VHVK E Newsletter June 2023

No insider trading offence in the absence of intention

An intention to make unlawful gain from trade in shares with information not yet made public is essential for “insider trading” charges to sustain. With this ruling in SEBI v Abhijit Rajan,₁ the Supreme Court set aside the disgorgement order passed by the Securities and Exchange Board of India (SEBI) against Abhijit Rajan. Under the SEBI order Rajan, Chairman and Managing Director of Gammon Infrastructure Projects Ltd (“Gammon”), had to payback ₹ 1.09 crores that SEBI determined were unlawful gains he made from insider trading.

Gammon, a listed company, had entered into a joint venture with Simplex Infrastructure Ltd; it terminated the joint venture in early August 2013. The termination, being price sensitive information under the SEBI (Prohibition of Insider Trading) Regulations, 1992, ₂ was reported to the stock exchanges by end August 2013. In the meantime, Rajan sold his shares in the market before the joint venture termination was reported to the exchanges. Treating this transaction as “insider trading,” SEBI passed a disgorgement order for the “unlawful gains” Rajan made from the sale of his shares.

Rajan’s defence was there was no lapse in disclosing the price sensitive information to the market and his sale of shares was a necessity to fund Gammon’s debt restructuring. The Supreme Court agreed Rajan had no guilty intention to profit from sale of shares with the as-yet-undisclosed price sensitive information. The ruling clarifies that intention to earn profits based on price sensitive information is a precondition for insider trading.

No special protection for MSME against SARFAESI proceedings

Holding that the overriding clause under the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act) has limited application, the Supreme Court refused to grant precedence to the MSMED Act in an asset seizure proceeding under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act). With this verdict in Kotak Mahindra Bank Ltd v Girnar Corrugators P Ltd, ₃ action under the SARFAESI Act will prevail in recovery proceedings against small and medium enterprises (SME).

The jurisdictional Tehsildar at Naib, Punjab refused to assist Kotak Mahindra Bank in taking possession of the secured assets of a SME citing the issue of recovery certificate to another creditor under the MSMED Act. Ruling that the overriding provision in the MSMED Act (section 24) has a limited application – namely, providing for a different dispute resolution procedure for SME, the Supreme Court disagreed with the stand taken by the Tehsildar. On the contrary, the Supreme Court held the overriding provision in the SARFAESI Act was broader in scope. Therefore, there was no bar on taking action under the SARFAESI Act despite the pendency of proceedings under the MSMED Act.

The ruling of the Supreme Court adopts a more literary approach that overlooks the ameliorative effort the MSMED Act makes for small enterprises. This can undermine the legislative intent that informs the MSMED Act.

Google breached competition law, Appellate Tribunal rules

In Google LLC v Competition Commission of India,₄ the National Company Law Appellate Tribunal upheld the penalty of ₹ 1,337 crores levied on Google for anti-competitive practices. More importantly, the Appellate Tribunal affirmed most of the directions issued by the Competition Commission of India (CCI) to Google to discontinue its anti-competitive practices.

The directions upheld by the Appellate Tribunal are summarized below.

• Original equipment manufacturers (OEM) can choose from Google’s proprietary applications to be pre-installed. They cannot be compelled to pre-install the complete bouquet of applications.
• OEM can decide the placement of pre-installed apps on their smart devices, without any necessary preference for Google apps.
• Licensing of Google Play Store shall not be linked with the requirement of pre-installing Google search services, Chrome browser, YouTube, Google Maps Gmail or any other application of Google.
• Google shall provide access to its Play Services APIs (Application Programming Interface) and not place OEMs, app developers and its existing or potential competitors at a disadvantage.
• Google must not offer any monetary other incentives to OEMs for ensuring exclusivity for its search services.
• Google shall not impose anti-fragmentation obligations on OEM and bar “forked” operating systems that are developed by third parties from Android.

National Company Law Appellate Tribunal’s affirmation of Competition Commission of India’s order against Google underscores ongoing vibrancy in the enforcement of market integrity rules – a necessary safeguard against abuse by dominant companies.

Sureties not automatically relieved from liability upon approval of insolvency resolution plan

When directors offer personal guarantees for companies’ dues, their liability continues despite approval of insolvency resolution plans (IRP) for the companies. With this verdict in Narendra Singh Panwar v Pashchimanchal Vidyut Vitran Nigam Ltd,₅ the Allahabad High Court introduces a new twist in the ongoing experience with the implementation of the Insolvency and Bankruptcy Code, 2016 (IBC), particularly with regard to the obligations of sureties.

In Narendra Singh Panwar, the electricity supplier of the company attempted to enforce a guarantee provided by a director in 2013, long before the company went into insolvency resolution process. The enforcement effort began in August 2022, several months after an Insolvency Resolution Plan (IRP) was approved for the company in March 2022. This effort by the electricity company effectively sidestepped the IRP that included electricity arrears; it represented an independent effort to recover these dues.

The Allahabad High Court, as noted, upheld the efforts of the electricity company to seek remedy outside the IRP. This introduces an element of uncertainty in IRP and can have a destabilizing impact for debtor companies by enabling creditors to pursue parallel remedies even when IRP is under implementation.

Joint venture liabilities binding on partners

In ITD Cementation India Ltd v SSJV-ZVS Joint Venture,6 the Delhi High Court held parties to a joint venture would be liable for the debts and obligations of the joint venture. This reaffirms the established position that joint ventures (JV) are in the nature of partnerships and liabilities they incur can enforced against JV partners.

It is common practice for companies entering into JV to incorporate another company as Special Purpose Vehicle (SPV) for the proposed activities. An important question is whether JV partners can be responsible for their JVs’ liabilities. At law, JVs have generally been treated as partnerships for the purpose of fastening liability on JV partners for the debts and obligations of JVs. This is despite the adoption of the company structure for implementing JVs. The Delhi High Court ruling in ITD Cementation India Ltd continues with this position and ensures better remedy for the creditors of joint ventures.

Domestic sales not relevant in determining tax refund on exports

Karnataka High Court in Tonbo Imaging India P Ltd v Union of India,7 quashed the linking of refund of tax on exports to domestic sales. The court held this breached the legislative intention of the Integrated Goods and Services Tax Act, 2017 (IGST Act), to fully “zero-rate” exports and exempt them from both input tax and output tax.

An amendment made to the Central Goods and Services Tax Rules (CGST Rules) attempted to reduce the refund of input taxes paid on export products, by linking the refund amount to the domestic sales of exporters. This amendment to Rule 89 reduced the refund eligibility for exporters that had lower domestic sales. In effect, it penalized top exporters by denying refund of input tax on a portion of their export sales.

As such, the Karnataka High Court held the amendment made to CGST Rules in 2020 to link export sales to domestic sales breached the legislative mandate to completely exempt export sales from taxes in India (IGST Act Section 16(3)). On this basis, the Karnataka High Court quashed the amendment and the effort to reduce refund of input taxes paid on export sales by considering the ratio of export sales to domestic sales.