In Touch, In TuneWith the Developments in Law and Business…

AWARDS ANDRECOGNITIONS

CONTENTS

Amitabh�Sharma�Managing�Partner�

Aninda�Pal�Partner

Bharat�SharmaPartner

Soumya�Kanti�De�Mallik�Associate�Partner

Anjan�Dasgupta��Partner�

Editorial Board

Aparajit�Bhattacharya�Partner

All rights reserved. This disclaimer governs the use of this newsletter. HSA Advocates retain the copyright of all the material published. No part/section can be reproduced in any form without prior written permission from the copyright holder. The views expressed in the publication do not necessarily reflect the views of the firm. The newsletter should not be construed as a legal opinion of the firm on any subject.

Disclaimer

From the Founder’s Desk

HSA - Workplace of Choice

Significant Deals

The Ugly Spat Over E-Pharmacy in IndiaAparajit Bhattacharya

What The Current FDI Policy Foretells The E-Commerce SectorHarvinder Singh

A Director’s Woes Under The New Corporate RegimeSumedha Dutta, Harvinder Singh

Foreign Direct Investment in Indian Railways - Potential Game ChangerAniket Prasoon, Kush Saggi

Grant of Pendente Lite Interest By An Arbitral TribunalAkansha Rai, Anshuman Pande

Impartiality of The JudiciaryMurtaza Kachwalla

Developments To The Laws Relating To Bank Guarantees Impact of the Supreme Court's judgment in Gangotri EnterprisesAnshuman Pande

Reverse Payment Deals in Patent Disputes and its Impact on CompetitionSakya Chaudhuri, Shuchi Singh, Ikleen Kaur

Reforms in Electricity Distribution : A Mile Too Short?Anand K Shrivastava

The Real Estate Act - A Nuanced ViewGarima Singh

CBFC'S Need For Transformation of Approach Post The Udta Punjab JudgmentKunal Badyal

Whether India Needs The Geospatial Information BillVaidehi Naik

Concept of Force Majeure & its Importance in Project ContractsMegha Arora

Right to Recompense in Light of the RBI's Norms on Strategic Debt RestructuringHarsh Arora

HSA Reminisce

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I have completed over two years with HSA now, and as I reflect back at this journey, it has been nothing short of remarkable! I

joined HSA after having left the profession to work for a year and a half, sitting on the other side of the table. There I learned

not only to appreciate lawyers but also to understand the needs of clients, particularly from a legal-commercial perspective.

When I left my position as Global CEO and joined HSA, I had the option of joining any law firm of my choice, but it had to be

this firm. I believe that HSA offers me, personally, a unique and challenging opportunity to build the firm from being midsized to

becoming a firm to be reckoned with over the next few years. The pool of fresh and dynamic talent housed at HSA makes it an

unprecedented and highly competitive workplace. A firm that brims with impeccable energy like ours, is the sort of place I love

walking into every morning. It is this zest, that is steering the firm and paving the way towards achieving a unique position in the

legal market.

Abeezar E. Faizullabhoy Senior Partner

Thirteen years ago, we founded HSA Advocates to address the need of supplementing legal advice with an astute under-

standing of business imperatives.What started as an aspiration, is today an institutionalized practice and a magnet to some

of the brightest minds in the legal industry. In addition to being reckoned with as one of the leading full service law firms

in the country, we are also one of the fastest growing legal practices in India.

Two critical contributors to the firm’s success are 1) our clients, who invest their trust in us and our capability, and 2) our attorneys,

whose passion to excel has been demonstrated by the success of our clients. ‘In Touch, In Tune’ is an honest effort to help both

these groups stay ahead of their respective contemporaries.

India is at the cusp of a transformation; the breakneck pace of developments in business and regulatory environment make it

necessary to read between these lines, and accordingly adjust the sails, to remain relevant.

We strongly believe that knowledge is the currency of power and competitive advantage. To do our bit, we bring to you ‘In Touch,

In Tune’, the HSA newsletter which will provide an objective analysis of latest developments in the country's policy landscape.

HSA Advocates is undertaking this initiative for only one reason – to help you decipher the impact of these developments on your

business and operations. Our raison d'etre is to help you stay ahead of the curve as we continue to create new avenues. I, on behalf

of the editorial team, invite you to play an active part in making 'In Touch, In Tune' a compelling platform. To make every

subsequent edition more relevant, we invite your feedback and suggestions at editorialboard@hsalegal.com

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Hemant SahaiFounding Partner

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Banking & Finance

HSA acted as Lender's Legal Counsel to Rural Electrification Corporation Limited REC) for 1200 MW Teesta III Hydroelectric Project located in North District of Sikkim, one of the largest project finance deals in India in the recent past. HSA advised the REC led consortium of 11 lenders, for the debt financing of INR 113.82 billion, for the development, construction, commissioning, operation and maintenance of 1200 MW Teesta III Hydroelectric Project.

HSA acted as legal counsel to Yes Bank for the term loan and working capital facilities to Wave Hospitality Private Limited (WHPL), aggregat-ing to INR 1550 million for refinancing of outstanding loans & unsecured loans from promoters/group companies utilised for capital expenditure and part funding of ongoing capex/maintenance capex including reimbursement of already incurred capex & maintenance capex.

HSA acted as legal counsel to Allahabad Bank for term loan financing to MEP Tormato Private Limited.

The Lender provided a term loan of INR 500 million towards the cost of implementation of the projects services, which is maintenance of toll plazas at designated tolls by the National Highway Authority of India.

HSA acted as Lender's Legal Counsel to a co n s o r t i u m l ed by Powe r F i n a n c e Corporation Limited (PFCL) and REC

(i) Acting as Lender's Legal Counsel to PFCL for a cost overrun sanction of INR 16.60 billion to KSK Mahanadi Limited for executing, implementing and developing its coal based thermal power plant based at Janjgir Champa District in the State of Chhattisgarh comprising of Units 1, 2, 3, 4, 5 and 6, having installed capacity of 6 X 600 MW.

(ii) Acting as Lender's Legal Counsel to REC for a cost overrun sanction of INR 13.50 billion from REC to KSK Mahanadi Limited for executing, implementing and developing its coal based thermal power plant based at Janjgir Champa District in the State of Chhattisgarh comprising of Unit 1, 2, 3, 4, 5 and 6, having installed capacity of 6 X 600 MW.

This is one of the largest financing in India today. As this is a cost overrun facility it was extremely complicated given the number of consortium members involved in this

financing.HSA acted as Lender's legal counsel to PTC India Financial Services Limited for financing of 19.2 MW wind based power project in Kurnool District, Andhra Pradesh at an estimated cost of INR 1000 million.

HSA advised a wind power developer on the EPC Contracts for 60 MW capacity wind power project, comprising of 30 numbers of wind turbine generators with an installed capacity of 2 MW each to be located at Gurmitkal, Yadgir District, Karnataka.

HSA advised a wind power developer on the EPC Contracts for 40 MW capacity wind power project, comprising of 20 numbers of WTGs with an installed capacity of 2 MW each to be located at Maliya, Morbi District, Gujarat.

HSA advised a leading infrastructure company on execution of the Concession Agreement with NHAI in relation to the four laning of Chutmalpur - Ganeshpur section of NH-72A and Roorkee – Chutmalpur – Gagalheri section of NH-73 in the States of Uttarakhand and Uttar Pradesh under NHPD Phase-IV on Hybrid Annuity Mode.

HSA advised a leading renewable energy company on execution of the Concession Agreement with NHAI in relation to the four laning of Gagalheri-Saharanpur-Yamunanagar (Uttar Pradesh/Haryana Border) section of NH-73 in the state of Uttar Pradesh under NHDP - IV on Hybrid Annuity mode.

Corporate

HSA advised Hero Electronix Private Limited (“Hero”), a part of Hero Group, and Mr. Suman Kant Munjal, Chairman and Managing Director, to acquire majority stake in Tessolve Semiconductor Private Limited and all its group companies, including subsidiaries in USA and Singapore from its existing investors being Jafco Asia Technology Investments IV (Mauritius) Limited, India China Pre-IPO Equity (Mauritius) Limited, Applied Materials South East Asia Pte. Ltd, Reliance Capital Limited, Qualcomm Asia Pacific Pte. Ltd and other shareholders, with a right to acquire 100% of the company at the end of a specified period.

HSA advised OMRO SEA Acquisitions Pvt. Ltd. (a KKR company) on the transfer of business by JVS Engineers (a partnership firm) and 100% acquisition of JVS Industries Pvt. Ltd., India, and JVS Engineers Pte. Ltd., Singapore (“JVS”). JVS is engaged in the

business of oil and gas, including the design, engineering, manufacturing, servicing of upstream oil and gas equipment, which includes well control equipment, jacking system parts, pressure control equipment, bop spools, riser system, diverter system, for drilling rigs and production platform.HSA advised ReNew Power Ventures Private Limited on their acquisition of a SPV engaged in operating 180 MW wind power project located at Bhadhrapuram Extension Area, Anantapur, Andhra Pradesh.

HSA advised C.K. Jaipuria Group in making angel round investment in the Taptap Meals Private Limited, engaged in the business of developing a mobile application 'NOW' for the localized logistics industry, which shall be used for an on-demand 2-wheeler taxi service and food delivery services.

HSA represented Gamma Pizzakraft (Overseas) Private Limited, a CK Jaipuria Group Company, for setting up of joint venture company with Castway Maldives Private Limited, undertaking the business of quick service restaurants as a franchisee of YUM! for operating “Pizza Hut” outlets and “KFC” outlets in Maldives and as a franchisee of Delifrance, for operating “Delifrance” outlets in Maldives.

Disputes & Litigation

HSA represented Alipurduar Transmission Limited (wholly owned subsidiary of Kalpataru Power Transmission Limited) before CERC seeking grant of transmission license and adoption of transmission charges for the 'Transmission system strengthening project in Indian system for transfer of power from new HEPs in Bhutan' being implemented by it on build, own, operate and maintain basis.

HSA represented Nabha Power Limited (NPL, wholly owned subsidiary of L&T Power Development Limited) before APTEL in a matter dealing with arrangement of coal for its 2 x700 MW Rajpura Power Project and ensuring that a consent order is passed allowing NPL to arrange coal from alternate sources throughout lifetime of project to meet the shortfall in supply of required quantum of coal from linked sources.

HSA represented NPL in arbitration proceed-ings against Punjab State Power Corporation Limited (State of Punjab's distribution company) in relation to adjudication of claims arising on account of delay in achieving commercial operation of the 2 x700 MW

Significant DealsSome of the noteworthy transactions that HSA and its attorneys have handled, in the recent past, include the following:

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Rajpura Power Project by the scheduled commercial operation date under the PPA on account of non-fulfillment of reciprocal obligations by PSPCL. [The matter primarily involved recovery of approximately Rs. 50 crores unilaterally deducted by PSPCL towards liquidated damages for delay in commissioning, other losses to the tune of Rs. 150 crores suffered by NPL on account of delay in achieving SCOD and a claim for approximately Rs. 8 crores towards losses suffered by NPL due to deficiency in transmission system provided by PSPCL for evacuation of power.]

HSA represented Inox Renewables Limited (earlier Gujarat Flourochemicals Ltd.), in an international commercial arbitration against world's no. 1 wind energy group, Vestas. The matter was significant in contract law jurisprudence and involved issues relating to misrepresentation of standard terms usually provided in renewable energy contracts – which is a verdant area in Indian law. The arbitration award is a landmark decision as diverse equipment suppliers can now be held liable for underperforming equipment and assets, such as power generation turbines etc.

HSA represented SEPCO, a Chinese state owned power company, in an international commercial arbitration against an Indian power developer involving a claim of over US $ 600 million with respect to a power project in the state of Punjab in India. The seat of arbitration was in Singapore. There was a serious threat on the part of the project developer to illegally encash the Bank guarantees provided by the client as security for performance of the project, valuing more than US $ 200 million. A complex strategy and innovative legal argu-ments were developed which eventually secured an injunction against the encashment of the bank guarantee. Thereafter, the matter was successfully brought to a close by way of a settlement.

HSA represented SEPCOIII, a Chinese state owned power company, in an international commercial arbitration against an Indian power developer with respect to a power project in the state of Odisha, India, involving a claim of over US $ 300 million. The issue arose with respect to breaches under an EPC contract executed

between the parties. HSA represented Shenzhen Shandong Nuclear Power Construction Company Limited, a Chinese state owned company in an international commercial arbitration against Vedanta Aluminium Ltd, the project developer and a major energy and mining conglomerate, for a claim of more than US $ 250 million. The complicated dispute involves substantial questions pertaining to construction laws, contract laws with respect to interpretations of highly technical EPC contracts, the law of damages, as well as environmental law procedures in India.

Projects & Infratructure

HSA advised World Bank with the conceptual-ization and drafting of model documents required to effectively implement the Smart Cities Mission launched by the Ministry of Urban Development, and providing implemen-tation guidance for the special purpose vehicles envisaged to undertake and carry out the smart city projects.

HSA advised Delhi Mumbai Industrial Cor ridor Development Corporation Limited (DMICDC) on the development of projects along the Delhi – Mumbai Industrial Corridor, a mega infra-structure project being the largest infrastructure and urbanisation project in the world, comprising creation of 6 greenfield mega cities covering an overall length of 1483 kilometres between the political capital and the business capital of India, i.e. Delhi and Mumbai.HSA is advising DMICDC, on development of the infrastructure projects along the 550 kms Chennai- Bangalore Industrial Corridor, in the states of Karnataka, Tamil Nadu and Andhra Pradesh.

HSA advised Vizhinjam International Seaport Limited, on evaluation of bids received, and the process of selection of independent engineer in relation to develop-ment of a deep-water sea port.

Taxation

HSA is assisting M/s Khatau Narbheram, a unit of Atha Group in an ongoing litigation

involving recovery of duty convert to INR million Rs. 135 Crore and equivalent amount as penalty against the company. The core issue involved is whether mere crushing and screening of iron ore lumps would amount to manufacture of iron ore concentrate post 1st March, 2011. The matter required thorough analysis of concept of manufacture, interpreta-tion of HSN notes, technical and scientific books pertaining to metallurgy, provisions of Central Excise Act and the Mine Act, 1952.

HSA is advising X Ltd., on the issue as to whether electricity and water charges reim-bursed by a tenant to his landlord, on actuals, would be subject to levy of service tax post 1st July, 2012. The issue involved the analysis of very interesting aspect of definition of “service” whereby activities constituting mere transfer of title in goods in any form got excluded from definition, considering the fact that electricity has been declared as “goods” by the Hon'ble Supreme Court in case of State of A.P. etc. vs. National Thermal Power Corpn. Ltd. and Ors. etc. (2002-TIOL-107-SC-CT).

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Last year's circular issued on December 30, 2015, by the office of the Drugs Controller General of India (“DCGI”),

created quite a fuwre in the e-pharmacy sector in India, when it directed all State and Union Territory drug controllers to maintain strict vigilance on online sale of drugs and take action, in public health interest, against persons engaging in such sales in violation of the Drugs and Cosmetics Act, 1940 (“DCA”) and Drugs and Cosmetics Rules, 1945 (“DCR”). While the circular promulgated that the provisions under the DCR must be complied with both for brick-and-mortar sale and online sale of drugs, the DCGI admitted that no clear differentiation has been made between the two types of sales under the DCR.

The circular is, however, temporary and has certain background, which would explain why it was issued in the first place. Based on representations of various stake holders in the brick-and-mortar pharmacy sector (like All India Association of Chemists and Druggists) and e-pharmacy sector (like Indian Internet P h a r m a c y A s s o c i a t i o n ) , t h e D r u g s Consultative Committee was formed under the DCA. The Committee analyzed the issue regarding online sale of drugs and, after due deliberations, formed a 7-member sub-committee to further analyze the issue of impact of such sales on public health and the provisions under DCA and DCR. The sub-committee invited experts from various fields, such as IT, Medical Council of India, National enforcement, investigation agencies and the like, to express their views and also invited the public to suggest and comment on the issue of such sales. The sub-committee is still involved in deliberations with various stakeholders and until the final report on the issue of online sale of drugs is made available to the public, the DCGI decided, as a temporary safety measure, to issue a direction of firm watchfulness in the e-pharmacy sector.

Another important development, which the e-pharmacy sector ought to watch out for, is the public interest litigation (PIL) filed by N. Ruthynamoorthy in the Madras High Court seeking a direction to Central and State authorities to ban websites selling schedule drugs online in violation of the DCA and DCR as well as the aforesaid DCGI circular imposing strict vigilance in relation to the same. As per the DCA, drugs specified under Schedules H, H1 and X of the DCR, are not permitted to be sold except on a registered

medical practitioner's prescription. However, excluding prescription drugs specified under Schedules H, H1 and X of the DCR, there is a confusion on whether e-commerce players can sell over-the-counter (OTC)/non-prescription drugs listed in Schedule K of the DCR because of certain conditions stipulated in Schedule K, which e-commerce players cannot meet.

It may be recalled that in May 2015, the Maharashtra FDA filed a FIR against Snapdeal CEO, Kunal Bahl, and other directors for selling prescription drugs online. Snapdeal was reportedly selling sildenafil citrate tablets or Viagra (which is only prescribed by urologists, psychiatrists, endocrinologists and dermatolo-gists) as well as OTC emergency contraceptives. Immediately thereafter, Snapdeal removed all listings of products even remotely related to health and medicines. In the same month, the Gujarat FDA raided Prowisor Pharma, a Surat-based online pharmacy.

In February this year, the Maharashtra FDA also took action against Flipkart, Snapdeal and Amazon, for selling drugs online without valid sales bill and requisite licenses, whereas more recently, 5 more portals have come under its scanner for such sales. While FIRs have already been registered by the FDA against e-pharm-acies, MeraPharmacy.com, mChemist.com and Healercart.com, it is in the process of initiating action against the other two e-pharm-acies, Pharmeasy.in and Netmed.com.

In spite of these negative developments, online pharmacies have significantly increased due to growing e-commerce in India. There are various online pharmacies selling medicines under different business models, including an aggregator model, where websites and apps do not directly sell drugs but merely connect local pharmacies to consumers and assist in faster delivery of drugs by permitting such consumers to upload their prescriptions online. An example of such a model is CareOnGo, a drug delivery app, which acts only as a medium for local pharmacies to distribute drugs and has recently raised USD 300,000 in its seed round of funding in February.

There are various players who are vying with each other to grab the largest piece of the USD11.5 billion retail pharmacy pie, which is growing at a rate of 20% year-on-year. Startups like 1mgAyush.com, Healthkart.com, BigChemist.com, Healthgenie.com, Healthadda.com, Medidart.com and

Deemark.com are some of the few names. Online players have been able to offer consumers with better discounts and easier and quickerround-the-clock access to drugs, there by posingtough competition to even large players in the offline space, which is the reason why many chemists and pharmacists have expressed their massive opposition against e-pharmacy. However, there are certain inherent dangers of online sale of medicines in a country like India, where spurious and counterfeit products are rampantly available, although no one denies the rampant violations in the offline space too. No medical store keeps a record of prescriptions. It is a fact that patients order drugs over telephone and neighborhood pharmacies deliver them, without even asking for prescriptions.

The e-commerce sector in India can only hope that in view of the great investments in the e-pharmacy sector and ultimate benefit to consumers by way of easier and quicker round-the-clock access to drugs, with minimum hassles, the Indian government will introduce amendments to the DCA and DCR in order to facilitate online sale of drugs and establish an appropriate and workable framework consisting of the right checks and balances in place to address the same and ensure quality as well as accessibility of drugs to consumers.

The Ugly Spat Over E-Pharmacy in India

Aparajit BhattacharyaPartner

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The Government finally issued its policy in relation to FDI in e-commerce by way of press note no. 3 of 2016. The

said policy seeks to diffuse some part of the ongoing tension between online and offline retailers and bring some relief to the e-commerce sector in India.

The revised FDI policy expressly provides that FDI is not permitted in the inventory-based e-commerce business model, where inventory of goods/services is owned by the e-commerce player. Apart from the above, e-commerce players have been left slightly disgruntled by two predominant issues arising from the revised policy, firstly being , the cap on sales from one vendor or from group companies of the e-commerce players being fixed at 25%, and secondly, the deterrence on e-commerce players from influencing, directly or indirectly, the sale price of goods/services and the requirement that they need to maintain a “level playing field”. Moreover, the policy gives an unfair advantage to some extent, to Indian owned domestic marketplaces, who will have no restrictions at all.

Cap on sales from one vendor comes across as a strong restriction, as the majority portion of sales of most e-commerce players comes from one main vendor, who (in most cases) also happens to be a related/group company of the e-commerce player. Take for example Flipkart, whose majority sales are from WS Retail, which earlier used to be a subsidiary of Flipkart. Similarly, in Amazon's case, Cloudtail India Pvt. Ltd., a joint venture between Amazon Asia and Catamaran Ventures, is the biggest contributor (around 40%) to its sales. The majority sales (around 90%) for Myntra are contributed by Vector e-commerce while for Jabong its through Xerion Retail. This cap attempts to ensure that inventory-based e-commerce business model is not carried on in the garb of a marketplace e-commerce business model. As a result, e-commerce players would now have to go back to their drawing boards to take a relook at their structures.

The restriction on directly or indirectly influencing sale price of goods/services and requirement of maintaining a “level playing field” will be a greater hurdle for e-commerce players to overcome since one of the main attractions for shopping on online market-places is the incredible discounts offered. The restriction and requirement would impact, though not expressly prohibit, the discounting

methods used by e-commerce players. A blanket ban on discounting by e-commerce players cannot be the purpose of the policy since that would put them at a disadvantage and obviously overturn the “level playing field” requirement in favour of brick-and-mortar retailers, which could not be the Government's intention. The e-commerce players will have to be innovative and use other avenues to woo customers, such as subscription/loyalty point FDI and RBI /lock-in program, cash back incentive program, free gifts, etc.

The revised policy is not infallible and the marketplaces are going to enter into opaque contracts with the sellers and find ways of influencing prices indirectly by compensating the sellers with marketing commissions or kickbacks. We are already witnessing the trend of exclusive launches by e-commerce players, where the marketplaces are investing in brand-building of the seller/products, attracting customers, showcasing products and indulging in all kinds of marketing and/or promotional activities on “behalf ” of the sellers and the sellers are giving huge discounts to the customers and selling their products exclusively through such marketplace.

The aforesaid amendments to the revised policy have not yet been notified by the RBI and made into law, in the form of amendments to the Foreign Exchange Management (Transfer or issue of Security by a Person Resident outside India) Regulations, 2000. Whilst the corresponding amendment is likely to be a matter of course, e-commerce players still have some time to rework their organization structure (especially those having large single seller/inventory-based models) and discount-ing strategies. Further, e-commerce players will be facing a lot of uncertainty and will also have to face probable legal challenges as a result of their practices. The Competition Commission of India (CCI) will be the appropriate regulatory authority capable of determining whether the prices of goods/services were being influenced in the e-commerce space, a level playing field is being maintained by e-commerce players or e-commerce players are engaging in unfair trade practices.

Due to the accelerated growth of the Indian e-commerce sector, various market regulators will be keeping a close eye on the operational dynamics of the entities operating in the e-commerce sector. In such a scenario, the Government's efforts to put to rest certain

basic questions pertaining to the commercial practices of such online retail companies is laudable. However, entirely burdening the e-commerce players with the responsibility to ensure fair play to the advantage of brick-and-mortar retailers, is certainly unfair.

It will not be as easy for a brick-and-mortar retailer to win online as online retailing requires an entirely different approach and skillset. However, in order to survive, online retailers will have to cut wastage, create efficient and lean business models, develop new markets and take brands to markets where it's hard to reach, develop vendors and pass on the benefits to the customers.

For the Government, the key is to develop a policy with a road map and a workable framework to carry out the same. The Government should not be dictating to businesses what they can or cannot do especially if it is not an essential life-saving commodity. No one is forcing the marketplaces to offer discounts. It is a business decision and there is no reason to assume that it will go on forever. It is expected that the regulations will most likely evolve by the time it becomes a real threat.

What The Current FDI Policy ForetellsFor The E-Commerce Sector

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Harvinder SinghPartner

The spate of several scams from the year 2009 onwards, viz. Satyam, Saradha Chit Fund, Sahara and Sun Pharma-

Ranbaxy's insider trading issues, to name a few, affected almost all strata of the society. Pursuant to the series of scams, the Companies Ac t , 2013 (CA13 ) ove rhau l ed the responsibilities, accountability and liabilities attached to the position of a Director in a Company. Though stricter vigilance may protect the interest of shareholders and third parties dealing with the Company, it could have far reaching and serious implications on the position of Director.

While various Indian laws already provided provisions holding Directors liable for defaults such as these on the part of the Company, CA13's stringent penal provisions make it more onerous, keeping mind the accountabilities and liabilities, for a person to become a Director of the Company.

Duties of a DirectorIt is a Director's duty to work in the best interest of the Company and its stakeholders. CA13 has, for the first time, not only spelled out the duties of the Directors but has also imposed hefty fines if a Director is found guilty of not fulfilling his duties.

Directors are also responsible for acting with diligence and independence. They are not permitted to get involved in situations where there could be conflict of their personal interest with that of the Company's. In his fiduciary capacity, a Director is required to refrain from attempting to attain undue gain/ advantage directly or indirectly from the Company. What forces a Director to tread with caution is that it will be very difficult for a Director to prove that while holding office he conducted himself lawfully while fulfilling and undertaking his duties. Consent or Connivance of Director, no longer required to make one guiltyThe defense that a particular offence was committed by the Company without the knowledge, consent or connivance of the Director, is no longer available to the Director. As per CA13, a Director who is aware of a contravention by virtue of receiving minutes of the meeting or by participating in the meeting without raising any objection therein, shall be deemed to have knowledge of such contravention. The new legal regime recognizes both remaining silent and not

recording dissent to constitute connivance, thereby requiring Directors to be more cautious as merely by virtue of their attendance in a board meeting they could be held liable as an 'officer in default'. However, if a Director records his dissent in the minutes or otherwise then he will not be treated as an officer in default, unless he is charged by the Board of Directors for the responsibility of such compliance.

Increased compliance burden with serious consequencesThe Director's burden of compliance under CA13 has substantially increased. A large number of resolutions passed by the Board of Directors are now required to be filed with the Registrar of Companies (RoC). This means that the Board of Director's proceedings are no longer private and will be available for public inspection. Compliances have become more burdensome since lapse or non-compliance of such administrative filing requirements attracts hefty fines on every 'officer in default' of the Company.

Responsibility to ensure compliance with all applicable lawsThe Board of Directors is required to send its report along with the audited financials of the Company to all its shareholders, at the end of every financial year. The report has to include Directors' Responsibility Statement (DRS), which is an undertaking by the Board that the Company has devised proper and adequate systems to ensure compliance with all applicable laws.

Firstly, it is unfair to ask a Director, who is not conversant with laws, to confirm that the Company is in compliance with “all” applicable laws. Secondly, if the Company does not have sufficient funds to ensure setting up proper systems, the Directors will have no option but to be non-compliant, which would attract imprisonment and/or fine.

Casual approach in imposing imp-risonmentApart from monetary penalties, certain offences and defaults could attract fines in the range of INR 25,000 to INR 250,000,000, along with imprisonment.

Following are a list of few of the cognizable offences, i.e. offences where persons can be arrested without a Court warrant, for which Directors can be arrested:

1 Furnishing incorrect information to the RoC while registering the Company

2 Authorizing issue of prospectus that contains misleading statements

3 Fraudulently inducing persons to invest any money into the Company

4 Conducting business for a fraudulent or unlawful purpose

5 The Company making an offer or accepting money in contravention of private placement guidelines

The RoC can impose a monetary fine, while for imposing an imprisonment sentence, it is required to follow regular civil and criminal procedure against the defaulting Directors. Directors have the right to approach the National Company Law Tribunal, a special court envisaged under CA13 for compounding of offences, if the offences are compoundable. The National Company Law Tribunal has finally been set up on June 1, 2016 by the Ministry of Corporate Affairs.

Disqualification for appointment as Director in any other Company If a Company has failed to file its financial statements or annual returns for any continuous period of 3 financial years or has failed to repay deposits or redeem debentures or interest due thereon or pay any dividend and such failure continues for 1 year or more, its Director(s) shall be disqualified for appointment as Director for 5 years in any other Company, irrespective of whether he was directly responsible for such defaults or whether he objected to the commission of such offences. In such a case, the Director has only one way out - resign before the clock starts ticking.

Related Party TransactionsEvery Director is required to disclose his concern or interest in any company, corporate, etc., to the Board of Directors. Failure to do so, even accidently, is punishable with imprisonment for a term of 1 year or with fine in the range of INR 50,000 to INR 100,000 or with both.

The concepts of “related party” and “relative” have been so widely worded that it is not possible for a Director to know all the persons who will be covered under those concepts. If any related party contract is entered into by the Company, even without the knowledge of the Director, he shall be liable to indemnify the Company against any loss incurred. This is also

A Director’s Woes Under The New Corporate Regime

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Harvinder SinghPartner

Sumedha DuttaAssociate Partner

Development of a robust railway infrastructure is quintessential for providing adequate and modern

transport infrastructure that could serve the requirements of a modern India. Indian railways, despite being one of the largest networks in the world, has been primarily cash starved considering its revenue earnings have been low as compared to the expenditure incurred by it and therefore, could not generate enough surplus required for necessary moder-nization over a period of time. Histo-rically, the railways sector has been funded and operated entirely by the Gover-nment as a monopoly with minimalistic private parti-cipation.

Appreciating the requirement of domestic private investment, the Ministry of Railways (MoR) came out with 'Participative models for rail-connectivity and capacity augmentation projects' (Participative Policy) in December 2012 and stipulated five models for seeking private participation. Though this Participative Policy was issued in 2012 to attract private investment, it could not result in the desired investment considering only domestic funds could not have met the required investments. Consequently, keeping in view the financial crunch and the added requirements of massive investment to modernize and improve safety in the railways sector, the Government decided to open the doors of Indian railways to foreign investments. Accordingly, the Department of Industrial Policy and Promotion (DIPP) by way of its Press Note No. 8 of 2014 dated August 27, 2014 introduced and permitted foreign direct investment (FDI) for the purpose of construction, operation and maintenance in relation to the certain activities in the railway sector. In the specified activities, 100% FDI under the automatic route is

allowed. However, proposals involving FDI above 49% in sensitive areas from a security point of view are required to be brought before the Cabinet Committee on Security by the MoR on case to case basis.

In order to facilitate such investments, the MoR on November 20, 2014 laid down the 'Sectoral guidelines for Domestic/Foreign Direct Investment in Railways' (Sectoral Guid-elines). These Sectoral Guidelines set out the framework within which proposals are required to be made by the project proponent for taking relevant approvals. The Sectoral Guidelines specifically refer to the various models envisaged under the Participative Policy and envisage the authority who will be responsible for providing in-principle approval.

Considering freight has been the largest source of revenue for the Indian railways, one of the major focus areas of the FDI is development of the Dedicated Freight Corridor (DFC). DFC is proposed to adopt world class and state of the art technology. Significant improvement is proposed to be made in the existing carrying capacity by modifying basic design features. The permanent way will be constructed with significantly higher design features that will enable it to withstand heavier loads at higher speeds. Simultaneously, in order to optimize productive use of the right of way, dimensions of the rolling stock are proposed to be enlarged. Both these improvements will allow longer and heavier trains to ply on the DFC. Key feature of the DFC is that the goods trains can even go up to 100 km/ hour while the existing speed is just 25 or 26 km/hour. Japan International Cooperation Agency is already funding the western arm of the DFC project through a soft loan. Further, foreign investors

including from Spain and France are also interested in DFC projects, provided their business concerns like financial returns, risk-allocation and mitigation are well addressed.

It is clear that with the incursion of the foreign capital, there will be a technological change, which will help India to have new technologies and advancements and with the opening up of the economy, best management practices from all over the world will come in. For freight traffic, FDI will prove to be a vital tool, it will trigger the freight market and will bring in modern technology and a swift mode of transportation of freight. Having said that, it is necessary to keep an eye on the crucial fact that falling freight volumes, from which the railways generates approximately three-fifths of its revenues, are undermining revenue growth. In the financial year 2015-16, Indian Railways posted the lowest revenue growth since 2010-11. The slump in revenue growth is also attributable to some extent to the uncom- petitive position the railways has got itself into by way of entailing successive tariff hikes. Considering, private investment is being made into the DFC, it is expected that the same would lead to further tariff hikes to ensure requisite return to the investors. It is beyond any doubt that DFC has the potential to revamp the manner in which transportation of freight is carried out in India specifically in context of long haul distance, however, it will be crucial to keep under tab the possible tariff increase to ensure that the DFC reaches its full potential. In addition, the process for land acquisition for DFC should be streamlined as any time overrun on account of this will in any case lead to further increase in tariff.

Analyzing the pros and cons of FDI in Indian

8

Foreign Direct Investment in Indian Railways- A Potential Game Changer

Aniket PrasoonAssociate Partner

Kush SaggiAssociate

punishable with fine in the range of INR 25,000 to INR 500,000. Further, the concerned Director will not be eligible to be appointed as Director of any other company for 5 years.

Unless the relatives of a Director are financially dependent on him, a Director can neither ensure correct disclosures by them nor that such relatives wouldn't hold any position/ shares in a company with which the Director's Company is contracting (so that it remains out of the related party transaction ambit).

Restriction on giving loan to themselvesCa13 restricts private companies from giving

loans to their own Directors. This doesn't take into account the fact that the shareholding and management of private companies is usually the same so it amounts to the owners lending to themselves. CA13 imposes a very stringent liability on the Director to whom such loan is advanced by prescribing punishment by way of imprisonment which may extend to 6 months or with fine in the range of INR 500,000 to INR 2,500,000, or with both.In the new legal regime, the cost of Directors and Officers' liability insurance is bound to increase for corporates. Concurrently, Directors need to be very

careful in carrying out their duties and cannot afford to be casual in compliance under the CA13, otherwise they will be subject to pay hefty fine or might land up behind bars.With limitations such as these, CA13 might shunt away genuine businesses. Regulators need to ensure that CA13 should not have a ruinous impact on the corporate sector and bring it further down. There is no doubt that the stringent compliance requirements will raise the bar on governance and transparency but application of the same for unlisted and medium/small entities ought to be re-evaluated in the light of the costs, benefits and possible negative impact on the growth of such companies.

Grant of interest pendente lite (interest during the pendency of the dispute resolution proceedings) by an

arbitrator has been a highly contentious issue before courts in India. The issue had been considered to be a more-or-less settled proposition vide the far-seeing decision of a Constitution (five-judge) Bench of the Hon'ble Supreme Court in the case of Secretary, Irrigation Department, Government of Orissa v. G.C. Roy (1992) 1 SCC 508 (“G.C. Roy”), which summarised the position as under (Para 44):

“Where the agreement between the parties does not prohibit grant of interest and where a party claims interest and that dispute (alongwith the claim for principal amount or independently) is referred to the arbitrator, he shall have the power to award interest pendente lite. This is for the reason that in such a case it must be presumed that interest was an implied term of the agreement between the parties and therefore when the parties refer all their disputes-or refer the dispute as to interest as such-to the arbitrator, he shall have the power to award interest. This does not mean that in every case the arbitrator should necessarily award interest pendente lite. It is a matter within his discretion to be exercised in the light of all the facts and circumstances of the case, keeping the ends of justice in view.”

The aforesaid decision had been passed under the Arbitration Act, 1940, whose Section 41 incorporated the terms of Section 34 of the Code of Civil Procedure, 1908, allowing courts to grant pendente lite interest. The court in G.C. Roy also upheld the grant of pendente lite interest based on its reasoning as to the presumption of such interest in cases where the agreement is silent on interest. However, the confusion arose out of two subsequent decisions of the court in Board of Trustees for the Port of Calcutta v. Engineers-De-

Space-Age(1996) 1 SCC 516 (“Engineers-D e - S p a c e - A g e ” ) ; a n d M a d n a n i Construction Corporation (P) Ltd. v. Union of India and Others (2010) 1 SCC 549 (the latter of which has not being discussed/considered herein since it followed the reasoning in Engineers-De-Space-Age). In Engineers-De-Space-Age, the court relied upon G.C. Roy in holding that pendente lite interest would be payable even if the agreement is silent on interest. The clause in that particular contract is provided hereunder:

“No claim for interest will be entertained by the Commissioners with respect to any money or balance which may be in their hands owing to any dispute between themselves and the Contractor or which respect to any delay on the part of the Commissioners in making interim or final payment or otherwise.”

Ideally and as per the decision in the G.C. Roy case, this clause fell within the exception of a claim prohibited by an agreement. However, the court in Engineers-De-Space-Age held that the restriction only applied to the 'Commission-ers' of one of the parties and not on the arbitrator. In other words, the arbitrator was well-within its rights, post-reference of the dispute to arbitration, to award pendente lite interest and the restriction only operated on one of the parties to the contract. This led to a lot of confusion in subsequent cases and many subsequent decisions doubted the correctness of the judgment, particularly on the proposition that, even if there is an express bar on the award of pendente lite interest in the agreement, the power of the arbitrator to award such interest is not taken away – a proposition termed as 'outlandish' in a subsequent decision. Vide the recent decision in the case of Union of India v. Ambica Construction (SLP (C) No. 11114/2009 – “Ambica Construction”) pertaining to the 1940 law, the Court has

finally diluted Engineers-De-Space-Age and has held as follows (Paras 35-37):

(a) if, in a contract, there is an express bar on the arbitrator to award pendente lite interest, then the arbitrator would have no power for the same – the arbitrator being a creature of the contract;

(b) generalised clauses barring interest on any payments, within the contract, will not be readily inferred as an express bar on the arbitrator. Ultimately, the question as to whether the arbitrator has the power to grant pendente lite interest, may depend upon the “phraseology used in the agreement, clauses conferring power relating to arbitration (i.e. the arbitration agreement), nature of claim and dispute and on what items the power to award interest have been taken away and for which period.”

(c) As a postscript, we would add that this judgment is also relevant for the Arbitration and Conciliation Act, 1996 within which, Section 31(7)(a) allows for grant of pendente lite interest “unless otherwise excluded by the parties.” The ambit of the exclusion clause may now be explained with reference to the decision in the Ambica Construction decision. The decision and scope of the exclusion clauses may be of interest to parties seeking to exclude such interest from their agreements.

Grant of Pendente Lite InterestBy An Arbitral Tribunal

9

Akansha Rai Associate

Anshuman PandeSenior Associate

Railways, it can be concluded that it will not be a cake walk for the government for getting the Indian railways on track. However, FDI in the railway sector aims to generate much needed

funding to the cash strapped Indian railways, and enable it to inter alia augment freight log is t ic capac i ty through the speedy development of DFCs. Such developments as

mentioned above surely have the potential to change the face of Indian railways in the near future.

Activities in which FDI is permitted are (i) suburban corridor projects through Public Private Partnership (PPP); (ii) high speed train projects; (iii) dedicated freight lines; (iv) rolling stock including train sets and locomotives/coaches manufacturing and maintenance facilities; (v) railway electrification; (vi) signaling systems; (vii) freight terminals; (viii) passenger terminals; (ix) infrastructure in industrial park pertaining to railway line/sidings including electrified

railway lines and connectivity to main railway line; and (x) mass rapid transport systems.

10

It is one of the settled principles of natural justice that a Judge is required to be impartial. Impartiality is the sine qua non for

the judiciary. It sometimes happens that a Judge before whom a matter is placed for hearing has a financial interest in the matter or is somehow directly or indirectly connected with either of the parties or the subject matter of the dispute. Such circumstances usually raise doubts as to the impartiality of a Judge hearing the matter.

In such cases where a party has a doubt as to the impartiality of a Judge, the party could make an application to the Judge to recuse himself. It is only a party who has suffered or is likely to suffer an adverse adjudication because of the possibility of bias on the part of the adjudicator, who can raise an objection.

It is the duty of every Judge to adjudicate every matter placed before him without fear or favor and with absolute earnestness and sincerity. A Judge should never recuse himself on the asking of a litigating party, unless it is justified. It is the duty of a Judge to apply his mind and only in cases where the Judge comes to a conclusion that there was a reasonable doubt as to his impartiality should he recuse himself. If an application for recusal is not well founded, it is the duty of the Judge to reject such an application. It is of fundamental importance that justice should not only be done but should manifestly and undoubtedly be seen to be done. The Judge should recuse himself only if there exist circumstances where a reasonable and fair minded man would think it probable or likely that the Judge would be prejudiced against a litigant.

A Judge would normally recuse himself from hearing a matter if a Judge has a pecuniary interest, affinity or adversity with the parties in the case, direct or indirect interest in the outcome of the litigation, family directly involved in litigation on the same issue elsewhere, the Judge being aware that he or someone in his immediate family has an interest, financial or otherwise that could have a substantial bearing as a consequence of the decision in the litigation.

The Supreme Court in the case of Supreme Court Advocates on Record Association v. Union of India (Recusal Matter) has attempted to summarize the principles which are applicable to determine whether the impartiality of a judge is sufficiently in doubt so as to warrant recusal:

(Iif a Judge has financial interest in the outcome of a case, he is automatically disqualified from hearing the case.

(ii) In cases where the interest of the Judge is other than financial, then the disqualification is not automatic but an enquiry is required whether the existence of such an interest disqualifies the judge tested either on the principle of “real danger” or “reasonable apprehension” of bias.

(iii) A Judge is automatically disqualified from hearing a case where a judge is interested in a cause which is being promoted by one of the parties to the case.

If any of the circumstances set out above exist, a Judge should recuse himself.

However it is a well-established principle of law that an objection based on bias of the adjudicator can be waived. The right to object to a disqualified adjudicator may be waived and this may be so even where the disqualification is statutory. Thus even if the above circumstances exist, the parties may waive their right to object to such Judge deciding the matter and could proceed with the matter. However, if the aggrieved party knew about the disqualification and allows the proceedings to continue without protest, they are held to have waived their objection and the determination thereafter cannot be challenged. The courts generally do not entertain such objection raised belatedly by the aggrieved party.

Sometimes, a case is required to be heard by a Bench and not by a single Judge. In such a case, a question arises as to whether the application for recusal is required to be made to the Judge whose recusal is sought or to the Bench as a whole. Justice Lokur in the above matter has opined that when an application for recusal of a Judge from hearing a case is made, the application is made to the Judge concerned and not to the Bench as a whole. The decision whether to recuse himself or not is entirely that of the Judge whose recusal is sought. Justice Lokur considered a situation where if an application for recusal of a Judge was made to a Bench, and if the Judge whose recusal was sought decided to recuse from the case, but the other Judges disagreed and formed an opinion that there was no justifiable reason for recusal, could the Judge whose recusal was sought be compelled to hear the case? In order to over-come such a situation, the application for

recusal is actually made to an individual Judge and not to the Bench as a whole.

Justice Joseph in the above matter has also stated that while recusing himself, a Judge should broadly set out the reasons for his recusal so that the parties are aware of the reasons for his recusal. He was of the view that giving reasons would remove any suspicion in the mind of any person as to the motive for the recusal. However, Justice Lokur was of the view that if reasons are given and such an order is challenged, and if the appeal court is of the view that the reasons given are frivolous and therefore the order is set aside, then could the Judge who recused himself be bound to hear the case even though he genuinely believed that he should not hear the case? In light of the contrary view expressed by Justice Lokur, the issue as to whether reasons should be given by a judge recusing himself is not settled.

In view of the above judgment, it is clear that a Judge before whom an application is made should not reject an application for recusal made by a party for the asking. He is required to apply his mind and decide whether there is a sufficient ground for him to recuse and only after being satisfied that there is reasonable doubt with respect to his independence and his impartiality should a judge recuse himself.

Murtaza KachwallaSenior Associate

Impartiality of The JudiciaryCircumstances in which a Judge should recuse himself

Developments To The Laws Relating To Bank GuaranteesImpact of the Supreme Court's judgment in Gangotri Enterprises

Bank guarantees (“BG” or “BGs”) form an integral part of many transactions worldwide and are one of the most

commonly-used instruments to secure a party's obligations. The advantages of BGs, from the beneficiary's perspective are manifold. The beneficiary can take comfort in the fact that the guarantor is a bank which is under a fiduciary duty to honour the BG if called/invoked, regardless of extraneous factors. Usual concerns are related to solvency or wherewithal of the guarantor to fulfill its obligations are met, especially in cases where the issuing bank is one of repute. A major attraction of BGs is that most municipal legal systems proscribe or decry its judicial fora from interfering in the invocation or encashment of the BGs. In other words, once a BG is sought to be called upon by the beneficiary, courts/judicial authorities would ordinarily not impede the same via interlocutory orders and the like, at the instance of the principal debtor.

In India, too, the position of law is well-entrenched and the courts have consistently held that a BG is an independent contract and distinct from the underlying contract between the beneficiary and the principle debtor, notwithstanding the terms of the underlying contracts.

However, certain exceptions to the rule have been carved-out over the years and they are summarised as follows:

- Fraud of an egregious nature, of which the bank has notice and a fraud of the beneficiary from which it seeks to benefit;

- irretrievable injustice and/or special equities, to the extent that, if the invocation is wrongful, the principal debtor may find it 'impossible' to recover the amounts. Certain precedents hold both the terms to be distinct carve-outs although most courts hold “special equities” to be a part of the exception of “irretrievable injury”;

- an invocation against the stated terms of the BG itself, which operate to make even an unconditional BG 'conditional' to that extent; and

- where the performance of the obligation, by the principal debtor, against which a BG has been issued, has been carried out to the explicit satisfaction of the beneficiary.

The carve-outs appear to have been expanded

recently vide the Supreme Court's recent decision dated May 5, 2016 in the matter of M/s Gangotri Enterprises Ltd. v. Union of India (C.A. 4814/2016 arising out of SLP(C) 27052/2012 – “Gangotri”). The court allowed injunction against the encashment of a performance BG. Uniquely, the usual carve-outs, as summarised above, were not mentioned in the decision (except for the fact that the performance, against which the BG had been provided, had been discharged). Instead, the court based its decision on the following facts:

- The court observed that the beneficiary had sought to encash the BG to recover a claim of damages. Basing its decision upon a number of precedents germane to the law of damages which state that damages have to be adjudicated upon before they may be recovered, the court held that until the damages were adjudicated upon and decided by arbitration, the BG could not be encashed.

- The BG was against a contract different to the one whereunder the alleged breach had been caused.

- The BG was a performance BG and since the performance had been carried out (albeit with delays) to the satisfaction of the beneficiary, the beneficiary had no right to call upon it.

It is arguable that, the carve-outs in Gangotri enlarge the already existing exceptions – particularly the ones on damages since, too often, beneficiaries tend to call upon the BGs on the basis of their claims for damages upon the principal debtors. As a matter of fact, one of the principal causes for courts allowing encashment of BGs was that the principal debtor could subsequently recover the amounts after adjudication of the claims and cross-claims of both parties and (save for cases of irretrievable injury). That reasoning would now be diluted with the new exceptions, as provided in the Gangotri case.

Beneficiaries now seeking to call upon BG’s would have to take additional precautions in ensuring that their invocation is not vitiated by the reasoning in the Gangotri decision. One probable consequence may be that BG clauses in contracts between parties may contain a clause that the beneficiary is entitled to call upon the guarantee – regardless of the adjudication of the damages. However, wider repercussions

of the Gangotri judgment may also lie in the fact that the Court chose to distinguish many set precedents which call for courts' non-interference in bank guarantee cases, by holding that these precedents had different factual matrices. This opens doors for persons/debtors seeking to injunct the calling on the BG’s to attempt the same – a practice which was hitherto always hit by the strident refusal of most courts in the light of the strong decisions enjoining stay of invocations.

Anshuman PandeSenior Associate

11

Sakya ChaudhuriPartner

Shuchi SinghAssociate

Reverse Payment Deals in Patent Disputes and its Impact on Competition

Ikleen Kaur Associate

The February decision of the UK's Competition & Market Authority (CMA) on ag reements between

GlaxoSmithKline PLC (GSK) and some pharmaceutical companies was found to be anti-competitive. During 2001, GSK had in its name, certain patents related to paroxetine (an anti-depressant medicine); with the name of 'Seroxat' which was a major revenue earner for GSK. In the same year, many pharmaceutical companies, including Generics (UK) Limited (GUK) and Alpharma Limited (Alpharma) were trying to enter the UK market for a generic paroxetine version.

GSK had planned to challenge these versions of paroxetine as the generic drugs would have infringed GSK's patents. However, GUK and Alpharma entered into separate agreements w i t h G S K , w h e r e b y t h e s e g e n e r i c pharmaceutical makers agreed not to launch their product for a certain period of time against payments and other value transfers made by GSK to these companies totaling over 50 million pounds. The CMA, considering the anti-competitive nature of the GSK's agreements with GUK and Alpharma imposed fines amounting to 44.99 million Pounds on the companies; to which the companies have appealed to in the Competition Appeal Tribunal (CAT).

The agreement worked out by GSK with GUK and Alpharma is commonly referred to as 'pay-for-delay' agreements. The effect of 'pay for delay' agreements is adverse to free competition in the market such as the pharmaceutical sector as such agreements would deter the price of drugs being reduced which causes serious harm to the consumers in terms of having to pay exorbitant prices. Pay for delay agreements are generally entered into by patent owners to curb the threat of lower prices offered by competing (generic) entrants. In the GSK case, the agreements had potentially deprived the National Health Service (NHS) of substantial price reductions in paroxetine, which eventually took place at the end of year 2003 when the average paroxetine prices dropped by over 70% in 2 years.

How 'Pay for Delay' deals work?

Pay for delay agreements are a type of patent settlement mechanism, especially in the pharmaceutical sector. Once a generic drug

maker tries to enter a market of a particular drug, the patent holder of the branded version of the drug challenges the same with the respective authorities. In order to settle the matter amicably the patent holder promises to pay the generic drug maker a certain amount, along with other benefits as long as the said drug maker agrees to stay out of the market of the specific drug for a certain period. The arrangement is beneficial for both the parties as the patent holder is able to hold on to its monopoly, without any competition for a longer period of time; while on the other hand the generic maker is able to earn a decent amount of money without having to face the risk of penetrability and marketing of its drug. It's a win-win situation for all except the consumers, who in the process are denied access to a lower priced product.

The effect of 'pay for delay' agreements on Indian Market

There is a growing concern for 'pay for delay' deals in various industries, especially in the pharmaceutical industry as reverse payments or pay for delay deals hinder effective competition in the market. Indian courts often direct parties involved in patent infringement actions for mediation to reach amicable settlement. It is important for the CCI to closely monitor and examine such settlements to see if these u l t imate l y resu l t in an t i - compet i t ive arrangements as larger the reverse payment, the stronger is the presumption of invalid or weak patents still persisting in the market.

Pay for delay agreements between rival pharmaceutical companies that delay entry of a generic drug in the market can be presumed to cause an adverse effect on competition in India, and therefore call for scrutiny under the Competition Act, 2002. The raison d'etre of an intellectual property right is to grant the originator the ability to solely exploit an original creation and this could arguably include compensation paid to maintain the exclusivity of that right. However, this line of defense would have to be weighed against how the consumers and the relevant market are being affected by such a horizontal agreement. In India, 'pay for delay' conduct can be scrutinized as anti-competitive agreement or as abuse of dominance where such agreements are entered by a dominant firm (e.g. Pharmaceutical Company / Originator) to for eclose effective

competition in the market.

To conclude, though patent laws recognize the requirement of innovators to recoup research cost investment, yet, the practice where an innovator may artificially increase the costs for a certain period to gain supernormal profits violates anti-trust law and distorts price stability in the market which ultimately affects consumers.

12

The Indian electricity sector has transformed phenomenally since the mid 1990's and especially after the

enactment of the Electricity Act, 2003 (“2003 Act”). In the early 1990's the process of re-structuring of the power sector was commenced and private investment was permitted by the policy makers in electricity generation in a market regulated by Government. However, due to various policy gaps, private investment in electricity generation could not pick up in the 90s as per the expectation of the policy makers.

Accordingly, the 2003 Act, was enacted and a road map was laid down for the transformation of the erstwhile Government run utilities in the Indian electricity sectorfrom vertically integrated monopolies to unbundled autonomous entities, resulting in greater efficiency by streamlining operation of electricity distribution, transmission and generation and promoting transparency and accountability in the Indian electricity sector. Pursuant to the enactment of the 2003 Act, the generation of electricity was de-licensed to attract private investment in the sector and to leverage the electricity demand supply gap prevailing in India.

The 2003 Act also provided for reforms in electricity distribution by permitting private participation, parallel licensing and non-discriminatory open access for the consumers in the distribution sector.Whilst de-licensing of electricity generation led to increase in competition and increased private investment in electricity generation, the reforms in electricity distribution had limited success in the past one and a half decades on a national level.

The parallel distribution licensing model failed to provide the development and investment that was envisaged by the policy makers in distribution sector as it requires the distribution licensees to supply electricity “through their own distribution system within the same area”. This requirement for replication of network for supply of electricity by a parallel licensee is one of the biggest causes for absence of significant private investment and competition in the electricity distribution sector. The requirement for each distribution licensee to invest in its own distribution system leads to duplication of network and higher capital investment which in turn leads to higher retail supply tariff for the end consumers, thereby eroding any benefit for the end-consumer that may accrue due to

increased competition. This is amply demonstrated by the fact that with the exclusion of Mumbai and Kandla SEZ (Gujarat), no participation has been made by the private sector in parallel distribution systems.Even the open access model has not been able to achieve much success as the grant of open access by a distribution licensee on its wires, means loss of retail business by the distribution licensee. However, it is pertinent to note that in November 2011, the Ministry of Law and Justice vide letter dated 30.11.2011 opined that consumers above 1 MW shall be deemed to be open access consumers and the Electricity Regulatory Commission will no longer continue to regulate the supply of electricity to such consumers of 1 MW and above. While this may be a welcome measure, in effect it is a case of “too little too late”.

Although the reform process has been continuing for around two decades now and the policy makers have been making efforts to promote competition and growth in the Indian electricity sector, the electricity distribution sector unfortunately still functions as a State owned monopoly lacking transparency and accountability. The perpetual trickling of revenue in the electricity distribution sector occurring at national level due to inefficient management / non-transparency and mostly due to absence of competition which could result in investment in the sector and reduced tariff for retail end-consumers. Efficiency at the upper value chain (i.e. generation) also loses significance for the end consumer if trickling of revenue is not effectively blocked by bringing in competition in the distribution sector.

The fact that the distribution licensees in India manage businesses of two different natures, i.e. wire business and supply business, is the biggest obstacle in bringing competition in the distribution sector. The wire business by its very nature is capital intensive and monopolistic. while the supply business on the other hand is more amenable to competition and has better capabilities to attract investment as it involves purchase of electricity in bulk and collection of charges from consumers.

However, in the extant market wherein the wire business and the supply business is being operated by the same licensee, the possibility of competition is vastly reduced as a parallel licensee would need to replicate the distribution system anyway. Further, the open access model

too has failed to pick up due to transmission/ distribution constraints and high level of cross subsidy charges levied by distribution licensees.

The need of the hour to promote competition and efficiency in the electricity distribution sector is to divide the distribution business into wire business and supply business. The owner of the wire business would be responsible for setting up and maintaining the distribution system between the transmission interface and the retail consumer and will be eligible for a regulated rate of return on its investment. On the other hand, the supply business would be handled by multiple private licensees operating in the same area offering varied choices to the retail consumer of price and quality of service. Competition in the electricity supply business would help in improving the operational and cost efficiencies and provide the consumer with better offering at efficient pricing.

However, notwithstanding the benefits that the end consumer may gain with the introduction of competition in the distribution sector, there is also a probability of various issues that will need to be addressed along with the introduction of competition in the distribution sector, such as separation of cost and tariff for network service including additional manpower and financial segregation. The resultant increase in demand due to introduction of competition would also need to be fulfilled by ensuring flexibility in transmission and tariff. There also remains the issue of eliminating / reducing the prevailing cross-subsidy regime.

Introduction of real competition in electricity supply business has the potential of completely altering the dynamics of the electricity distribution sector giving a major push to the Indian economy. In this regard the Electricity Amendment Bill, 2014 was introduced in Lok Sabha in the year 2014, to bring in substantive reforms by enabling the segregation of distribution business / wire business from the supply business amongst other provisions. The amendment bill also provides for the concept of supply licensee and segregation of duties as a network owner and supply licensee. However, since the concept of segregation of wire business and supply business is still merely a part of the amendment bill pending before the Parliament, verdict on competition in the distribution sector is still not out.

Reforms in Electricity Distribution : A Mile Too Short?

Anand K ShrivastavaSenior Associate

13

14

The Real Estate (Regulation and Development) Act, 2016 (“Act”), which came into effect on 1st May, 2016,

certainly brings a lot of respite to home-buyers.

Aimed at making the sector transparent, trustworthy and regulated, the Act has put in place a state based regulator, responsible for overseeing all the real estate projects (beyond a specified threshold) within the state. Developers will now be mandatorily required to register their projects with the concerned Real Estate Regulatory Authority(“RERA”), in the process disclosing the status of their consents and approvals, names of promoters, project layouts, plans of development works, title clearance for the land being used for the project, draft of builder-buyer agreements, and names and addresses of real estate agents, contractors, architects and structural engineers, to the concerned RERA. All these details will be readily available on the RERA website, thereby helping consumers to make an informed decision before actually investing in a project.

All real estate agents are also required to be registered with the RERA and obtain an agent registration number, to be quoted in every sale transaction that they facilitate. The promoters, developers and agents will now be under the purview of this Act and accountable to the buyers.

In order to deal with the problem of diversion of funds by builders from one project to the other, the Act envisages creation of a mandatory separate escrow account for each project wherein money collected from the buyers for that project will be deposited. Any withdrawals from the account shall only be for the works related to that particular project after due certification, and in proportion to the percentage of completion of the project. Buyers are entitled to get compensated for a delayed/defective project with the option to exit in case of a delayed project.

Thus, there are plenty of take-aways from the Act for the buyers/consumers. To summarise-

· Buyers will now be able to check and verify status of the projects, all permissions and compliances from the RERA website. This will enable them to make an informed decision before investing their money.

· The promoters, developers and agents will

be under the purview of the Act and accountable to the buyers.

· Lesser chances of delays in projects as one of the main reason for delays, the diversion of funds, may be difficult, in view of the restrictions under the Act.

While the Act definitely introduces a stringent regulatory framework by making builders more accountable and answerable at every stage, yet, there is much to ponder before we rejoice.

The Negatives

One of the important aspects, which will require some thinking is with regard to the situation where there are delays in the designation of the authority/officer or establishment of the RERA, in which case buyers will have no recourse to the remedies provided under the Act. To explain this better, as per the current timelines, the states/union territories have been given a time frame of one year from the inception of the Act to establish their respective authorities i.e. RERA. Upon establishment, each state RERA will get a further time of three months to formulate their respective regulations under the Act. In terms of the Act the appropriate government may designate a separate regulatory authority or an officer to act as the RERA for the interim period, till the establishment of the actual RERA.

In case of ongoing projects which have not yet received a completion certificate, the developers are mandatorily required to register the same with the authority within a period of three months from the date of the commencement of the Act. Again, if there are d e l ay s i n t h e d e s i g n a t i o n o f t h e authority/officer or establishment of the RERA, the incomplete projects will not be able to get themselves registered, and there is likely to be an impasse to the effect ive implementation of the provisions of the Act.

Further, the Act provides that if the application for registration has not been approved or rejected within the specified timelines, it shall be deemed to have been approved. This is peculiar as projects which have not been granted approval due to some shortfall will be automatically deemed approved after thirty days if not explicitly rejected.

From the developer's perspective, parking 70%

of their funds in an escrow account may create a liquidity crunch which may force developers to shift the burden on consumers by increasing prices for home-buyers, and even going to the extent of having a tacit understanding between other developers for pricing projects in a certain area.

Positive Beginning

Having said that, the Act is certainly a giant step in the right direction and will help in regularizing the real estate sector, especially for the home-buyers. From an industry standpoint, the Act has already boosted confidence of foreign investors and multi-national companies in the Indian real estate sector and promises to attract foreign investment in the long run.

The Real Estate Act - A Nuanced View

Garima SinghSenior Associate

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Kunal BadyalSenior Associate

The Central Board of Film Certification (“CBFC”) has been condemned by the entire film industry and the masses,

especially the last few years, for its arbitrariness in decision making for certification of films and attempts to curb creativity. CBFC has become controversial due to its suggestions and objections for use of expletives, and even for the slightest display of affection like kissing. Many films like Aligarh, Angry Indian Goddesses, Spectre, Messenger of God, 50 Shades of Grey, NH10, and Jai Gangajal, etc. have been at the receiving end of these objections.Recently, the botched up cuts/deletions in Udta Punjab (“Film”) was warded off because of timely action taken by the Bombay High Court (“Court”). The Court's decision to allow the Film's release with a single cut, as opposed to thirteen cuts/deletions the CBFC had demanded, was appreciated by the filmmakers and the public at large, as it recognized CBFC more as a certification body rather than as a censorsship one.

The Court recently on June 13, 2016 in Phantom Films Pvt. Ltd. and Anr. v. The Central Board of Film Certification, adjudicated upon the roles and responsibilities of CBFC in relation to film certification, controversy which has been hailed widely and is a shot in the arm for creativity.

Facts of the Case:

The Film is a Hindi-Punjabi movie depicting the menace of drugs in the State of Punjab. The Film, scheduled to be released on 17th June, 2016, was submitted to the CBFC for certification on 10th May, 2016 as required by the Cinematography Act, 1952 (“Act”). In terms of the Act, CBFC is empowered to examine and certify cinematograph films prior to their exhibition. The filmmakers of the Film sought an 'A' certificate for the Film. The Film was referred to the revision committee by the chairman of the CBFC without giving reasons for the same. The decision of the revision committee is required to be conveyed within three days of the referral but as no such decision was made and considerable time passed, the filmmakers were constrained to file a writ petition with the Court. The filmmakers prayed for issuance of writ of mandamus directing the CBFC to issue the 'A' certificate. The same day of filing the writ petition the revision committee gave their decision – 'A with Cuts - Certificate'. This was based on the

condition that certain portions of the Film should be deleted therefrom.

The Judgment:

The Court observed that the Film is a work of fiction depicting the menace of drugs amongst the youth of Punjab and is socially and morally relevant in the Film. The filmmakers, in order to promote creativity and keep up the art of cinema alive and up to date, are allowed to choose the setting and the background of their liking.

The Court gave its decision on all the thirteen cuts cuts/deletions and directed the filmmakers to cut the shot where a character was urinating in front of the crowd (it is important to note that such a cut/deletion was not challenged by the filmmakers at the outset) and a few alterations and insertions in the disclaimer, all the other cuts were quashed. The Court reiterated the need for the Film to be viewed as a whole and not by taking out a scene or a dialogue out of context and viewing it in isolation, thereby not interfering with the creative freedom of the filmmakers. Further, the Court emphasized that the CBFC should take a decision consistent with the mandate of Article 19(1)(a) of the Constitution of India. The Court observed that while the larger power of certification contains as a part and parcel the smaller power of censorship (as understood as per its dictionary meaning), CBFC was requested not to transgress from the constitutional limits. The Court also encouraged the portrayal of reality rather than being within the, not so well established, societal limits.

The Court observed that burning social, psychological problems and behavioral issues are not handled with enough sensitivity, maturity, compassion and conviction today. Keeping in mind the two Supreme Court judgments, the Court reiterated that the CBFC has to certify the Film keeping in mind the fundamental right of free speech and expression of the film makers.

Justices SC Dharmadhikari and Shalini Phansalkar Joshi ordered that the Film be certified accordingly as restricted in its exhibition to the adult audience and the CBFC to issue a new certificate to the filmmakers of Film within a period of 48 hours on account of their right to artistic expression and creative freedom guaranteed under the Constitution of

India.

To summarize, the Court's decision gives a constructive approach, paving a smooth road for the writers/ creators / filmmakers to safeguard their right of freedom of speech and expression and of choosing any theme and selecting characters to indicate how any burning issue concerning the society has assumed serious proportions within the purview of law.

CBFC's Need For Transformation of Approach Post The Udta Punjab Judgment

Vaidehi NaikSenior Associate

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In today's world technology has drastically changed our lives to such an extent that it has become an integral part of our society

and our foreseeable future. People have now become completely dependent on its use in their everyday lives as communication over vast distances and access to each and every information in the world is at their finger tips. However, alongside the technological innovations towards which the world is progressing today, there are some unusual developments which are also underway which seem to have quite a regressive approach.

One such development is the draft of the “Geospatial Information Regulation Bill” released by the Ministry of Home Affairs (MHA) on May 4, 2016 (Bill). Not only does the Bill in its present form have the potential to cause quite a panic as well as largely discourage commerce currently flourishing in the country, but in a single blow, manages to interfere with several legal rights of a person.

The Bill is a classic example of how the country's concern regarding protection of its national security and nurturing of its own existence is at the cost of constitutional liberties of a person. As part of national security, the state has to implement civil defense and ensure emergency preparedness measures (including anti-terrorism), it has to ensure use of intelligence services to detect and defeat or avoid threats and espionage, and to protect classified information using counter-intelligence services to protect the nation from internal as well as external threats. The purpose behind formulating this Bill is to “regulate the acquisition, dissemination, publication and distribution of geospatial information of India which is likely to affect the security, sovereignty and integrity of India”. So what can affect the security, sovereignty and integrity of India? Well it could be any digital or web based platform where any person could have easy access to the confidential information of a country. It is on the state's national security agencies to protect and control dissemination of such information. Instead, what the state does is come out with the Bill.

The Bill defines geospatial information to mean “geospatial imagery or data acquired through space or aerial platforms such as satellite, aircrafts, airships, balloons, unmanned aerial vehicles including value addition; or graphical or digital data depicting natural or man-made physical features, phenomenon or boundaries of the earth or any information

related thereto including surveys, charts, maps, terrestrial photos referenced to a co-ordinate system and having attributes”. What this essentially means is that every bit of geospatial information i.e. satellite images including but not limited to any surveys, charts, maps etc. including but not limited to graphical or digital data depicting natural or man-made physical features or even boundaries of the earth, would be covered in the definition. This potentially would extend to something as simple as tagging your residence on Google maps or taking a photo-imagery of a particular destination on Google Earth.

The Bill attempts to force any and every mapping service within and outside India to get a license from the MHA before operating in India, failing which it may face fine up to INR. 1,000,000,000 and/or 7 years jail term. It intends to regulate acquisition dissemination, publication and distribution of geospatial information of India, irrespective of how the data is acquired, by making it mandatory for every person who in any manner makes use of, disseminates, publishes or distributes any geospatial information of India, within or outside India, to obtain prior permission from the 'Security Vetting Authority' (SVA).

The implications of these inclusions can be far reaching and would give a blanket right to the Government to implicate any person in contravention of the above. This would effectively mean that any use of the geospatial information including mere possession of the same would have to be with the approval of the SVA failing which such persons would be liable for punitive action. Accordingly, in the current technologically dependent world, any and every activity regarding sharing of such information by any person would be subject to the provisions of the Bill.

On the face of it, the Bill is vague and draconian and a threat to kill any and every technological innovation. It will not only affect the trade and commerce industry including the Skill India and Make in India initiatives introduced by the Government, but also greatly impact the common man in his daily lifestyle. While the Bill intends to impose an absolute ban on dissemination of geospatial information by electronic means there is a serious doubt as to whether its impact on Digital India has been assessed. The definition is too wide and includes everything from satellite imagery, to atlases, books, magazines, car navigation systems, GPS enabled devices like cameras,

smartphones and tablets etc., The Bill in its current form does not give clarity on whether a service provider or a car manufacturer will need to obtain a licence from the Authorities whether individuals using these services also need to obtain a licence whether the publishers as well as the schools who distribute such information and visualize will also need a license. If there is an incorrect depiction of such information in any of the publications, will the publisher who publishes or the subscriber who visualizes be liable under the Bill? Thus, if this Bill indeed goes through, it could potentially give the authorities the right to book a person for things such as location check-ins, posting pictures with geo-tags, location based e-commerce activities, taxi aggregators and other services which rely on geospatial information.

The restriction on accessing geospatial data poses to curb the fundamental right to freedom of expression granted to Indian citizens under Article 19(1)(a) of the Constitution of India, as it prevents one from even drawing a map for their personal use in the interest of safeguarding of national security, which is well beyond reasonable restrictions. Further, these stringent provisions contemplated by the Bill also in a way seem to violate privacy of individuals, as it gives the government ample powers to ensure surveillance of personal data to ensure compliance with the regulations. Not only that, the Bill is in contravention of the provisions of the Information Technology Act 2000 (IT Act), which is a special law enacted to deal with digital information and which would prevail, in case of conflict with any other law. Under Section 33, the Bill seeks to grant a special status in a situation of a conflict with any other law including the IT Act, which clearly results in the creation of a lacuna with regard to the applicability of the two acts in the case of a conflict situation.

The Bill fails to take into account the fact that today the internet age has advanced to such an extent that there is no need for persons to physically possess data and they can just access data from anywhere across the globe and instead curbs the individual rights granted to the citizens. Thus, although the need of the hour is for a policy framework to ensure protection of India's security, but the Bill in its present form is unconstitutional and has to be formulated into an encouraging regulation keeping in mind the constitutional liberties.

Whether India Needs The Geospatial Information Bill

17

Megha AroraPartner

Contracting parties may be precluded from performing their obligations under a contract as a consequence of

certain events beyond their control. Section 56 of the Indian Contract Act, 1872 provides for the concept of 'frustration' of contract, i.e., circumstances arising after the formation of the contract, the occurrence of which could not be prevented by the parties and which renders the contract impossible or unlawful to perform. In such circumstances, the contract becomes void.

However, 'frustration' is concerned with unforeseen events. If the parties to a contract have expressly provided for a provision with respect to disruptive events foreseen by them, in such cases, the doctrine of frustration will not have any application. The parties may contractually agree to allocate or apportion the risks arising from such an event or excuse the affected party from performance or deal with such event in a manner mutually agreed.

In this regard, parties to a contract typically provide for a 'force majeure' clause. The term 'force majeure' is a French term, which literally means 'great force'. Force majeure' clauses are widely used in commercial contracts typically to excuse an affected party for non-performance, due to certain reasons or events beyond its reasonable control. The 'force majeure' events generally include natural events (act of god, natural calamities etc.), direct political events (expropriation, nationalisation, etc.) and indirect political events (war, terrorism, etc.).

Contracting parties have the freedom to define what would constitute an event of 'force majeure' and the consequences of occurrence of such an event. The contract would be interpreted accordingly. It is therefore important to analyse the key considerations to be borne in mind while drafting 'force majeure' clauses in project contracts.

The validity of a 'force majeure' clause has been recognised by the Supreme Court of India in various judgments. In project contracts, the rationale of a 'force majeure' clause is for parties to share risks and consequences in a project, in the event of occurrence of events that are not within a party's control.

Generally speaking, the project owner /developer is required to bear the costs and consequences of a 'force majeure' event,

because in circumstances where performance is rendered outside the control of the other party, such other party would be excused from performing the contract during the continuation of such event. Further, the parties may agree to terminate the contract if the 'force majeure' event continues for a stipulated period.

One of the ways of mitigating the liabilities associated with 'force majeure' events in project contracts is to obtain a comprehensive insurance coverage. This would be of particular significance in projects which are located in challenging terrains and sensitive geographical locations which are prone to natural calamities. Depending upon the nature of the project, the definition of a may be made ‘exhaustive’ (if the parties wish to limit the excused performance to certain identified events only) or it may be made ‘inclusive’, in which case the benefit of the clause would be available for events that are similar to the listed events. Lenders to a project seem to prefer the 'exhaustive' approach, as it limits the circumstances under which a contracting party may be excused from performance.

Certain carve-outs can be used to the benefit of the party not affected by the 'force majeure' event. For example, in many contracts, if an act of government is non-discriminatory in nature, only then does it excuse performance. Similarly, strikes and lockouts are sometimes allowed as a 'force majeure' event, only if it affects the industry as a whole and not the affected party particularly. The 'force majeure' provision may seek to exclude circumstances which are somewhat within the control of a contracting party, such as shortage of raw materials or shortage of resources and labour. It may be noted that in most project contracts, payment obligations of a party are specifically excluded from the purview of 'force majeure' relief. Following are some events which have been held not to qualify as events of 'force majeure', unless expressly specified by the parties:

(a) occurrences which only result in escalation of cost of performance of the contract;

(b) an order of restraint passed by a court has been held not to amount to an act of government and hence not an event of 'force majeure';

(c) changes in law that make the performance o f t h e co n t r a c t m o re o n e ro u s commercially (but not impossible to

perform) than what is contemplated at the time of entering into the contract;

(d) delay by a supplier, who is affected by an event of 'force majeure' unless affected party can prove that it could not have procured the goods from another supplier;

(e) bad weather conditions, which usually interrupt work;

(f) power-cuts and other regular business hazards.

The affected party should be under an express duty to provide notice to the other party as soon as the 'force majeure' event occurs and to mitigate the consequences of the 'force majeure' event. The affected party should only be relieved from those obligations, which it is prevented from performing as a result of the 'force majeure' event.

For back-to-back project contracts, the treatment of a 'force majeure' clause merits even more careful consideration. For example, if during the occurrence of a 'force majeure' event, a power project company will not receive revenues under its power purchase agreement, care should be taken to ensure that it is excused from performance under its fuel supply arrangement. Hence, a force majeure under the power purchase agreement may be made a specific event of force majeure under the fuel supply agreement (as a pass through clause).

While drafting contracts, it is imperative to carefully understand and consider the 'force majeure' clause, which should in no event be treated as a mere boiler-plate clause. It is important for parties to carefully evaluate 'force majeure' events and analyse at the contracting stage itself, as to how the risks are to be allocated and the consequences of occurrence of such events.

Concept of Force Majeure & its Importance in Project Contracts

18

The Reserve Bank of India (RBI) unveiled

norms for Strategic Debt Restructuring (SDR)

vide its circular dated 08 June 2015 (SDR

Scheme), which enables lenders to expedite the

change of management of the borrower by

converting their debts (including unpaid

interest) into equity in case the borrower fails to

meet the milestones embedded in a

restructuring plan. Further, Guidelines of Joint

Lending Forum and Corrective Action Plan

issued on 26 February 2015 (JLF Guidelines)

envisages the procedure to be followed by the

lenders to deal with the special mention

account (SMA) prior to slippage of these

accounts into to non-performing assets (NPA).

Under SDR the lenders have the right:

(a) to closely monitor the affairs of debtor;

(b) acquire a majority (51%) ownership;

(c) appoint suitable professional management,

and pass ordinary resolutions matters since

the debt-equity swap will result in dilution

of existing shareholders; and

(d) divest their holding in the borrower

company to a new promoter.

Generally, restructuring package comprise of

certain waivers and concessions extended by

the lenders to deserving borrowers during

difficult times in order to keep them afloat.

When the borrower stops incurring losses and

starts earning profit, the lenders have right to

recoup the sacrifice and to recuperate their loan

dues. The entire amount of such waivers/

concessions can be recovered by the lenders by

exercising their right of recompense.

Right of recompense is a tool available to

banks/lender to recover the concessions

extended to the borrower. It is a predetermined

right decided upfront at the time of settlement

of the rehabilitation/restructuring package.

Largely, the compensation for the loss or

sacrifice of the lender depends on the

performance of the borrower following the

implementation of the restructuring package.

As per the RBI's Master Circular on Prudential

norms on Income Recognition, Asset

Classification and Provisioning pertaining to

Advances bearing reference no. RBI/2015-

16/101 DBR.No.BP.BC.2/21.04.048/2015-16

dated 01 July 2015 (Master Circular) read with

RBI's circular on Guidelines on Joint Lenders'

Forum (JLF) and Corrective Action Plan (CAP)

dated 26 February 2014 (JLF Framework), all

restructuring packages must incorporate 'right

to recompense' clause and it should be based on

certain performance criteria of the borrower.

For restructuring of dues in respect of listed

companies, lenders may be ab-initio

compensated for their loss/sacrifice

(diminution in fair value of account in net

present value terms) by way of issuance of

equity share of the company upfront, subject to

the extant regulations and statutory

requirements. In such cases, the restructuring

agreement shall not incorporate any right of

recompense clause. However, if the lenders'

sacrifice is not fully compensated by way of

issuance of equities, the right of recompense

clause may be incorporated to the extent of

shortfall. For unlisted companies, the JLF will

have option of either getting equities issued or

incorporate suitable 'right to recompense'

clause.

The right to recompense under SDR Scheme is

a contractual right and can only be claimed if

the specific conditions on lender's right to

recompense are laid down in the restructuring

package. The SDR Scheme and JLF Guidelines

only provide for an option of either getting

equities issued or incorporate suitable 'right to

recompense' clause under the restructuring

agreement. If the lenders utilize the option of

converting their equity into debt as per the SDR

Scheme, the right of recompense is not

available to them, unless contractually agreed

by the borrower. The lenders unless contrary

agreed by promoter/borrower cannot bind the

promoter/borrower to bear any losses incurred

due to subsequent transfer of equity by the

lenders to a new promoter. Therefore, in order

to excise the right of recompense there should

be an express stipulation in the restructuring

package or the borrower should agree to the

lender's right of recompense, otherwise the

lender shall not be recompensed for the

concessions given to the promoter/borrower

by the lender.

The general principle of restructuring is that

the shareholders bear the first loss rather than

the lenders. However, in order to effectuate the

aforesaid principle the banks and financial

institutions must ensure that suitable right to

recompense provisions are included at the

onset in the restructuring package.

Right to recompense in light of the RBI's Norms on Strategic Debt Restructuring

Harsh AroraPartner

The event held on 27th May 2016 at Le Meridien, New Delhi brought together various stakeholders of the governance and legal machinery of the country to see how best the existing challenges can be tackled with and foster the growth within the sector. Mr. Avijeet Lala (R), Partner was one of the panellists on the session focussed on Contract & Disputes time for Speedy Redressals.

The Lex Witness, 5th Annual Edition of the Real Estate & Construction Legal Summit 2016

The summit took place on 11th September 2015 at Shangri-La, New Delhi. The event focussed on the various aspects of a smart city including urban development, power, energy, transport, technology, green building, network & communication technology, etc. Mr. Hemant Sahai, Founding Partner, was one of the panellists, while HSA was associated as the Smart City Legal Partner.

National Summit on 100 Smart Cities India 2015

HSA Advocates organised a knowledge session called In The Know (ITK) in March 2016. The event was based on the newly amended Power Tariff Policy and impact of the Union Budget on the power sector. Former Technical Members of Appellate Tribunal for Electricity (APTEL) Mr. Rakesh Nath and Mr. Vishwa Jeet Talwar led the discussion highlighting the sectoral trends. The evening brought together key clients of HSA who are prominent stakeholders from the power sector and offered multiple opportunities to network with key industry experts.

HSA In the Know

Airport Community Platform held an event in Delhi, on January 27 and 28, 2016. The event saw discussions over the current status and future trends of the Indian airports, government initiatives and proposed airport industry in India. Panelists spoke about regional and emerging airport construction and expansion projects, discovering the current investment opportunities and financing solutions, as well as identifying the construction and expansion challenges airport authorities and operators must overcome and figuring out effective solutions. Mr. Anjan Dasgupta, Partner, was one of the panellists.

Airport Community Platform, India 2016

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HSA Reminisce

HSA conducted a panel discussion in the IFLR India M&A Forum on September 10, 2015 at Sofitel Mumbai BKC. The discussion was on overcoming post-acquisition teething problems, moderated by Mr. Hemant Sahai. The other panelists were Aparajit Bhattacharya (Corporate Partner), Ajay Vaidya (General Counsel, Kotak Mahindra Capital Co, Mumbai), Anand Sonbhadra (Group CFO, GETIT Infoservices / ASKME), Anil Talreja (Partner, Deloitte Haskins & Sells LLP).

IFLR M&A Forum 2015

Mr. Hemant Sahai was one of the speakers at BW Smart Cities Thinkathon held in September 2015 in New Delhi. The event was a success and was attended by many distinguished people from various industries including H.E. ViljarLubi - Ambassador of Estonia to India, Tarun Kapoor - Joint Secretary. Ministry of New and Renewable Energy and Dr. Muktesh Chander IPS and Special Commissioner (Traffic) Delhi Police among others.

BW Smart Cities Conference

Mr. Hemant Sahai along with Abhaya Aggarwal, head PPP of E&Y conducted a discussion at Japanese Embassy on February 23, 2016 pertaining to PPP Projects in India with a special focus on Kelkar Committee report and its implication, in addition to the basic overview of India's PPP mode. The audience included senior representatives from major Japanese companies who are struggling to enter into India. The seminar was a huge success for them to understand and explore the PPP sector in India.

Training session in Japanese Embassy

Indo - US Smart Cities Roundtable for Ajmer organized by USIBC and FICCI was held on May 29 and May 30, 2015 in Ajmer, Rajasthan. The event unveiled the Smart City development plan for Ajmer, identified the business opportunities for the Indian and US companies and featured discussions on how to capitalize on the opportunities. Mr. Hemant Sahai was one of the speakers at the conference.

Indo - US Smart Cities Roundtable for Ajmer

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