VHVK E Newsletter August 2021
Aug 2021
Volume V Issue 4
VHVK Law Bulletin
In this fourth issue of VHVK Law Bulletin for 2021, we are pleased to present the following:
- Legal protection for product designs under Designs Act, 2002 not available for functional standards of products (Delhi High Court)
- Gold Exchange proposed, and draft regulations published (SEBI)
- Sharing forwarded messages on WhatsApp is not “insider trading” (Securities Appellate Tribunal)
- Moratorium under Insolvency & Bankruptcy Code applicable to electricity bills for office work (National Company Law Appellate Tribunal)
- Bidders quoting same price, by itself, does not amount to bid rigging (Competition Commission of India)
- Chief Financial Officer cannot initiate legal action against shareholder group without board authority (Karnataka High Court)
Mere product functionality not entitled to protection under Designs Act, 2002
When a product merely meets pre-defined functional standards, it would not qualify for protection as a “design” under the Designs Act, 2002. Laying down this principle in Kamdhenu Ltd v Ashiana Rolling Mills Ltd,1 the Delhi High Court dismissed the infringement suit and granted a summary judgment in favour of the defendant.
The plaintiff, Kamdhenu Ltd, had registered a product design for steel bars under the Designs Act, 2002. This was on the basis the “double ribs” pattern and related features on the bars were new and original. Kamdhenu Ltd sued Ashiana Rolling Mills alleging infringement of its design. Resisting the lawsuit, Ashiana pointed out the “double ribs” pattern on steel bars was only a functional standard and it was in compliance with the applicable product standard for steel bars (British Standard 44449:2005, category B500C). Ashiana charged Kamdhenu with supressing this fact in obtaining registration under the Designs Act and argued that Kamdhenu was not entitled to protection under the Designs Act.
Accepting the submissions, the Delhi High Court rejected the case and granted a summary judgment in favour of Ashiana. In doing so, the court noted “despite functionality, no distinct feature that can claim novelty was revealed, deserving design registration.”
SEBI proposes Gold Exchange
Following the announcement made in the Central Government budget for 2021-22, Securities & Exchange Board of India (SEBI) has moved ahead with steps to establish a Gold Exchange. In May 2021, SEBI issued a Consultation Paper that proposes a regulatory framework and draft regulations for managers of vaults that would house physical gold.2
Trade will be in electronic instruments that represent physical stock of gold. The instruments, termed Electronic Gold Receipts (EGR), would be backed by physical reserves of gold held in vaults by regulated entities. EGR holders will have the option to redeem the instruments in gold.
Two important themes are apparent in the SEBI Consultation Paper. One, the goal is to develop a stable structure and efficient systems for the gold exchange. Two, in doing so the effort is to look to the current model of trade in securities (shares and bonds) and the existing trade infrastructure (stock/commodity exchanges), and adapt them for the Gold Exchange. The SEBI Consultation Paper seeks feedback from stakeholders on several issues related to the Gold Exchange, including the following.
- Should a new exchange be created or can existing stock exchanges be allowed to deal in EGR?
- Should trade be permitted in smaller denominations (10 grams, 5 grams, or even lower), to promote greater participation and liquidity in the market?
- Should beneficial owners of EGR be made liable for storage/vaulting charges?
- Should beneficial owners of EGR seeking redemption in physical gold be liable for delivery charges?
- What kind of tax rules (incentives, exemptions, modifications) must be sought from the Government of India, to promote the EGR market?
The proposed Gold Exchange aims to provide liquidity for the vast holdings of the yellow metal that have been accumulated in India – historically, but more so in the recent decades. Conventionally, gold has been considered a sterile asset, but one that has enduring value and will appreciate over time. This represents the “property” dimension of gold holdings. From here, the transition the government and SEBI aim for is to make gold liquid, with ability for holders to convert into cash through trade on regulated markets.
Sharing forwarded messages on WhatsApp is not “insider trading”
Circulating forwarded messages received on WhatsApp does not amount to sharing unpublished price sensitive information. Consequently, it would not attract the rule against insider trading. Securities Appellate Tribunal’s came to this conclusion in Shruti Vohra v Securities and Exchange Board of India,3 and quashed the penalty levied on market professionals that shared forwarded messages within their groups.
Acting on media reports that price-sensitive information about some companies had been shared on WhatsApp before publication of results by companies, SEBI launched an investigation in November 2017. The list of companies included several high-profile names – Bajaj Auto, Bata India, Ambuja Cements, Asian Paints, Wipro and Mindtree. On completion of the investigation, SEBI found close similarity between the data some market actors had shared and the corporate results that were soon published by the companies. Treating this as insider trading, SEBI levied penalty (₹ 15 lakhs each) on the professionals under the SEBI (Prohibition of Insider Trading) Regulations, 2015.
Challenging the penalty, the appellants argued they had merely shared the messages received by them; they were not the originators of the messages. They also pointed out they received several other messages of a similar nature, but with inaccurate information. Circulation of information about companies was a market practice termed “Heard on (Dalal) Street)” and occurs regularly. In levying the penalty, SEBI had only chosen to look at the companies for which the market-circulated information was accurate and ignored other reports that were off target.
The Securities Appellate Tribunal accepted the appellants’ contentions and held that sharing forwarded messages, by itself, does not violate the rule against insider trading. On this basis, the Tribunal deleted the penalty.
Electricity for office work not covered by moratorium under Insolvency & Bankruptcy Code
In Executive Engineer Uttar Gujarat Vij Co Ltd v Devang Samapat,4 the National Company Law Appellate Tribunal (NCLAT) held that electricity charges incurred for office work do not qualify as operating expenses under the Insolvency & Bankruptcy Code (IBC section 14). Accordingly, no directions can be issued for payment of the electricity charges during the moratorium period.
IBC (section 14) protects corporate debtors in insolvency resolution process from disruption in the supply of “essential goods and services” during the moratorium period. The rule is onerous; suppliers must continue to make sales to distressed corporate debtors despite not receiving payment for sales. To mitigate the resulting hardship to suppliers, a new rule was introduced recently. It applies to a more select set of “goods or services critical to protect and preserve the value of the corporate debtor and manage [the debtor’s] operations as a going concern” (section 14(2A)). Sellers in this limited category can stop further sales to debtors in insolvency resolution process, if they are not paid. The rule permits payments to select suppliers that provide “critical” goods and services.
In Executive Engineer v Devang Samapat, NCLAT considered whether electrical power used for running the debtor’s office to facilitate the Insolvency Resolution Professional’s work is a “critical” service. Affirming the ruling of the Company Law Tribunal, the Appellate Tribunal held power consumed for office work does not qualify for payment during the moratorium period. In effect, during the moratorium period, debtors in insolvency resolution can continue to receive power for keeping their office open for the work of the Resolution Professional, despite non-payment of dues.
Mere similarity in quoted price does not amount to cartelization
Among the bids received for the supply of close to 10 lakh pairs of woollen underpants for military needs, 7 bids met the eligibility standards. Out of the 7 qualifying bids, 2 bidders quoted identical prices. The Competition Commission of India in Directorate General of Ordnance Service v Sankeshwar Synthetics Pvt Ltd,5 rejected a complaint about bid rigging by the 2 bidders and held that mere identity in price cannot amount to bid rigging or cartelization, in the absence of any other evidence of collusion.
The Competition Act, 2002 defines bid rigging as an agreement between enterprises to eliminate or reduce competition for bids, or adversely affect/manipulate the bidding process for products or services (section 3). In the Directorate General of Ordnance Service case, the procurement agency received, as noted, a total of 12 bids in response to its Request for Proposals (RFP) for the supply of woollen underpants. Of these, only 7 bids met the eligibility criteria and qualified for consideration. Among the 7, the price quoted was identical in 2 bids.
Based on price identity, the procurement agency lodged a complaint of rigging by the 2 bidders. No other materials were produced to support the allegation. The Competition Commission held that mere identity in price would not be bid rigging or cartelization, and dismissed the complaint brought against the bidders.
Chief Financial Officer needs authority from directors to sue shareholders
In C Krishniah Chetty & Sons Pvt Ltd v Deepali Co Pvt Ltd, the Karnataka High Court rejected a lawsuit filed without board resolution against a shareholder group alleging violation of intellectual property rights.6 In delivering this ruling, the court pointed out that suits filed against third parties were different from those brought against warring shareholders in family-controlled companies.
The plaintif/appellant, C Krishniah Chetty & Sons Pvt Ltd, is a family-owned company that operates a leading jewellery store in Bangalore. Two branches of the controlling family hold equal shares (50 percent) in the company. They have been in conflict for several years. In this background, the Chief Financial Officer (CFO) of the company filed a lawsuit against one branch of the family to restrain the use of disputed trademarks by those family members. In resisting the suit, the defendant-shareholders argued the suit was not maintainable because the CFO had filed it without sanction from the board of directors.
Agreeing with the plea of the defendant-shareholder group, the Karnataka High Court ruled CFO could not initiate legal action against a shareholding group without sanction from the company’s directors. It pointed out that disputes of this nature – feud among shareholders and lawsuits against one group – are different from taking legal action against third parties to protect companies’ interests. The court rejected the CFO’s reliance on the Code of Civil Procedure, 1908 (Order XXIX Rule 1). Pointing out it was merely a procedural rule that covered verification of pleadings, the court held it did not grant substantive authority to the specified persons (secretary, director, principal officer) to make decisions to launch legal action.
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VHVK Law Bulletin is issued for information purposes only and does not constitute legal advice. For more information on any of the material covered here and/or their implications for your situation, please obtain competent legal advice.