in the arbitrations of Vodafone International Holdings BV v. Republic of India (Vodafone)[4] and Cairn Energy Plc and Cairn UK Holdings Ltd. v. Republic of India (Cairn)[5]. The tribunals based their view upon violation of the “fair and equitable treatment” standard guaranteed to the investors under bilateral investment treaties. Consequently, the Arbitral Tribunal awarded Cairn a billion dollar in damages for the “total harm” suffered by them as a result of breach of BIT with India. Such cases are a reminder of limits placed by international law upon sovereign right of taxation. International law recognises States sovereign right to tax and determine whether a specific transaction is chargeable to tax or not. However, the manner and imposition of tax on the foreign investor can be tested on the anvil of “fair and equitable treatment” under various BITs.

 

Until recently, news reports suggested that India did not accept the arbitration awards and appealed the decision in both Vodafone[6] and Cairn case[7].  At the same time, Cairn moved the United States District Court in the Southern District of New York (SDNY) on 14-5-2021 stating that they intended to enforce the arbitration award[8]. Cairn sought seizure of assets of Air India as “an alter ego of Indian Government” on the premise that Air India is State owned and “legally indistinct” from the State. For now, the US District Court has stayed the proceedings in light of any potential settlement that might be agreed between Cairn and India[9].

 


Course correction


 

The key aspects of the 2021 Act are as follows:

  • Non-levy of taxes on offshore indirect transfers undertaken prior to 28-5-2012 i.e. the law on taxation of indirect transfers has been made prospectively applicable from the date of the amendment.
  • Government would nullify the demands raised, subject to withdrawal of pending litigation by the taxpayers (including, international arbitration). The taxpayers are also required to furnish an undertaking waiving their rights to seek or pursue any remedy in connection thereto.
  • Refund of taxes which were collected pursuant to demand raised on account of indirect transfers. However, the Government would not be paying any interest on refund of the tax amounts.

 

The enactment of 2021 Act as a means to settle the long-drawn controversy is a welcome move. Though delayed, the amendment, along with the Government’s efforts to revamp the tax ecosystem to bring out a change in how taxpayers are assessed could enhance investor confidence. Having said that denial of interest on principal tax amount not only denies the existing right of a taxpayer enshrined in the statute book, but it also results in inequitable treatment. However, the larger construct behind the enactment cannot be faulted with.

 


Way forward


It is hoped that 2021 Act will draw the final curtains to the decade long controversy. There are however some notable lessons that may be drawn from this matter:

  • Changes in law, specifically tax law, should be guided by sound policy rather than revenue considerations alone. While the controversy disparaged India’s image as an investment jurisdiction, no meaningful revenue was collected from such measure. In a world driven by cross-border investments, having a sound tax policy will ensure that India is seen positively as a country that honours its treaty obligations and presents tax certainty which will in turn attract more investment, possibly leading to higher tax collections.
  • In addition, considering the changing international tax ecosystem, it would serve well if the dispute resolution mechanisms were relooked at to provide for a faster resolution of tax disputes.

Partner, Khaitan & Co.

†† Associate, Khaitan & Co.

[1] Taxation Laws (Amendment) Act, 2021, See HERE

[2] Vodafone International Holdings BV v. Union of India, (2012) 6 SCC  613 : (2012) 341 ITR 1.

[3] See HERE.

[4] (2012) 6 SCC  613

[5] PCA Case No. 2016-7.

[6]See HERE.

[7]See HERE.

[8]See HERE.

[9]See HERE.

Law Firms NewsNews

Mayuri Tiwari Agarwala graduated from GNLU in 2010 and completed her masters from Columbia Law School, New York in 2015. Her practice focuses on domestic and international arbitration, complex commercial litigation and public international law. Prior to joining Khaitan, she was with Shardul Amarchand Mangaldas, Mumbai and was an Associate Counsel at Singapore International Arbitration Centre (SIAC).

Mayuri is a member of Young International Council for Commercial Arbitration (YICCA), Young Singapore International Arbitration Centre (YSIAC), Young Mumbai Centre for International Arbitration (YMCIA) and Young International Arbitration Group (YIAG).

 

She regularly represents clients in international arbitrations, seated throughout the world (Singapore London, the Hague, New York Mumbai, Delhi etc.) conducted under different arbitration rules (SIAC, LCIA ICC UNCITRAL ICSID etc.) and different laws (Indian law, English law, Singapore law, New York law, etc.) across a wide range of industries (infrastructure, construction energy, oil & gas, healthcare etc.). She regularly acts for foreign investors against States under various bilateral investment treaties and represents clients in domestic arbitration and litigation related to arbitration before Indian Courts.

Op EdsOP. ED.

The Trade Marks Rules, 2017 (New Rules), which repeals the Trade Marks Rules, 2002 (Repealed Rules), have come into effect from 6 March 2017. The key highlights of the new Rules are broadly set out below:

New applicant category

>Under the New Rules, a new category of applicant has been introduced viz: Start-up / Small Enterprises / Individual.

Increase in official fees

>There is a steep 100% increase in fees for most applications / requests. The New Rules provide for a 25% increase in trade mark application fee in case of an individual / start-up/small enterprise applicant. For other applicants, the trade mark application fee has increased by 150%. With a view to encourage electronic filings, there is 10% concession on official fees for e-filings.

Forms simplified

> The Repealed Rules had more than 70 forms / applications for various purposes whereas the New Rules have consolidated the same and the number of forms / applications has been reduced to 8 (eight). The new forms have been simplified further and are now named using alphabets. For example: (i) Form TM-A for applications: (ii) Form TM-O for oppositions; etc.

Electronic communication

>The New Rules set out the modalities for service of documents through electronic communications, from the Trade Mark Registry (TMR) to the applicants. While providing the address for service in India, the applicant is necessarily required to provide an email address as well. Any written communication from the TMR to the postal address or email address as provided shall be deemed to be properly addressed.

User claim made stringent

>When a trade mark application is to be filed for the purposes of claiming ‘prior user’, the same has to be supported by an affidavit along with relevant user documents.

Expedited registration process

>On an application for expedited examination, the examination stage as well as subsequent stages including oppositions will be expedited. The Repealed Rules provided for an expedited examination process which at times led to stalling of an application, subsequent to the examination stage.

No extension of time

>The Repealed Rules allowed for additional time for filing evidences in case of oppositions and rectifications / cancellation proceedings. The New Rules do not provide for any additional time as the legislative intent is to mainly curtail prolonged opposition/rectification proceedings.

Expeditious Hearing

>The applicant / opponent shall be given only 2 (two) adjournments in respect of a hearing and each adjournment shall not be for more than 30 days.

>Hearings at the TMR may also be held through video-conferencing or audio-visual communication devices.

Renewal

>Under the New Rules, fees for the renewal of a mark can be paid 1 (one) year prior to the expiration of its registration whereas in the Repealed Rules it was 6 (six) months prior to the expiration of registration.

Applications for Well-Known Marks

> This application will now be possible at a steep fee of INR 100,000.

>Under the New Rules, any person can file an application with the TMR to include a mark in the list of well-known marks maintained by the TMR. Such a request has to be supported by necessary documents. However, before determining a trade mark as “well-known”, the Registrar may invite objections from the general public.

>Notably, the Registrar of trade marks now has the power to remove a trade mark from the list of well-known marks if it is found that the same has been (i) erroneously or inadvertently included; or (ii) no longer justified to be, in the list of well-known trade marks.

Khaitan Comment: The New Rules are certainly a step towards expeditious trade mark registration process in India. The other notable takeaways of the New Rules are: (i) increase in fees; (ii) simplified forms; and (iii) provisions for determining a mark as a well-known trade mark.

Smriti Yadav (Counsel), Rajeevkumar Nambiar (Senior Associate) and Raj Rao (Senior Associate)

Note by Khaitan & Co., Advocates since 1911. For more information, please contact editors@khaitanco.com

 

Op EdsOP. ED.

The United Kingdom has voted to leave the European Union (EU) in its recent referendum on continued EU membership (Brexit). This has significant implications for trade between India and the UK as well as for Indian businesses with operations located in the UK. The immediate market shock is still being felt, but in this briefing note, we assess the emerging considerations for Indian businesses with exposure to the UK and the EU.

Key emerging thoughts

Economic and market consequences: The market is still absorbing the news and there is the immediate currency and stock exchange volatility.  There are also the wider consequences for the UK economy, with experts highlighting the downside risks (at least in the short term), which will need consideration by the boards of any companies with significant UK or EU exposure.

Brexit is not an immediate event and will take time to work through: The timing of Brexit is not clear and it may be some time before Brexit is fully implemented; until then, much of the current regulatory regime in the UK may continue in force.  This gives useful breathing space to Indian businesses seeking to assess their strategic options.

Much of the consequences depends on what the UK does from here on: The shape and form of the likely changes is still unclear as much of it will depend on the arrangements, if any, that the UK negotiates with the EU. For example, if it were to leave the EU and join the European Economic Area (EEA) and the European Free Trade Area (EFTA) in a manner similar to Norway, then a number of EU laws will continue to apply. If, on the other hand, the UK elects to pursue a path outside of this (or outside of only EFTA membership), then the regulatory impact will be greater.

Key regulatory touch points: Much of UK company and contract law will likely continue to remain in place, as well as the UK’s public takeover regime. However, there are a number of other areas, in particular, employment laws, laws affecting visas and migration and financial services regulation, where a number of more significant changes are likely to occur. Competition law is also likely to see some change, for example, the larger M&A deals will be likely subject to both UK as well as EU competition clearance processes.

Regulatory impact on the City of London as a global financial centre: There are concerns over the implications for the City of London as a financial centre. From a regulatory perspective, there are a number of quite difficult issues that market participants will need to consider. For example, financial services regulation is likely to need considerable re-working to disentangle UK regulation from the EU regulation as a result of previous implementation of the EU’s financial services action plan in the 2000s.  One of the key issues here is the potential loss of “passporting” provisions which facilitates access to investors in other European markets, will be a concern to Indian businesses in the longer term.

Potential tax consequences: This is not clear yet. Without the need to comply with EU law, there may well be a number of changes both in relation to direct and indirect tax.

Indian businesses that have Brexit exposure: Those with UK operations (which may be affected both by any downturn in the UK economy, but also changes to employment laws and the ability to hire talent from outside the UK. Businesses which have used the UK as a hub for a European presence will also be affected.  Finally, exporters to the UK will be affected by the currency volatility. However, it is difficult to say at this stage what the precise impact will be as a lot depends on what pat the UK takes from here.

Questions and answers on Brexit

  1. How is Brexit going to be implemented and what is its likely timeframe?

One possibility is for the UK to invoke the EU exit process under Article 50 of the EU Treaty, which sets into motion a two year transitional period. That period can be extended if all the member states agree. News reports suggest that senior members of the “leave” campaign do not currently favour this approach and would prefer a special and negotiated exit. However, that is not an approach favoured by EU officials who have suggested that the next step should be a quick departure for the UK.

  1. How will Brexit affect my company’s operations in the UK?

At this stage, there are more questions than answers.  However, some of the key issues that Indian businesses will need to consider are set out below:

Ø                 Revenue exposure: The impact of sterling revenues on the overall business performance will need strategic consideration at a board level.

Ø                The ability to hire non-UK employees and the terms of employment: Given that immigration was at the centre of the “leave” campaign, Indian businesses should expect some restrictions to be imposed here. Will Indian businesses be able to hire skilled employees or otherwise import their skills through secondment arrangements? Obvious stress points include IT, where there is a skills shortage in the UK, or senior management or skilled technicians continental Europe. There are a number of aspects to this issue:

  • As far as the ability to hire EU nationals is concerned, the shape and form of any changes as far as EU migration is concerned will depend very much on the path the UK takes and its future visa policies as well as whether or not it accepts EEA membership (which is likely to mitigate the consequences).
  • As far as the ability to hire non-UK nationals is concerned, the political mood is not encouraging, although there has been discussion of a “points based” migration system to fill skills gap.
  • On the other hand, in the longer term, Brexit may result in the relaxation of various EU employee protection measures (but that will depend on the political leaning of the party in power in the UK).

Ø                 Impact on imports and exports into and out of the UK: Exports to the UK and trade between the UK and other countries, including the EU remains a question mark. The likely outcome is not clear. If the UK were to remain part of the EEA and EFTA, in many respects, trading with the EU would continue unaffected. If, on the other hand the UK elects to “go it alone” and rely on its WTO membership and negotiate bilateral deals with other jurisdictions, there could be a period of protracted uncertainty. At this stage, all that Indian businesses can do is to watch and plan for the various possible scenarios.

Ø                Intellectual property: To the extent that intellectual property is being created in the UK, Indian businesses will want to seek UK legal advice on the likely impact of any EU community wide protections sought in the longer term. This is a larger issue that will probably unfold as part of the exit arrangements.

Ø                 Tax impact? This is not clear yet. There may be changes to both the direct and indirect tax regimes as the UK removes the linkages to EU law.

This is not an exhaustive list and there are a number of issues that an Indian company with operations in the UK will need to consider. However, given that it is likely that Brexit will be a process that unfolds over a few years, Indian businesses are likely to have the time to put in place appropriate strategic plans.

  1. How will Brexit affect inbound M&A into the UK? There are a number of aspects that an Indian buyer will need to bear in mind:

Ø                 No short term impact: If an Indian company were to make a commercial decision to acquire a UK target or business in the near term, there is likely to be little immediate regulatory impact of Brexit as the current regulatory regime will continue until a plan to give effect to Brexit is formulated, agreed with the EU and then actually implemented. Of course, any M&A decision will need to factor in the longer term outlook for the UK and from that strategic perspective Brexit is very relevant.

Ø                 MAC clauses: There are two aspects to this:

  • To the extent that an Indian purchaser has entered into a purchase agreement that has not yet completed, the question may arise as to whether any termination clauses such as material adverse change (“MAC”) clauses can be used to terminate the arrangement.  The answer will depend on the commercial intention of the parties and how the clauses have been drafted. That said, MAC provisions are not traditionally seen as being easy to enforce in the UK (and the Takeover Panel was reluctant to allow its usage post 9/11).
  • To the extent that Indian buyers are still negotiating purchase agreements, they may wish to pay particular intention to the drafting of these provisions and any carve outs.  The intention of the parties must be clear and practice may evolve so as to tie these events to certain definitive triggers, as otherwise, they tend to be difficult to enforce.

Ø                 Change of law risk: Indian parties entering into M&A transactions in the UK would be well advised to consider “change of law” risk allocation provisions. Again, this is more relevant to the longer term when the effects of Brexit begin to bite on the regulatory side, rather than in the immediate term.

Ø                Employee transfers: Indian purchasers of businesses in the UK will be familiar with the Transfer of Undertakings (Protection of Employees) Regulations 2006 (“TUPE”), which regulates the transfer of employees in a business acquisition and which was originally based on the EU’s Acquired Rights Directive.  In the short term, before Brexit is implemented, there will be no impact, but it remains to be seen as to whether TUPE will change post Brexit.  There may potentially be some softening of employee protections, but this is an issue for the longer term rather than for the near term.

Ø                 Pensions related issues: Pensions and unfunded pension liabilities are a significant issue in UK M&A deals. Indian parties would be well advised to seek the advice of their English legal counsel on any changes which may flow through to their deals.

Ø                Competition issues: The UK has its own self-standing competition regime which is very similar to the EU regime. The main impact on M&A transactions, which again will be post-Brexit rather than in the short term, will be the likelihood of parties undergoing competition clearance processes in both the UK as well as the EU.

  1. Should we reconsider English law as the governing law of our contracts? English contract law is very different from that in continental Europe and is favoured for its certainty, the UK approach of enforcing the parties’ contractual intentions and the speed and sophistication of its judicial process. None of that will change with Brexit and, in our view, there is no reason for this alone to cause parties to re-consider the choice of English law as the governing law of their contracts.

That said, it is likely that the enforcement of UK contracts in EU jurisdictions becomes more time consuming and potentially more difficult in practice, because it would also result in the loss of the benefit of EU legislation on the enforcement and recognition of judgments.  The outcome here will depend on whether the UK becomes a signatory to other international treaties in relation to this subject matter or whether it signs, for example, the Lugano convention. The fall-back will of course be for contracting parties to rely on international principles of conflicts of law to enforce UK awards in the EU, which may make their enforceability more time consuming, but not impossible.

In any event, international arbitration relating to Indian parties, where the proceeding are based in London, will be unaffected because both India and the UK (and many other jurisdictions) are the signatories of the New York Convention, which ensures the enforceability of international arbitral awards.

  1. What is the likely regulatory impact on securities issuances by Indian companies in the UK? As with a number of other aspects of Brexit, this is an issue that is more likely to have a longer term impact rather than an immediate one (as the current regulations will continue to remain in place for now). The one short term point of note is that parties may wish to consider including Brexit and market dislocation related risk factors in any offer documentation.

However, the longer term regulatory picture is quite complicated. Broadly, the UK implemented the EU’s financial services action plan in the 2000s aligning English securities laws with pan-European legislation to create common standards across the EU.  The regulatory aim was to create a broader European securities market with market participants regulated in any one “home state”, being able to passport themselves to other EU jurisdictions.

Unravelling this will be particularly difficult in practice. The regulatory challenge will be in ensuring that issuers listing in London are not precluded from marketing their securities to investors elsewhere in Europe (or do not face onerous requirements in doing so).  This is a critical issue, given the importance of financial services to the UK economy, and is an issue that will be no doubt carefully considered in the exit arrangements.

  1. Will there be any immediate adverse personal impact for promoters based in the UK? Not in the short term. In the longer term, Indian promoters may face increased visa and migration issues (both for themselves as well as for their employees) and will need to keep a close eye on any tax changes that may unfold.

Comment

Brexit is a landmark event. Everyone agrees on the challenges that it has thrown up, but the answers are not obvious to policymakers in the UK or to market participants and may not reveal themselves until discussions between the UK and the the EU on the terms of exit begin and until the UK makes a number of subsidiary political choices, such as whether or not to remain in the EEA and/or EFTA.

Once agreed, the changes will probably be phased in in a sensible manner. Therefore, apart from the immediate impact on any sterling revenues as a result of the volatility of the pound or any downturn in the UK economy that may or may not arise, Indian businesses will have some time to evaluate their strategic alternatives. However, our advice is that they do so as soon as possible and keep abreast of political developments in the UK for an orderly transition as far as their businesses are concerned.

–    Nikhil Narayanan  (Partner)

Note by Khaitan & Co, Advocates since 1911. For more information contact editors@khaitanco.com

Picture Credits: neogaf.com

 

Legislation UpdatesNotifications

Definitive anti-dumping duty imposed on imports of measuring tapes originating in, or exported from Chinese Taipei, Malaysia, Thailand and Vietnam for a period of five years.

[Ref: Notification No 16/2016- Cus (ADD) dated 13 May, 2016]

Note by Khaitan & Co, Advocates since 1911. For more information contact editors@khaitanco.com