Planning Opportunities For Indian Foreign Investments In Colombia

With a population of 44.9 million people and a per capita income of $9,070, Colombia is one of the largest markets in Latin America. Colombia has become an attractive market for foreign investments thanks to its political stability, and burgeoning oil, gas and mining sectors. In the first half of 2011, foreign investment in the petroleum and mining industry (representing approximately 85% of all direct foreign investment in Colombia) reached $7.3 billion dollars, which is an increase of roughly $2.3 billion dollars from the first half of 2010. In 2010, total direct investment in Colombia by Indian investors was approximately $500 million dollars. This figure is expected to increase significantly due to the recently enacted bilateral investment protection treaty entered into between Colombia and India, and the signing of the India-Colombia double tax treaty.

On June 12, 2011 India and Colombia entered into a bilateral investment protection treaty (the “India-Colombia BIT”). Investment protection treaties are agreements entered into by countries for the reciprocal encouragement, promotion, and protections of investments made by nationals of one treaty country in the territory of the other treaty country. Investment treaties are adopted by countries in order to spur economic development by attempting to attract foreign capital and encourage investment.

India-Colombia Investment Treaty

The India-Colombia BIT encourages bilateral investment by protecting the investors of a contracting party against arbitrary or confiscatory government measures. The protections to Indian investors are enforceable by independent international arbitration. The India-Colombia BIT is typical of most investment treaties in its framework and substantive protections. Thus, it includes: (i) initial provisions establishing the scope of coverage and the meaning of the terms “investor” and “investments”; (ii) substantive protections related to non-discrimination of treaty investors, fair and equitable treatment, and protection against government expropriation; and (iii) mechanisms for the settlement of disputes. While a discussion of each provision of the India-Colombia BIT is beyond the scope of this article, the following is a brief summary of its substantive provisions:

  • Fair and Equitable Treatment: the India-Colombia BIT affords a foreign investor protection against arbitrary and unfair or inequitable treatment by the government under standards of international law.
  • Non Discrimination: the India-Colombia BIT assures national treatment and most favored nation status to investors of each state. This means that foreign investors cannot be treated less favorably than investors from the host country or from a third party country.
  • Anti-Expropriation: the India-Colombia BIT guarantees that government expropriation of investments, including actions tantamount to expropriation, are prohibited except under due process of law and accompanied by full compensation.
  • Dispute Settlement: Under the India-Colombia BIT a state must submit a foreign investor’s claim of a treaty violation to arbitration. The arbitration must be conducted by an independent ad hoc tribunal and the tribunal’s award will be binding.

Covered Investors and Investments under the India-Colombia BIT        

Perhaps the most significant provisions of bilateral investment agreements are those related to the definitions of “investor” and “investments”. As with all investment agreements, the definition of the term “investor” and “investment” is usually found in Article 1 of an investment treaty. Read together, the definition of “investment” and “investor” delimits which parties may benefit from treaty protection.

Investment

The definition of “investment” is often the first point in determining whether a transaction is subject to treaty protection. Since the principle purpose of investment agreements is to encourage foreign investment, the definitions of investment found in most treaties are virtually always expansive. Accordingly, Article 1, Section 2.1 of the India-Colombia BIT defines investments to mean: “every type of asset that have been established or acquired by investors of a contracting party in the territory of the other contracting party…” Similarly to most investment agreements, the India-Colombia BIT subsequently provides a non-exclusive list of permitted investments, and Article 1, Section 2.3 specifically states that the minimum characteristics of an investment under the treaty must include: (i) the commitment of capital or other resources (ii) the expectation of gain or profit and (iii) the assumption of risk for the investor. Hence, an “investment”, for purposes of the India-Colombia BIT, applies to a broad spectrum of current and future potential arrangements within each member country.

Tribunals interpreting the term “investment” tend to apply the term liberally. In Fedax N.V. v. Venezuela, for example, the tribunal determined that, even an indirect transaction in which a claimant acquired Venezuelan promissory notes by endorsement from the original note-holder qualified as an “investment” under the Netherlands-Venezuela investment treaty. Furthermore, tribunals have ruled that a qualifying investment under an investment treaty may even include transactions that, taken in isolation, might not otherwise qualify as an investment. For example, the tribunal report in Chevron-Texaco v. Ecuador, stated that an “investment” needed to be “viewed holistically and not as discrete transactions or components”. Therefore, countries that seek a restrictive reading of the term will often find themselves on the losing end of the argument.

“Investor”

The definition of the term “investor” is the second point of reference in determining whether a party is subject to the protection of an investment treaty. The India-Colombia BIT defines investor as follows:

Any physical or natural person or an entity of one of the contracting parties that has made investments in the territory of the other contracting party in accordance with its national legislation.

  1. A physical or natural person shall mean a person who, in the case of India is a citizen of India and in the case of Colombia is a citizen of Colombia pursuant to their respective legislations
  1. An entity shall mean a company, corporation, firm or association incorporated or constituted or otherwise duly established pursuant to the laws of that contracting party and is engaged in substantial business activities in the territory of the Contracting Party.

Natural persons that are nationals of the state party to the India-Colombia BIT and entities incorporated or constituted under the laws of such state that carry out substantial business in the are thus able to rely on treaty protection. Interestingly, the India-Colombia BIT is representative of various Latin American investment treaties in that it requires corporate investors to carry out substantial business in the relevant state. This provision is included to prevent treaty shopping, i.e., when individuals from 3rd party jurisdictions create a new company, or shell company simply to benefit from the provisions of a particular investment treaty. As further discussed below however, this provision should not limit treaty protection to Indian nationals or Indian corporations (with substantial activities in India) that structure their investment in Colombia through intermediary corporate vehicles located in third party jurisdictions.

Many BITs expressly include in their definition of investor, corporations “owned or controlled” by nationals of a contracting state. This is important in order to account for the myriad of ways in which investment may be structured in a foreign country. Often, the corporate structure of a contracting partner to an investment treaty may include one or more intermediary corporate entities located in third party jurisdictions. For example, the Netherlands includes in its 2004 model investment treaty, the definition of investors that are:

“Legal persons not constituted under the law of that contracting party but controlled, directly or indirectly by natural persons… or by legal persons [ who otherwise meet the definition of national]”. Article 1(b)(iii).

Likewise, Article 1 of the U.S. 2004 model investment treaty covers protection to intermediary corporations by expressly defining “investment” to include “every asset that an investor owns or controls, directly or indirectly, that has the characteristics of an investment”. ”. It would have preferable to have seen this language incorporated into the India-Colombia BIT and not leave it potentially open to argument of whether indirectly controlled investments are covered by the treaty protection.

Nonetheless, we believe that a bona-fide Indian national (or entity with substantial business activities in India) who invests in Colombia through a corporate intermediary established in a third party jurisdiction would be provided treaty protection. In such a case, treaty protection would be consistent with Article 31, Section 1 of the Vienna Convention on Law of Treaties, which states that “a treaty shall be interpreted in good faith, in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in light of its object and purpose.” The objective and purpose of investment agreements, which is stated in their preamble, is to encourage foreign investment. Thus, tribunals have traditionally been flexible and willing to uphold the right of bona-fide investors under a particular treaty, including where investments are made through intermediary companies.

New Tax Treaty signed between India and Colombia.

On May 13, 2011 India and Colombia signed a Double Taxation Avoidance Agreement (“DTAA”). The DTAA is a comprehensive tax treaty designed to prevent double taxation of income earned in one country by a resident of the other country. The DTAA will also include provisions for the exchange of information for tax purposes.

The DTAA has yet to be ratified by the contracting parties and enter into force. However, if ratified, the DTAA will set maximum rates for withholding taxes imposed on dividends, interest and royalties. While, dividends, interest and royalties will be subject to tax in both India and Colombia, the maximum withholding tax will not exceed 5% in the case of dividends and 10% in the case of interest and royalties. The DTAA provides that business profits from a permanent establishment will be taxable in the source State. Furthermore, profits derived from construction, assembly or installation projects lasting at least six months will be taxed in the source state. Capital gains from the sale of shares will be taxable in the country of source.

The DTAA is an important development for India-Colombia trade and bilateral relations.

Colombian Investments

Colombia allows foreign investment in virtually all sectors of the economy except for sectors related to national security and the disposal of hazardous waste product. Colombia offers a variety of incentives such as tax exemptions and tax holidays for investment in priority sectors, including manufacturing, agro-industry, mining and petroleum.

The forms of business organization most often used by foreign investors in Colombia are joint capital stock corporations (“Sociedad Anonima”) and limited liability companies (“Sociedad Limitada”). The corporate income tax rate and capital gains rate is 33%, which applies both to the Sociedad Anonima and the Sociedad Limitada, and all expenses incurred in the normal course of business are generally deductible to both types of entities. Furthermore, no thin capitalization rules or CFC regime exists. Significantly, dividends paid to a foreign company or entity not domiciled in Colombia are not subject to Colombian withholding tax so long as the corporate profits have already been subject to taxation at the corporate rate.

Interest is subject to a 33% withholding tax. Lastly, the deductibility of interest payments is limited to the interest rate published from time to time by Colombian Superintendencia. Thus, Colombia encourages foreign capital investments over foreign financing.

Structuring opportunities

There are various outbound structuring opportunities for Indian persons seeking to invest in Colombia. Significant planning opportunities exist to minimize the taxes on the repatriation of after-tax profits at the Colombian entity level. An Indian investor would obtain the greatest tax efficiencies, by structuring their investment through one or more corporate intermediaries located in a low-tax jurisdiction that has entered into a comprehensive income tax treaty with India. The following diagram illustrates the potential effects of utilizing a Cyprus and Panama intermediary; however, similar results may apply utilizing alternative jurisdictions. In each case, an efficient exit strategy would involve the tax free sale by Cyprus Co of its shares of Panama Co.

  1. Equity Investment

 

 

 

 

 

 

100%

 

 

 

 

 

 

100%

 

 

 

 

 

 

 

 

100%

 

Hold Co Ltda

Colombia

 

 

 

 

 

 

 

 

 

 

 

 

  1. Investment Utilizing Financing

 

 

 

 

 

 

 

100%

 

 

 

 

 

 

 

 

 

99%

 

 

 

 

 

 

 

 

 

 

100%

 

 

 

 

Hold Co Ltda

Colombia

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Conclusion

The enactment of the India-Colombia BIT and the impending DTAA are expected to facilitate Indian investment in Colombia. Bona-fide investors, even those that structure their investments through intermediary corporations should benefit from the protections set forth the India-Colombia BIT.

Fernan Rodriguez is a foreign legal consultant for The Richards Group, in Miami Florida. Fernan is a licensed Colombian attorney who specializes in tax and international transactional matters. He may be contacted by email at frodriguez@richards-law.com. Alonso Sanchez is an associate in The Richards Group’s tax department. He may be contacted by email at asanchez@richards-law.

 

 

By Fernan Rodriguez and Alonso Sanchez

Competition Commission Takes Hold Of M&A Activity

Background

            The Competition Commission of India (“CCI”) stepped into a new regulatory role with the release of the CCI (Procedure in regard to transaction of business relating to combination) Regulations, 2011 (“Combination Regulations”) on May 11, 2011. This was a sequential step to the notification of combination provisions (sections 5 and 6) of the Competition Act, 2002 (“Act”) issued on March 4, 2011. As a result, the CCI is now equipped with a complete set of substantive and procedural rules to scrutinize mergers and acquisitions which cross the prescribed assets or turnover based thresholds. Effective June 1, 2011, no transaction that is likely to have an “appreciable adverse effect on competition in relevant market in India” can be consummated without a prior approval from the CCI. After implementing the Combination Regulations for almost nine months, CCI has brought some significant changes through the CCI (Procedure in regard to transaction of business relating to combination) Amendment Regulations, 2012 (“Combination Amendment Regulations”) on February 23, 2012.

This article analyses this new regulatory framework, highlighting the potential impact of the Combination Regulations as well as the Combination Amendment Regulations on mergers and acquisitions in India.

Transactions covered under the Competition Act

Section 5 of the Act has been very broadly cast and defines “combination” to include an acquisition of shares, voting rights, assets, or control of an enterprise or merger or amalgamations of enterprises. Essentially, all transactions crossing the following prescribed monetary threshold would require a prior notification to the CCI. All figures are approximations.

Threshold referencing India:

  • Acquirer and target having assets worth $330 million or turnover of $1 billion.
  • Acquiring “group” and target having assets worth $1.33 billion or turnover of $4 billion.

Threshold with world-wide reference:

  • Acquirer and target having assets worth $0.75 billion (out of which at least $167 million in India) or turnover of $2.25 billion (out of which at least $500 million in India).
  • Acquiring “group” and target having assets worth $3 billion (out of which at least $167 million in India) or turnover of $9 billion (out of which at least $500 million in India).

Interestingly, on March 4, 2011 (the same date on which the combination provisions under the Act were notified) the government also issued an array of investor friendly notifications, including: (i) an increase of 50% in asset/turnover based monetary thresholds to reach the present levels mentioned above; (ii) amendment to the definition of “group” whereby groups exercising less than 50% of voting rights in the other enterprise are exempt from the purview of the Act and Combination Regulations for a period of five years starting June 1, 2011; and (iii) a similar exemption of five years to enterprises having assets below $56 million or a turnover of not more than $167 million.

In our view, the monetary criterion alone is not appropriate to define the contours of a combination in every case. But, if the financial triggers are attracted that would compel parties to notify even small combinations having no appreciable adverse effect on competition, just on account of their size. On the other hand, dilution of the definition of “group” is a welcome move as it would ensure safe harbor for many more transactions involving group companies, than would have been the case with the earlier threshold of 26%.

Process of filing notice with CCI

Trigger Point: 30 days!

The Act mandates that a notice is to be filed with CCI within 30 days of an approval by the board of directors in case of intended mergers or amalgamations or execution of any agreement or “other document” in case of acquisitions. According to the definition inserted now in the Combination Regulations, “other document” will mean any “binding document” conveying or exhibiting the intention to acquire. In the context of “hostile takeovers,” mere execution of such a document by the acquirer itself would trigger the deadline of 30 days. The CCI will not interfere with transitory transactions where the relevant trigger event has occurred before June 1, 2011.

Form and fee

The CCI is to be normally notified in Form I (a short form prescribing entries with respect to products/services, market share, etc.) with a stipulated fee of approximately $20,000. This amount is a result of the Combination Amendment Regulations, whereby the fees has been increased almost 20 times. Regulation 5(2) provided an inclusive list of transactions, where in most cases only Form I (Part I) was required to be filed. The recent amendment deleted the reference to transactions for which Form I (Part I) had to be filed. This implies that it is now mandatory to file the complete Form I (Part I and Part II) in every instance.

Parties to the transaction also have an option to file Form II with a prescribed fee of approximately $80,000. The amended regulations also provide for some instance where filing of Form II is recommended. These recommendations include combinations involving horizontally or vertically aligned entities with combined market share of more than 15% or 25% in each case. Form II is longer and contains detailed requests for information regarding (among other things) relevant market structure, demand and supply in the market, entry and exit conditions. It is apparent that the type of detailed information required by the CCI would necessitate filing certain confidential information that could, eventually, be leaked out to the market and competitors and may not be in the best interest of the transacting parties. In order to claim confidentiality, parties are required to formally request and specify cogent reasons, including the implications on the business for protecting confidentiality regarding any information supplied to the CCI. Complete discretion rests with the CCI in granting any such request for confidentiality. Unless addressed properly, this could become a thorny issue as there will be inevitable reluctance to share confidential information without adequate security that it shall be preserved.

Any acquisition by a public financial institution, foreign institutional investor, bank or venture capital fund, pursuant to a covenant under a loan or investment agreement does not require a prior approval from the CCI. Such bodies are just required to notify the CCI in a simplified Form III along with a certified copy of the executed loan or investment agreement, without any fee, in seven days post such acquisition. The Combination Amendment Regulations have inserted a new sub regulation whereby CCI may permit filing of Form III even beyond the seven day period. This is inconsistent with section 6(5) of the Act, which specifically limits the filing period to seven days.

Onus of filing notice

In the acquisition of shares, voting rights, or control in an enterprise, the acquirer is under an obligation to file the relevant form with the CCI. In case of a merger or amalgamation, the transacting parties are required to jointly file the appropriate form with the CCI. The recent amendment has also authorized the company secretary of the company, duly authorized by its board, to do filing with the CCI in the aforementioned cases. In a scenario, where the intended objective of a business transaction is achieved through a series of individual transactions (inter–connected or inter–dependant), one or more of which may amount to a combination, the Combination Regulations provide that a single notice can be filed with the CCI. For example, in the recently proposed acquisition of UTV Software Communications by Walt Disney Company , the complete transaction as proposed by the parties involved two steps: firstly, acquisition of shares held by public shareholders through a delisting offer under the Delisting Regulations, 2009 and, secondly, a subsequent acquisition from promoters. The acquirer filed a single notice in Form I and CCI approved the entire transaction through an order dated August 25, 2011.             

Failure to file any of the prescribed forms can result in a penalty of up to 1% of the combined assets or turnover of the combined entity, whichever is higher, on the enterprise(s) that is under the obligation to file the relevant form in a particular case.

Evaluation of Proposals by the CCI

            Prima facie opinion: the CCI is obligated to make a prima facie opinion regarding whether there will be an appreciable adverse effect of the proposed transaction on the Indian market within 30 days of filing the notice. There were apprehensions in the industry on the competence of the CCI to approve proposed combinations within the short span of 30 days. However, on July 26, 2011, the CCI came out with its first order approving an acquisition by Reliance Industries Limited and Reliance Industrial Infrastructure Limited of a 74% stake held by the Bharti Group in each of two joint venture insurance companies, namely Bharti AXA Life Insurance and Bharti AXA General Insurance. The order approving the transaction was passed in a record time of just 18 days. Further, the competition regulator has already given its nod to twenty seven more proposed transactions, and most of them well within the timeframe of 30 days. Certainly, the CCI has started out well and it remains to be seen if such time frames shall be maintained going forward.

Detailed Investigations: If unsatisfied at the preliminary stage, the CCI could go for a detailed investigation, and, in such a case, would endeavor to pass an order within 180 days as opposed to 210 days. It is noteworthy that despite the global concern there is no commitment to approve within the reduced period of 180 days. The obligation of the CCI is merely confined to best efforts. There is also a provision for deemed approval in case the CCI does not pass an order within 210 days.

It remains unclear when the clock will start and the 210-day period will commence because chances are that the CCI will seek additional clarifications/information and that process could prove to be time consuming. Only time will tell whether the 210-day period will be extended or curtailed and respected. So far, the prognosis appears to be encouraging.

Another conundrum remains in case of takeovers or the substantial acquisition of shares of listed entities. In case parties execute an agreement to acquire more than 25% of voting rights in a listed company, this would trigger the “open offer” obligation under the Takeover Regulations. At the same time, notice would also need to be filed with the CCI under the Combination Regulations. This may lead the transacting parties embroiled between the competition and securities law, as they might not be able to complete the open offer within the time stipulated under the Takeover Regulations for want of clearance from the CCI which can, in turn, lead to payment of interest on the offer price to tendering shareholders at a rate decided by the Securities and Exchange Board of India (“SEBI”).             

The Regulations under Schedule I enumerate a list of transactions that are unlikely to cause any appreciable adverse effect on competition in India. The list includes:

  • An acquisition of shares or voting rights of an enterprise solely for the purpose of investment or in the ordinary course of business. In this case, the total share holding or voting rights of the acquirer should not exceed 25% and should not lead to the acquisition of control over the enterprise. The limit has been recently increased from 15% to 25% through the Combination Amendment Regulations. This amendment ensures that the threshold of 25% is in consonance with the new Takeover Regulations announced on October 22, 2011.
  • Any consolidation of holding where the acquirer already has more than 50% of share holding or voting rights in the target except when such acquisition leads to sole control from joint control. The Combination Regulations are silent upon any acquisition or consolidation of shareholding between 25–50%. This is in contrast to the new Takeover Regulations, which allow the consolidation of shareholding in a listed entity through the “creeping acquisition” of 5% in a financial year without getting indented by open offer requirements, in case the acquirer holds 25% or more in the target and until he transgresses the maximum permissible non-public shareholding limit of 75%. The Combination Regulations, on the other hand, do not provide for such leverage. A clarification on this particular point is very much required, as an acquisition of 5% of voting rights in a financial year in cases where it does result in change of “control” in an enterprise, would not cause any significant appreciable adverse effect on competition in the relevant market and should be exempted.
  • An acquisition of stock-in-trade, raw material, stores, etc. in ordinary course of business.
  • An acquisition of bonus or right shares not leading to control. The recent amendment has extended this exemption to buy back of shares as well.
  • Intra-group acquisitions are exempted. The Combination Amendment Regulations have now specifically exempted intra-group mergers or amalgamation between (i) wholly owned subsidiaries of the parent company inter-se or (ii) wholly owned subsidiary with the parent company. This change will facilitate consolidation of group companies with lesser statutory compliance. Further, the erstwhile regulations provided for a definition of “group” while determining any intra-group acquisition. The amendment has curiously deleted this definition leaving stakeholders with little guidance on interpretation of the term “group.”
  • A combination taking place entirely outside India with “insignificant local nexus” and effects on relevant market in India. Regrettably, no objectives or parameters are provided to determine “insignificant local nexus.”

The Combination Regulations state that these transactions are “ordinarily not likely” to cause an appreciable adverse effect in the relevant market, leaving it on the parties to assess the implication of their proposed combination and make a decision on notifying the CCI.

Pre -Merger Consultation

The Combination Regulations failed to provide any pre–notification consultation. But, in conformity with international practices and paying regard to the demands from industry, the CCI has recently started a separate mechanism, offering an informal and verbal consultation with the CCI staff by appointment. It is unclear at this stage what assistance the staff would provide, but in essence it could be confined to clarifications or guidance for the completion of forms. The CCI has also upfront clarified that such consultation should not be construed as its opinion and would not have any binding effect on it. At the very least, the CCI staff should review the relevant form and intimate parties of changes, if any, or any additional information/documents that ought to be supplied to avert delays at a later stage.

Comment

            The combination provisions under the Act have finally gathered full force after being in abeyance for almost a decade. There is some jurisprudence that exists with regard to anti-competitive agreements and abuse of dominant position in India, and now specific merger control regulations are a step in the right direction for healthier competition in the market. The industry anticipates a slowdown in the mergers and acquisitions due to the time the CCI will take in issuing its approval. The CCI is required to make sure that it strengthens the pre-merger consultation mechanism and regularly comes out with clarifications and amendments, as the recent one, to remove ambiguities. Nonetheless, the CCI has gathered the right momentum by approving most of the initial combination proposals within the stipulated 30 days, and this could be the harbinger of favourable and efficient regulatory action in days to come.

Ankush Goyal is an associate with Priti Suri & Associates. His specific area of practice includes general corporate, competition, project finance, M&A, banking and infrastructure. Ankush can be reached by e-mail at a.goyal@psalegal.com.

 

 

By Ankush Goyal

 

Equipping Competition Laws To Protect An Innovative Economy: Can Canada Assist India?

Is it good for the Indian economy if Wipro starts purchasing all of the promising small, entrepreneurial firms in India? Do Indian consumers benefit if Cipla and Ranbaxy engage in joint ventures for the research and production of new drugs? These types of questions are characteristic of a technologically advanced economy and are the types of questions India’s new Competition Commission (the “CCI”) will confront, as the CCI seeks to protect India’s marketplaces. This article seeks to identify whether India’s competition law is sufficiently equipped to resolve these questions, and where areas of concern are identified, looks to Canadian competition law for possible assistance.

  1. The (Collaborative) Innovation Imperative

As various panels appointed by governments in both India and Canada have identified, technological innovation is critical to the prosperity of each nation and its citizens. According to the OECD, technological innovation is typically defined as the implementation or commercialization of an invention arising from research and development work (OECD, Oslo Manual). It can range in significance from a mere incremental improvement to disruptive technologies, such as electric power.

The economic research driving this call to action could not be more compelling, as seven-eighths of economic growth in the United States between 1909 and 1949 according to economist Robert Solow, and three-quarters of economic growth since then according to the United Stated Department of Commerce, is attributable to technological innovation. This relationship has only grown stronger, such that today, one could look to any number of countries, especially those without significant amounts of natural resources, spending heavily to build domestic capability for technological innovation. China is a poignant example. Domestic technological innovation is therefore imperative if India is to achieve its national ambitions, as illustrated by Vannevar Bush in 1945 with reference to the United States. Innovation in high-technology industries, such as information and communications technology and pharmaceuticals, is especially important because these industries are responsible for major disruptive change to the global economy, such as through the development of the Internet. Technological innovation in high-technology industries often generates tremendous wealth and prosperity.

The “secret sauce” for technological innovation depends on a wide range of factors, and sometimes differs between industries and the stage of development of an industry. Innovation has historically been primarily the result of intra-firm research and development. However, as experience has demonstrated there is a range of potential benefits if the innovation process includes activity outside the firm, it is increasingly becoming a collaborative activity between and among firms in similar industries, dissimilar industries, universities and governments. The mechanisms permitting this transfer of technology include contractual arrangements, joint ventures and especially mergers and acquisitions, a frequent event in the ever-innovative Silicon Valley. However, especially since its modern genesis in the United States at the beginning of the 20th century, competition law has been particularly concerned with conspiring competitors, as consumers are usually harmed by these arrangements, such as in the event of price-fixing. Rapidly changing high-technology industries are no different, and harm to consumers, innovation and the economy is still very much of concern (Barnett, Competition Enforcement in an Innovative Economy).

In India, harmful anti-competitive conduct has historically remained free from government intervention, as the previous competition law, the Monopolies and Restrictive Trade Practices Act, 1969, was antiquated and rarely enforced. In May 2009, a modernized Competition Act, 2002 (the “Act”) came into effect, as did the provisions governing combinations, or mergers, on June 1, 2011.

Are India’s new competition laws and the enforcer of those laws, the CCI, equipped to deal with the nuances of protecting consumers, innovation and the economy, while still permitting the collaboration required for innovation to take place?

  1. Competition Laws Relevant To Collaborative Innovation

Competition law is a policy lever to facilitate technological innovation; however, it is not of the same type as patent law, tax law, or other levers that provide an explicit incentive to innovate. Instead, much as property rights do, competition law is a way of protecting the marketplace, including participants in the marketplace, by seeking to avoid the deterrence or prevention of innovation that can be caused by a range of harmful behaviours.

The Act created the CCI and empowered it with wide powers of investigation and the ability to levy significant financial penalties. Two provisions are of particular relevance to collaborative innovation: anti-competitive agreements and dealing with business combinations. Similar provisions exist in Canada’s Competition Act (the “Canada Act”).

  1. Anti-Competitive Agreements

Preventing conspiracy between competitors (the indicia of which are common in many countries, effectively consisting of competitors agreeing not to compete, typically through the fixing of prices, outputs or geographical markets) is a longstanding pillar of competition law. Whether referred to as a conspiracy or a cartel, the static economic effects are typically the same: prices are higher, output is reduced and consumer welfare is harmed. The dynamic effects, or the “impact on the optimal introduction or improvement of products and production processes” according to Canada’s counterpart to the CCI, the Competition Bureau (Competition Bureau, Efficiencies in Merger Review), are less well studied, but typically the static harm will outweigh any potential benefit created by increased innovation, and further, a competitor that is not competing has little incentive to innovate.

While conspiracy between competitors is almost always harmful, there are a wide range of agreements involving the sharing of, development of, or transfer of, technology between and among competitors. Some of these may be, on a net basis, anti-competitive. Many of them, however, are pro-competitive, owing to the technological innovation or dynamic efficiencies that are created. Policing these agreements correctly is an exceedingly difficult task.

Looking first to India, section 3 of the Act is the primary tool for stopping conspiracies. It provides that no person, enterprise or association thereof may enter into an agreement in respect of production, supply, distribution, storage, acquisition or control of goods or services, which causes or is likely to cause an appreciable adverse effect on competition within India. Sub-section 3(3) of the Act presumes that particularly harmful behaviour, such as price-fixing, satisfies this threshold.

This provision is similar to one of the two principal provisions of the Canada Act targeting anti-competitive agreements. The first is a flexible analysis similar to section 3 of the Act, in section 90.1 of the Canada Act. Instead of “appreciable adverse effect on competition”, the Canada Act imposes a similar threshold, although only of “competitors” of one another: whether an agreement “prevents or lessens, or is likely to prevent or lessen, competition substantially in a market…” (Canada Act, s. 90.1(1)). Under this flexible approach, this analysis considers a range of factors set out in the Canada Act, as well as an accompanying enforcement guideline created by the Competition Bureau (Competition Bureau, Competitor Collaboration Guidelines).

The Canada Act’s second principal provision combating conspiracy, section 45, requires no such flexible analysis. If a person is found to have engaged in the fixing of price, output or the production or supply of a product with a competitor, criminal sanctions will be applied. In a way, this is similar to section 3(3) of the Act, in that both target these particularly harmful activities and pay no regard to competitive effects, although section 3(3) carves out “joint ventures” from the presumption of an appreciable adverse effect.

  1. Business Combinations / Mergers

A firm wishing to expand or acquire a new competency typically faces a binary choice: grow organically or acquire an existing firm. It is the latter that permits a firm to rapidly accumulate market power and potentially even monopoly power, which attracts the attention of an enforcement body such as the CCI. In any developed economy, business combinations are a frequent occurrence. As noted above, they have also increasingly become a common vehicle for acquiring technology and the talented people that create and commercialize that technology.

Business combinations occur so frequently, in fact, that much of the merger review provisions under the Act are procedural in nature (Act, s. 5), to enable the CCI to gather relevant information quickly and assess whether a proposed merger will have an appreciable adverse effect on competition within a relevant market in India (Act, s. 6(1)). The Canada Act is largely similar in structure, by setting out procedure of merger review and only requiring medium and large firms to submit to the merger review process and governing the timing of the merger review. Also similar is the test for whether to approve or challenge a merger, based on whether it prevents or lessens, or is likely to prevent or lessen, competition substantially in a trade, industry or profession in Canada. One difference is that in Canada, the Competition Bureau will analyze a range of factors, contained in both the Canada Act and in an accompanying enforcement guideline, to assess whether the transaction will pass the test.

III.       Is India Equipped For Nuances In This Analysis?

The law relating to conspiracies and merger reviews is quite similar in Canada and India, subject to some subtle differences. However, applying these laws is the difficult part of safeguarding the marketplace, and doing so requires economic analysis of a given situation.

Unfortunately, the economic tools available to analyze the nuances of whether a particular arrangement or merger is pro-competitive or will increase technological innovation, are not nearly as well established as they are for static price or output effects, according to Gwill Allen and Alan Gunderson (19). As both the Act and the Canada Act are relying on this common body of economic theory, these challenges are common to both the CCI and the Competition Bureau.

In seeking to ensure that the CCI is best able to effectively enforce the Act, I offer three suggestions which may be of assistance.

  1. Insulate Non-Cartel Type Agreements From Serious Penalties to Avoid a Chilling Effect on Innovators

Currently, section 27 of the Act enables the CCI to apply onerous financial penalties, among a range of other remedies, against any type of agreement it determines to have an appreciable adverse impact on competition in India. While the ability to levy significant penalties may be desirable on occasion, the threat of penalties as significant as criminal sanctions in other countries can discourage firms from engaging in potentially beneficial alliances. This was a recognized shortcoming in Canadian competition law relating to anti-competitive agreements, which until 2009, was a regime built around criminal sanctions. In 2009, it was revised such that most agreements are analyzed under a flexible framework, considering a broad range of factors, usually with no potential criminal sanctions. The new framework acts to (i) prevent any chilling effect on most collaboration, since they don’t involve problematic behaviours, such as price-fixing, and (ii) identify and protect specific positive arrangements, including commercialization and joint selling agreements, research and development agreements, information sharing agreements and joint production agreements. Accordingly, while creating a flexible analysis, it retained a provision for criminal sanctions against serious conspiracies, in recognition that the harmful effects of such an arrangement will outweigh the benefits potentially created.

The CCI’s broad discretion in applying section 3, including levying significant penalties for a common technology transfer transaction, can create uncertainty amongst firms in arranging their affairs. An interpretive or enforcement guideline to provide similar safeguards could inspire confidence among firms, such as reserving serious penalties permitted by section 27 of the Act for serious anti-competitive conduct addressed in sub-section 3(3) and outlining types of agreements presumed to be beneficial, such as certain types of joint research and development agreements.

  1. Address The Shortcomings of Economic Analysis for High-Technology Industries

Competition law relies on economic theory to identify anti-competitive harm. However, in rapidly changing high-technology industries, traditional economic tools, such as an analysis of static price and output effects, can be misleading. For example, by focusing on traditional price or output effects, an analysis could entirely miss the dynamic effects of an arrangement, either positive or negative, and intervention by the CCI could significantly harm innovation (Rosch). Unfortunately, at the same time, the potential for anti-competitive harm is still very much a reality.

Various studies have identified that to better analyze high-technology industries, one should consider: (i) dynamic efficiencies, as defined above, (ii) qualitative factors, perhaps including incentives for innovating, and (iii) the presence of vigorous, innovative competitors, known as “mavericks”, who are generally beneficial to consumers because they often create downward pressure on prices, innovate and come up with new products, which disrupts the power of incumbents in a particular market.

With respect to combinations, encouragingly, the Act refers the CCI to a list of factors when determining whether a combination will result in an appreciable adverse effect on competition in the relevant market (Act, s. 20(4)). Explicit reference is made to considering the “nature and extent of innovation” likely to be generated or destroyed by the combination, as is any removal of “vigorous and effective competitors” (Act, ss. 20(4)(l) and (m)). The Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Regulations, 2011 (No. 3 of 2011) (the “Regulations”) note that information must be disclosed by the combining parties to speak to these considerations, including any new technologies in an industry, research and development and intellectual property rights (Regulations, ss 11.10(d) and (e), 11.18-11.20). Finally, just as Canadian merger review provisions provide for a “defense” if pro-competitive efficiencies outweigh anti-competitive effects (Canada Act, s. 96), the Act includes such considerations by analyzing the contribution to economic development and any outweighing of adverse impact (Act, s. 20(4)(n)).

With respect to anti-competitive agreements, the Act is similarly equipped to incorporate these factors into the analysis of whether harm has occurred. Sub-sections 19(3)(e) and (f) of the Act address the consideration of “improvements in production or distribution of goods or provision of services”, a functional definition of innovation, and “promotion of technical, scientific and economic development by means of production or distribution of goods or provision of services”, which also captures innovation and broader dynamic and qualitative effects.

The CCI should make full use of these provisions, in conjunction with the latest in economic theory, as the result will be a much better analysis of competitive benefits and harm.

  1. Provide Explicit Guidelines Around Patents and the Use of Patents

Intellectual property, and in particular, patent law, is a core component of a nation’s innovation policy. A patent is the statutory incentive for innovation, offering a temporary monopoly on an invention in exchange for disclosure of that invention into the public domain. However, as it is charged with protecting the economy, partially through hostility towards monopolies, competition law is inherently in tension with patent law. At the same time, keen management of this tension is in order, as both patent law and competition law have goals of promoting innovation.

The use of patents engages competition law in a variety of ways. As a contemporary example, for a hardware manufacturer in the information and communications technology industry, a major aspect of a firm’s business is the accumulation of patents to protect the ability to sell products and the incorporation of technological standards, such as 3G wireless technology, into their products. Building a product that is compatible with a standard often involves the declaration of patents covering that particular standard standard to the particular standard setting organization (“SSO”). There are a number of competition law issues with SSOs, some owing to the fact that a SSO is a collection of competitors or firms in similar industries agreeing to adopt particular technologies and engage in other conduct which can sometimes look like a conspiracy and the fixing of prices for key inputs. Typically, however, SSOs are pro-competitive.

Similarly, a firm participating in a standard can “ambush” that standard by not informing the SSO about a relevant patent which covers part of the standardized technology, then suing the other firms using the standardized technology afterwards for patent infringement, for a much higher amount than would otherwise be possible.

Another way that patent law is increasingly engaging competition law around the world is in considering how to deal with an increasing amount of “patent troll” litigation, particularly in the United States. A patent troll is an entity which does not produce products and instead acquires and holds patents simply to assert them for royalties or settlements in court. It is far from clear that such patent assertion is pro-competitive or that it encourages innovation, and indeed, many academic authors suggest this behaviour is likely harmful to innovation.

Unlike Canadian competition law, with a set of enforcement guidelines which provide limited direction to firms (Competition Bureau, Intellectual Property Enforcement Guidelines), or United States competition law, with a set of enforcement guidelines and a substantial body of relevant court decisions and, there is little guidance offered to firms operating in India under the Act. In fact, sub-section 3(5) of the Act offers protection for anti-competitive conduct simply because it “restrain[s] any infringement of… [an intellectual property right]”. This provision, and the lack of other applicable guidance, does not appear to equip the CCI with the ability to thoroughly identify competitive effects caused by certain uses of patents, analyze whether harm is occurring, and intervene accordingly. The CCI may find it helpful to refer to the body of analysis in other jurisdictions, especially Canada and the United States to remedy this shortcoming in the Act.

  1. Conclusion

Technological innovation is imperative to national development. The tricky question for the CCI is that collaboration is increasingly required for maximum technological innovation, yet collaboration may very easily cause anti-competitive harm. India’s new competition laws generally provide the tools necessary to successfully navigate around discouraging innovation, between the Scylla of “heavy handed” enforcement, and the Charybdis of no enforcement at all. For the particularly difficult problems, drawing upon experience with these issues in Canada and in the United States is helpful, and in particular, Canada’s recent amendments and enforcement guidelines offer the CCI guidance when applying the Act to novel situations.

Chris Hannesson is a Student-at-Law, Davies Ward Phillips & Vineberg LLP.

Chris graduated from the University of Western Ontario, Faculty of Law, in 2011 and from the Beedie School of Business at Simon Fraser University in 2008. Chris currently resides in Toronto, Ontario, Canada. Chris can be contacted at channesson@dwpv.com.

Sources

Canada, Competition Bureau, Competitor Collaboration Guidelines (Ottawa: Supply and Services Canada, 2009), online: <http://www.competitionbureau.gc.ca/eic/site/cb-bc.nsf/vwapj/Competitor-Collaboration-Guidelines-2009-12-22.pdf/$FILE/Competitor-Collaboration-Guidelines-2009-12-22.pdf&gt; (accessed 13 December 2011).

Canada, Competition Bureau, Efficiencies in Merger Review (Ottawa: Supply and Services Canada, March 2009), online: <http://www.competitionbureau.gc.ca/eic/site/cb-bc.nsf/vwapj/Bulletin-Efficiencies-Merger-Review-2009-03-02-e.pdf/$FILE/Bulletin-Efficiencies-Merger-Review-2009-03-02-e.pdf&gt; (accessed 13 December 2011).

Canada, Competition Bureau, Intellectual Property Enforcement Guidelines (Ottawa: Supply and Services Canada, September 2000), online: Competition Bureau <http://strategis.ic.gc.ca/pics/ct/ipege.pdf&gt; (accessed 13 December 2011).

OECD, Oslo Manual: Guidelines for Collecting and Interpreting Innovation Data, 3rd Edition, online: Organisation for Economic Cooperation and Development <http://www.oecd.org/document/23/0,3746,en_2649_34409_35595607_1_1_1_1,00.html/&gt; at 46.

Gwill Allen and Alan Gunderson, “Innovation and Competition Policy: An Economic Perspective” (Paper delivered at the CBA National Competition Law Section, Annual Fall Conference, 11 October 2007) at 19-20.

Robert M. Solow, “A Contribution to the Theory of Economic Growth”, (1956) 70 QJ Econ 65.

Thomas O. Barnett, Assistant Attorney General at the U.S. Department of Justice, “Competition Enforcement in an Innovative Economy” (Address delivered at the 4th Annual Competition Policy Conference, 20 June 2008) online: <http://www.justice.gov/atr/public/speeches/234246.htm&gt; (accessed 14 December 2011).

United States of America, Department of Commerce, Patent Reform: Unleashing Innovation, Promoting Economic Growth & Producing High-Paying Jobs, (April 2010) online <http://www.commerce.gov/sites/default/files/documents/migrated/Patent_Reform-paper.pdf&gt; (accessed 13 December 2011).

United States of America, Federal Trade Commission, Statement, “Statement of Commissioner J. Thomas Rosch on the Release of the 2010 Horizontal Merger Guidelines” (19 August 2010) online: FTC <http://www.ftc.gov/os/2010/08/100819hmgrosch.pdf&gt; (accessed 13 December 2011).

United States of America, Office of Scientific Research and Development, Science: The Endless Frontier, A Report to the President by Vannevar Bush, (Washington, DC: US Government Printing Office, 1945).

 

 

By Chris Hannesson

Merger Control In India

Introduction

Merger control is considered to be one of the most important pillars of competition law and policy worldwide. The main purpose behind merger control is to ensure that mergers do not create adverse conditions for competition in the relevant market. For a long period of time, this important aspect of competition law was not made effective in India. However, after much debate and deliberation, the merger control provisions under the (Indian) Competition Act, 2002 (“Act”) and the allied Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Regulations, 2011 (the “Combination Regulations”) which set out the scheme for implementing the merger control provisions under the Act, came into effect from June 1, 2011. The merger control regime has been in force for nine months. The CCI, on 23 February 2012, has amended the Combination Regulations, by way of the Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Amendment Regulations, 2012 (the “Amendment Regulations”) to inter alia make them consistent with the SEBI Takeover Regulations amongst other key changes which include substantial increase in filing fees, limited exemption to intra group re-organizations by way of merger and amalgamations and changes to the notification forms.

Merger Control Provisions Under the Act

Section 5 and 6 of the Act are the operative provisions dealing with merger control in India. Section 5 prescribes worldwide and Indian assets and turnover thresholds for transactions involving the acquisition of an “enterprise” or mergers and amalgamations of an enterprise that will be subject to merger control (i.e., require prior approval of the Competition Commission of India (the “CCI”)). An “enterprise” under the Act means a person or a department of the Government, who or which is, or has been, engaged in any activity, relating to production, storage, supply, distribution, acquisition or control of articles or goods, or the provision of services, of any kind, or in investment, or in the business of acquiring, holding, underwriting or dealing with shares, debentures or other securities of any body corporate, either directly or through one or more units or divisions or subsidiaries, whether such unit or division or subsidiary is located at the same place where the enterprise is located or at a different place or at different places, but does not include any activity of the Government relatable to the sovereign functions of the Government including all activities carried on by the departments of the Central Government dealing with atomic energy, currency, defence and space. Section 6 prohibits combinations that cause or are likely to cause an appreciable adverse effect on competition (“AAEC”) within the relevant market in India and treats such combinations as void.

Consequently, any acquisitions of shares, voting rights, control, assets, merger or amalgamation meeting the specified asset/turnover thresholds (“Combination”) require prior notification to, and approval from, the CCI. Section 5 enumerates three types of transactions necessitating prior approval from the CCI:

  • acquisition of control, shares, voting rights or assets of one or more enterprises by one or more persons (Section 5(a));
  • acquisition of control by a person over an enterprise when such person already hasdirect or indirect control over an enterprise engaged in production, distribution or trading of a similar or identical or substitutable goods or provision of a similar or identical or substitutable service (Section 5(b)); and
  • merger or amalgamation (Section 5(c)).

The Ministry of Corporate Affairs has, on March 4, 2011, also published a series of notifications, increasing the asset/turnover thresholds by 50% (on the basis of wholesale price index) and providing for an exemption to certain categories of enterprises from the scope of the merger control provisions (“Notifications”).

Exempted Transactions

The Notifications exempt Combinations from the mandatory filing requirement for a period of 5 years where the target enterprise, including its divisions, units and subsidiaries has:

  • either assets not exceeding Rs. 250 crores (USD 50 million approximately*) in India; or
  • turnover not exceeding Rs. 750 crores(USD 150 million approximately*) in India; (“Target Exemption”).

* The Combination Regulations provide that the exchange rate to be used to determine whether thresholds are met is the average of the spot rate published by the Reserve Bank of India for the six months prior to the trigger event. However, for ease of reference, the exchange rate used throughout this article is 1 USD = Rs. 50.

The intent behind the Target Exemption is to provide a ‘local nexus’ requirement thereby excluding global transactions having ‘insignificant’ local nexus and impact on the relevant market in India. Interestingly, the Combination Regulations separately provide an exemption for Combinations occurring outside India having an insignificant local nexus and impact on the relevant market in India (as discussed below). However, the term ‘insignificant’ remains undefined thus leaving scope for interpretation.

The Notifications also exempt, for a period of 5 years, enterprises exercising less than 50% of voting rights in the other enterprise to be treated as part of the same ‘Group’. Consequently, the asset and turnover figures of an enterprise in which the other enterprise holds less than 50% voting rights will not be aggregated for the purposes of determining the notifiability of a proposed Combination under the “Group test” (as discussed below).

The Combination Regulations also list out (under Schedule I) various Combinations which are not “ordinarily” likely to cause AAEC in India and would not “normally” require a notification to the CCI:

  • Direct or indirect acquisitions, which do not entitle the acquirer to hold 25% or more of shares or voting rights of a target company (including through shareholders’ agreements or articles of association), solely for investment purposes or in the ordinary course of business, not leading to acquisition of control;
  • Acquisitions above 50%: Acquisitions where the acquirer already holds 50% or more of the shares or voting rights in the target, except in cases where the transaction results in transfer from joint to sole control. In the case of the proposed acquisition of UTV Software Communications Limited by Walt Disney Company (Southeast Asia) Private Limited (“Walt Disney”) (C-2011/08/02), resulting in transfer of joint control to sole control, the CCI granted its approval on the basis that the relevant market was wide and fragmented with low entry and exit barriers and that the parties to the transaction operated in different segments, i.e., there were no horizontal or vertical overlaps;
  • Asset acquisitions: Acquisition of assets, not directly related to the business of the acquirer or made solely as an investment, or in the ordinary course of business, not leading to control of the target, except where the assets represent substantial business operations in a particular location or for a particular product/service of the target, irrespective of whether such assets are organized as a separate legal entity or not. As of December 2011, the CCI has cleared three merger filings in relation to an acquisition of assets on a going concern basis by another enterprise by way of a slump sale. (See G&K/Wockhardt (C-2011/08/03), AICA Laminates/BBTCL (C-2011/09/04), NHK Automotive/BBTCL (C-2011/10/05) ) ;
  • Amended/renewed tender offers: An amended or renewed tender offer, where notice has been filed by the party making such an offer;
  • Routine business acquisitions: Acquisition of stock-in-trade, raw materials, stores and spares in the ordinary course of business;
  • Bonus/rights issue/stock-split: Acquisition of shares or voting rights pursuant to bonus issue, stock splits, consolidation of face value of shares, subscription to rights issue (beyond the extent of entitlement) or buy-backs, not leading to acquisition of control;
  • Underwriting/stock-broking: Acquisition of shares by a securities underwriter or registered stock broker (on behalf of its clients), in the ordinary course of business;
  • Intra-group acquisitions: Acquisition of control, shares, voting rights or assets by a person or enterprise of another person or enterprise within the same group. In the Alstom Holdings/Alstom Projects case (C-2011/10/06.), Alstom Holdings (India) Limited proposed to merge into Alstom Projects India Limited pursuant to a scheme of amalgamation under the Companies Act, 1956. The CCI approved the proposed Combination by taking into account the fact that both parties were engaged in completely different business activities, and also that there would be no change in the management of the companies, as the parties to the proposed Combination were part of the same group. The CCI has further approved fourteen intra-group reorganizations by way of merger or amalgamation. However, the Amendment Regulations have amended the Combination Regulations to provide a partial exemption to intra-group reorganizations by way of mergers or amalgamations of a parent and its subsidiary wholly-owned within the same group or subsidiaries wholly owned by enterprises within the same group;;
  • Current assets: Acquisition of current assets, in the ordinary course of business; and
  • Purely offshore: Combinations taking place entirely outside India with “insignificant” local nexus and effect on markets in India.

The usage of term(s) “ordinarily” and “normally” leads to uncertainty leaving the onus on parties to determine whether a transaction is “extra-ordinary” and thus likely to cause an AAEC in India. Such ambiguous wording allows the parties two choices: (a) notify all transaction(s) which to the best of their judgment is likely to cause an AAEC in India; or (b) to take a gamble of not notifying the transaction, in which case the CCI may use the “look back” provision under Section 20(1) of the Act. This provision provides the power to the CCI to inquire, within one year of the Combination taking effect, whether the Combination has caused or is likely to cause an AAEC in India. However, the erstwhile Chairman of the CCI has publicly stated that Schedule I would operate as exemptions and parties can derive some comfort from this statement.

Notification Thresholds

The merger control provisions under the Act, prescribe the following thresholds, for notification of a transaction:

  • Target Test – Any enterprise, whose control, shares, voting rights or assets are being acquired, has either assets of the value of not more than Rs. 250 crores (approximately USD 50 million) in India or turnover of not more than Rs. 750 crores (approximately USD 150 million) in India, is exempt from the purview of the merger control provisions under the Act, for a period of five years (“Target Exemption”).
  • Parties Test – In order to determine as to whether the thresholds (provided in the table below) are breached, in case of an acquisition, the combined value of the acquirer (on a standalone basis) and target enterprise (including its subsidiaries, units, or divisions) is to be considered. However, in case of a merger or amalgamation, the asset/turnover figures for the enterprise remaining after the merger or enterprise created pursuant to an amalgamation has to be taken into consideration. Further, if as a part of a series of steps in a proposed transaction, particular assets of an enterprise (i.e., a business or a division) are moved to another separate enterprise which is then acquired by a third party, the entire assets and turnover of the selling enterprise (from which these assets and turnover were hived off) would be attributed to the second separate enterprise when calculating the assets and turnover for the purpose of Section 5.
  • Group Test: The Group test is applicable to the group to which the target enterprise would belong post the acquisition or merger or amalgamation.

The thresholds prescribed under Section 5 of the Act are provided below:

 

 

 

 

 

In India

 

 

Applicability

 

Assets

 

Turnover

 

For individual parties (i.e. acquirer and target)

(Combined)

 

Rs. 1,500 crores

(USD 300 million)*

 

Rs. 4,500 crores

(USD 900 million)*

 

For ‘Group’ (to which target belongs post- acquisition)

 

Rs. 6,000 crores

(USD 1.2 billion)*

 

Rs. 18,000 crores

(USD 3.6 billion)*

 

 

 

 

 

 

 

 

 

In India and Outside India

 

 

Applicability

 

Assets

 

Turnover

 

Total

 

Minimum in India

 

Total

 

Minimum in India

 

For individual parties

(i.e. acquirer and target)

(Combined)

 

USD 750 million

 

Rs. 750 crores

(USD 150 million)*

 

USD 2.25 billion

 

Rs. 2,250 crores

(USD 450 million)*

 

For ‘Group’ (to which target belongs post- acquisition)

 

USD 3 billion

 

Rs. 750 crores

(USD 150 million)*

 

USD 9 billion

 

Rs. 2,250 crores

(USD 450 million)*

* Assuming the exchange rate of 1 USD = Rs. 50.

Determination of the relevant market

From a merger control perspective, determination of the relevant market is critical to determine the effect of the proposed Combination. Under the Act, the term ‘relevant market’ includes both the ‘relevant product market’ (i.e., market comprising all those products/services which are regarded as interchangeable or substitutable) and the ‘relevant geographic market’ (i.e., market comprising the area in which the conditions of competition for demand or supply are distinctly homogenous and distinguishable). After the determination of the relevant market, the next step is to consider whether the proposed Combination causes or is likely to cause an AAEC in India or not. The factors for assessing an AAEC set out in Section 19(3) of the Act are as follows:

  • actual and potential level of competition through imports in the market;
  • extent of barriers to entry into the market;
  • level of Combination in the market;
  • degree of countervailing power in the market;
  • likelihood that the Combination would result in the parties to the Combination being able to significantly and sustainably increase prices or profit margins;
  • extent of effective competition likely to sustain in a market;
  • extent to which substitutes are available or are likely to be available in the market;
  • market share, in the relevant in market, of the persons or enterprise in a Combination, individually and as a Combination;
  • likelihood that the Combination would result in the removal of a vigorous and effective competitor or competitors in the market;
  • nature and extent of vertical integration in the market;
  • possibility of a failing business;
  • nature and extent of innovation;
  • relative advantage, by way of the contribution to the economic development, by any Combination having or likely to have an AAEC; and
  • whether the benefits of the Combination outweigh the adverse impact of the Combination, if any.

Forms

The Combination Regulations provide for three types of forms for the purpose of notification to the CCI:

  • Form I: All Combinations are “ordinarily” notifiable in Form I (short form), which is the default option. Further, the Amendment Regulations have increased the filing fee from Rs. 50,000 (approximately USD 1000)* to Rs. 1,000,000 (approximately USD 20,000).*
  • * Assuming the exchange rate of 1 USD = Rs. 50.
  • Form II: Parties to the Combination also have the option of filing Form II, which is a long form. While Form I is a very simple form and requires basic details of the parties to the Combination and the transaction, Form II is fairly extensive and requires minute details regarding the proposed Combination, including details such as analysis, reports, surveys, ownership details of the parties and groups, details of all the products of the parties, end use, etc. Form II is to be “preferably” filed in the following instances: (i) where the parties to the Combination are competitors and have a combined market share in the relevant market of more than 15%; and (ii) where the parties to the Combination share a vertical relationship, and the combined or individual market share of the parties in either the upstream or the downstream market is greater than 25%. In cases where the parties have filed Form I and the CCI is of the opinion that Form II should have been filed, it can direct the parties to re-file the notice in Form II. Further, the time taken by the parties to the Combination in having incorrectly filed Form I will not be taken into account. Therefore, it becomes significant for the parties (from the point of view of time and acquisition financing cost) to accurately determine the appropriate form in which the filing has to be made with the CCI. The filing fee for a Form II filing has increased from Rs. 1,000,000 (approximately USD 20,000) to Rs. 4,000,000 (approximately USD 40,000), by way of the Amendment Regulations.
  • Form III: This is a post-facto intimation form which is required to be filed in case of share subscription or financing facility or any acquisition by public financial institutions, foreign institutional investors, banks and venture capital funds, pursuant to any covenant of a loan agreement or investment agreement.

* Assuming the exchange rate of 1 USD = Rs. 50.

Trigger Events for notification of the Combination

Parties are required to file a notification with the CCI in either Form I or Form II within 30 days of:

  • approval of the proposed merger or amalgamation by the boards of directors of the enterprises concerned;
  • execution of any binding agreement or “other document” for acquisition or acquiring of control. The term “other document” refers to (a) any binding document, by whatever name called, conveying an agreement/decision to acquire control, shares, voting rights or assets; and (b) for hostile acquisitions, any document executed by the acquirer conveying a decision to acquire.

A copy of such documents or board approval, as the case may be, is now required to be submitted as a part of a Form filing. In case the documents have not been executed but the intention to acquire is communicated to the Central Government/State Government or any statutory authority, the date of such communication will be the date of execution of the other document. Under Section 20(1) of the Act, the CCI has the power to initiate a suo moto inquiry into a Combination which was not notified to it, for up to one year from the date the Combination has taken effect.

Timelines

  • The Act provides for a 210 day period for the CCI to reach a final decision, failing which, the transaction is deemed to be approved. Given the mandatory suspensory regime, no transaction in which the merger filing has been made can be completed before receiving approval from the CCI.
  • However, the CCI is required to form a prima facie opinion on whether a Combination is likely to cause an AAEC, within the relevant market in India, within a period of 30 days from receipt of the notification. The CCI gets an additional period of 15 days in case the parties to a Combination propose a modification before the CCI forms a prima facie opinion in relation to the proposed Combination.
  • The CCI can ‘stop the clock’ for defects or until such time as any information requested from the parties remains outstanding. The timelines for the review process are therefore not absolute.
  • In case the CCI forms a prima facie opinion that a Combination is likely to cause an AAEC, a more detailed investigation will be conducted. Thus, the merger control process can be viewed as a two phase process:
  • Phase 1 (Prima Facie Opinion) – In the Phase 1 period, the CCI can take upto 30 calendar days to form a prima facie opinion on whether a Combination is likely to cause an AAEC, or subject it to further investigation (45 calendar days, if modifications are offered by the parties); and
  • Phase 2 – In Phase 2, clearance may take a further 180 calendar days where a detailed investigation will be carried out by the CCI in those transactions where the CCI in its prima facie opinion believes that an AAEC in India is likely to be caused.

Extraterritoriality

Section 32 of the Act empowers the CCI to initiate inquiry into a Combination taking place outside India if such Combination has or is likely to cause an AAEC in India and to pass such order as it may deem fit. However, the Combination Regulations provide for a local nexus and effects test on the relevant market in India.

Penalties

  • The Act provides for severe penalties on parties for any non-compliance of its provisions. In case a person or enterprise fails to notify any Combination, the CCI has the power to impose a penalty which may extend up to 1% of the total turnover or assets, whichever is higher, of such Combination. In addition, where a Combination has or is likely to have an AAEC in India, the Combination (and presumably all acts in furtherance of the transaction) is void as a matter of Indian law.
  • Additionally, any non-compliance with the orders of the CCI can attract a monetary penalty up to Rs. 25 crores (approximately USD 5 million)* or imprisonment of up to three years or both. The Act also imposes personal liability on the persons in-charge and responsible for the conduct of the company, for contravention of any of the provisions of the Act.

* Assuming the exchange rate of 1 USD = Rs. 50.

Recent Trends

The recent trends emerging from the various Combination orders passed by the CCI are as follows:

  • No merger filing trigger on ‘option to acquire’

In the Reliance/Bharti AXA        case (C-2011/07/01), the proposed agreement for acquisition by Reliance Industries Limited (“RIL”) and Reliance Industrial Infrastructure Limited (“RIIL”) of a 74% stake in each of the joint venture companies between the Bharti entities and AXA contemplated an ‘option’ by which AXA would acquire up to 24% shareholding in the two joint ventures companies from RIL and RIIL as and when FDI Regulations permit such holding by AXA. The CCI order in relation to this merger approval suggests that in case of ‘option to acquire’, the determination from a competition perspective can only be made at the point when the transaction happens, for e.g. at the time the option is exercised and the “acquisition” takes place. Therefore, filing should, and can, be made only at the conversion stage (not at the time of grant). However, in this case, AXA’s option to acquire further shares was not an integral part of RIL’s and RIIL’s acquisition. Therefore, in a clearly inter-connected transaction the position may be different.

  • Joint to sole control is notifiable

In the Walt Disney/UTV case, it was stated that the acquisition of shares by an enterprise holding 50% or more shares in another enterprise resulting in transfer from joint control to sole control is notifiable under Section 6(2) of the Act and is excluded from exemption under Regulation 4, read with Item 2 of Schedule I of the Combination Regulations. This was also the case in the Tata Power Company/Tata BP Solar case (C-2012/01/26).

  • Intra-group reorganization by way of merger or amalgamation

An intra-group reorganization does not affect the competitive landscape and should not come under the purview of competition law. Also, the Combination Regulations exempt an intra-group reorganization by way of an acquisition. The availability of Intra-group exemption in case of internal re-organization by way of mergers and amalgamations was always a debatable topic considering the absence of the express wordings under Item 8 of Schedule I of the Combination Regulations in this regard. However, this debate was put to rest by the CCI in the Alstom Holdings/Alstom Projects case where an internal reorganization by way of a scheme of amalgamation was cleared by the CCI on merits. As a result of this ruling, 14 other intra-group reorganizations were notified to the CCI and cleared, to date, even though there is no distinction between an acquisition, merger or amalgamation as a mode of corporate reorganization. However, the Amendment Regulations have now brought in a partial exemption for intra-group reorganizations by way of merger or amalgamation.

  • Slump sale – the total asset/turnover of the transferor to be considered

The CCI, in three merger control reviews, has indicated that in the case of slump sales, or the sale of business divisions (i.e., less than an “enterprise” under the Act) the entire asset and turnover of the vendor enterprise has to be taken into consideration for determining the asset/turnover thresholds. Therefore, in such cases, the parties to the transaction cannot apply the thresholds for the Target Exemption or the Parties test to the business division being acquired, but to the vendor enterprise in its entirety. (i.e. G&K Baby Care Private Limited/Wockhardt Limited (C-2011/08/03), AICA Laminates /BBTCL (C-2011/09/04) and NHK Automotive/BBTCL, (C-2011/10/05).)

Grey Areas

As competition law in India is at a nascent stage, there are several grey areas under the Act and the Combination Regulations, with respect to merger control:

  • Treatment of Joint Ventures under Section 5

It is important to note that the formation of a joint venture is not specifically covered by Section 5 of the Act. The merger control provisions of the Act only cover acquisitions, mergers and amalgamations. The Act also does not make any distinction between “full function” and “non-full function” joint ventures. Further, there is no distinction as regards the treatment of ‘greenfield’ joint ventures and ‘brownfield’ joint ventures.

  • Insignificant local nexus exemption

Item 10 of Schedule I of the Combination Regulations exempts the notification of a combination taking place entirely outside India with insignificant local nexus and effect on markets in India. However, the word ‘insignificant local nexus’ has not been defined, leaving the parties with no guidance as regards the criteria to be applied determine the ‘insignificance’ of the Indian nexus of any combination taking place outside India.

Conclusion

Since June 1, 2011, the CCI has approved twenty eight merger filings at a swift pace, which has given Indian industry the much needed comfort that the CCI merger clearance process will not be unnecessarily long drawn. However, these are early days and the next few months are likely to see several merger filings which would be the true test of the CCI’s responsiveness. Also, the notifying parties are presently facing several interpretational issues from a merger filing standpoint due to ambiguities in the Act and the Combination Regulations. It is expected that the grey areas under the Act and the Combination Regulations in relation to merger control provisions would be addressed either through express clarifications or through the jurisprudence emerging from the orders of the CCI. Irrespective of that, merger control is here to stay in India and will have significant implications on inorganic growth through M&As, particularly India-centric M&A transactions, both within India and offshore.

Ashish Jejurkar is a Partner and Nisha Kaur Uberoi is a Principal Associate at Amarchand & Mangaldas & Suresh A. Shroff & Co. Ashish specializes in M&A, General Corporate and Securities law and Nisha specializes in Competition Law. They can be contacted at ashish.jejurkar@amarchand.com and nishakaur.uberoi@amarchand.com.

 

 

By Ashish Jejurkar and Nisha Kaur Uberoi

 

 

 

The Protection Of Privacy And Personal Data In Social Media – An Analysis Of The Indian Information Technology Act

The prolific growth of information and communication related technology has spawned myriad social media networking sites. However, the use of these technologies also presents new dangers for the privacy of individuals. Information is at the risk of being gathered without an individual’s knowledge. It may be reused for unauthorized purposes, retained for months and years, passed on to third parties, and published or circulated without permission. Increasingly, data available on social media sites is being used by several entities to track individuals’ preferences, interests, movements, networks and activities. The information that is gathered is widely used, among other things, to customize an individual’s email access as well as webpage that the individual may visit. This raises questions of privacy and data protection.

The Information Technology Act, 2000 (“IT Act”) was focused on the recognition of electronic records and facilitation of e-commerce. The emphasis of the Information Technology (Amendments) Act, 2008 was on Cyber Terrorism and to a significant extent, Cyber Crime. However, it also contains provisions that apply to data protection and privacy. The two statutes are collectively referred to as the IT Act.

The scope of this article is to highlight some of the important provisions of the IT Act relating to data protection and privacy vis-à-vis social media.

Data Protection

The IT Act (section 43) imposes civil penalties in the event of the commission of certain acts without the permission of the owner or person in charge of the computer or computer systems such as: (i) securing access (without permission); (ii) downloading or copying of data stored in a computer or computer system; (iii) introducing computer viruses; (iv) damaging computers and or data stored therein; (v) disrupting computers; (vi) denial of access; (vii) abetting such acts; or (viii) illegal charging for services on another’s account. The IT Act has included two additional violations (i) destruction, deletion and alteration of information residing on a computer and (ii) theft, concealment, destruction, alteration, (or to abet in the theft, concealment, destruction, or alteration), of any computer source code used for a computer resource with an intention to cause damage.

Further, the IT Act holds any “Body Corporate” possessing, dealing with or handling any “sensitive personal data or information” in a computer resource it owns, controls or operates, liable for negligence, if it fails to maintain “reasonable security practices and procedures[i]” and thereby causes wrongful loss or wrongful gain to any person. “Body Corporate” is defined in the IT Act as any company and includes a firm, sole proprietorship (sic) or other association of individuals engaged in commercial or professional activities

Apart from the Civil Penalties contained in the IT Act there also are criminal provisions, a few of which relate to data protection.

The IT Act provides that any act set out under section 43, if committed “dishonestly or fraudulently,” would amount to a criminal offence, punishable with imprisonment of up to three years or fine of a maximum of Rupees Five Lakh (approximately US$ 10,000) or both. The IT Act also makes the receipt or retention of a stolen computer resource or communication device punishable with imprisonment up to three years or with fine up to Rupees One Lakh or both. The term “computer resource” is defined under the IT Act as a “computer, computer system, computer network, data, computer database or software.” This provision applicable to the receiver of stolen computer resources, such as data and software, could prove to be substantially useful when faced with issues of data misuse or theft from a social networking site.

Under the IT Act the onus of implementing “Reasonable Security Practices” is on the business entity. “Reasonable security practices and procedures” are defined as “security practices and procedures designed to protect such information from unauthorized access, damage, use, modification, disclosure or impairment, as may be specified in an agreement between the parties or as may be specified in any law for the time being in force and in absence of such agreement or any law, such reasonable security practices and procedures, as may be prescribed by the Central Government in consultation with such professional bodies or associations as it may deem it.” Therefore, social media sites would be required to show that they have adopted such practices in case there is a violation on their site to help mitigate their liability.

Confidentiality and Privacy

The IT Act provides for the protection of physical or personal privacy of an individual. Also, the IT Act contains provisions against the dissemination of personal information obtained without the individual’s consent through an intermediary or under a services contract, with the intent to cause wrongful loss or wrongful gain. The maximum punishment prescribed for this offence is three years imprisonment, or fine up to Rupees Five Lakhs or both. These provisions protect privacy and personal information to a certain extent. In particular, service providers on the Internet, social networking sites, companies, firms, individuals and other intermediaries need to exercise caution in the collection, retention and dissemination of personal data.

The IT Act makes the dishonest or fraudulent use of a person’s electronic signature or identity, password or any other unique identification feature punishable as theft with imprisonment of up to three years and fine up to Rupees One Lakh.

The statute further makes cheating by impersonation through a computer resource punishable with imprisonment of up to three years and fine up to One Lakh Rupees.

The liability of an intermediary under this section is limited in specific instances, i.e., if he provides access to communication systems for transmission or temporary storage of third party information, data or communication links made available or hosted by him. The intermediary should however observe due diligence and comply with the prescribed guidelines, while discharging his duties.

The IT Act imputes vicarious liability in case of offences by companies and provides substantial and relevant rights allowing victims to seek redress in cases of violations. As most of the offences under the IT Act are cognizable, this provision is a cause for concern for social media entities and their management.

In comparison to the laws of developed nations, India requires laws that define data based on utility and importance. Rules related to data extraction and data destruction needs to be improvised. Stringent and comprehensive laws for the protection of data are the need of the hour. In 2011, the Government of India proposed the “Right to Privacy Bill”. However, we still await the final and conclusive draft of the Bill. Until then, businesses must implement appropriate safeguard policies and maintain an awareness of compliance obligations

Vidhi Agarwal is a partner at LawQuest International, a general practice law firm in Mumbai, India. She with a Masters Degree in Law as well as Commerce is admitted as an advocate to the Bar Council of Maharashtra and Goa. Vidhi may be reached at vidhi@lawquestinternational.com.

Annu Sharma is an Associate at LawQuest. She has completed her LL.B from K.C. LawCollege, Mumbai. She holds a B.Sc Degree from K.C. College of Arts, Commerce and Science. She can be reached at annu@lawquestinternational.com

 

 

By Vidhi Agarwal and Annu Sharma

 

 

 

 

Saving The Starving Artist

The authors and music composers who are left in the cold in the penumbral area of policy should be given justice by recognizing their rights when their works are used commercially separately from cinematograph film and the legislature should do something to help them.

In keeping with the spirit of the above view of Justice Krishna Iyer, both Houses of the Indian Parliament unanimously passed the Copyright Amendment Bill, 2012, bringing about considerable changes to the Copyright Act, 1957 (“Copyright Act”) in relation to, inter-alia, the rights of artists. The Bill received Presidential assent on June 07, 2012 and the Copyright (Amendment) Act, 2012 came into force on June 21, 2012 (“Amendment Act”).

POSITION BEFORE THE AMENDMENT ACT

The most significant and much debated provision in the Amendment Act is the right granted to authors and music composers in the works they create. Before the Amendment Act came into force, ownership of the copyright in underlying works in a cinematograph film was deemed to belong to the producer of the film, who is considered the owner of the copyright in a cinematograph film, unless there is a contract to the contrary between the authors / composers and the producer. Producers usually entered into contracts with the authors of the underlying works, getting such authors to assign the entire bundle of rights in such underlying works to the producer. As a result, many felt that such authors and composers were left in the lurch as the producers reaped all the benefits of such underlying works while authors and composers did not get what was rightfully due to them. The cases of shehnahi maestro Bismillah Khan and music composer Ravi have been quoted in the media as examples of how talented artists are deprived of their dues due to lack of legislative protection available to such artists, and therefore do not have the means to even pay for housing and medical care.

RIGHTS OF AUTHORS OF UNDERLYING WORKS

The Amendment Act seeks to protect the interest of such artists by including provisions granting certain rights to the authors and music composers of underlying works in a cinematograph film. The authors of underlying works incorporated in a cinematograph film may retain all the rights in their work except to the extent assigned for use in the cinematograph film. The assignment too has been subject to certain safeguards.

The authors of literary and musical works incorporated in cinematograph films, or sound recordings not forming part of the cinematograph film, have the right to receive royalties equal to the royalties received by the assignee of such rights, for utilization of such work in all forms other than communication of the cinematograph film to the public in cinema halls. The author can also assign the right to receive royalties to legal heirs or to a copyright society for collection and distribution. Any agreement that seeks to assign or waive the above right granted to authors of literary and musical works will be considered void.

Further, an assignment is not to be applicable to any medium or mode of exploitation of the work that did not exist or was not in commercial use at the time the assignment is made, unless the assignment specifically refers to such medium or mode of exploitation.

Moreover, an assignment of copyright in any work to make a cinematograph film or sound recording is not to affect the right of the author to claim royalties and consideration in case of utilization of the work in any form other than as part of the cinematograph film in a cinema hall.

RIGHTS OF PERFORMERS

The Amendment Act also grants certain rights to performers. Prior to the Amendment Act coming into force, although performers were granted certain rights, once a performer consented to the incorporation of his performance in a cinematograph film, the rights of the performance were deemed to have been waived.

As an initial matter, the Amendment Act has modified the definition of a performer. Earlier, a “performer” included “an actor, singer, musician, dancer, acrobat, juggler, conjurer, snake charmer, a person delivering a lecture or any other person who makes a performance.” The Amendment Act has added a proviso to state that, in a cinematograph film, a person whose performance is casual or incidental in nature and, in the normal course of the practice of the industry, is not acknowledged anywhere including in the credits of the film shall not be treated as a performer except for the purpose of attributing moral rights. Moral rights have been given the nomenclature of ‘Author’s Special Rights’ under the Copyright Act. They include the right to paternity which is the right to claim authorship of the work; and the right to integrity which is the right to restrain or claim damages in respect of any distortion, mutilation, modification or other act in relation to the said work if such distortion, mutilation, modification or other act would be prejudicial to the honour or reputation of the author.

The Amendment Act provides that the performer would have the right to make a sound recording or a visual recording of the performance and the right to broadcast or communicate the performance to the public except where the performance is already broadcast. Once a performer has, by written agreement, consented to the incorporation of his performance in a cinematograph film, he shall not object to the enjoyment by the film producer of the performer’s right therein unless there is a contract to the contrary. However, the performer is entitled to royalties where his performance is put to commercial use.

MORAL RIGHTS

The Copyright Act recognized certain special rights of the authors of a work. The moral rights of an author include the right to claim authorship of the work and the right to restrain or claim damages in respect of any distortion, mutilation, modification or other act in relation to the work if such distortion, mutilation, modification or other act would be prejudicial to his honour or reputation. The Copyright Act stated that the right to restrain or claim damages as above could also be exercised by the legal representatives of the author (but not the right to claim authorship).

The Amendment Act now permits the legal representatives of the author to also exercise the right to claim authorship of the work.

The Amendment Act also grants performers certain moral rights that were not granted to them under the Copyright Act. For example, the performer has the right to claim to be identified as the performer of his performance, except where omission is dictated by the manner of the use of the performance. The performer also has the right to restrain or claim damages in respect of any distortion, mutilation or other modification of his performance that would be prejudicial to his reputation.

COVER VERSIONS

Earlier, the Copyright Act provided that cover versions, if made following the conditions prescribed, were an exception to infringement. The Amendment Act has made it a separate right instead, by granting statutory licenses for such recording. Any person desirous of making a cover version, being a sound recording in respect of any literary, dramatic or musical work, where sound recordings of that work have been made by, or with the license or consent of, the owner of the right in the work, may do so subject to the conditions provided in the Amendment Act. No cover versions can be made until the expiration of five calendar years after the end of the year in which the first sound recording of the work was made. Royalty shall be paid for a minimum of fifty thousand copies of each work during each calendar year in which copies are made.

A BOON OR BANE?

There are various aspects with respect to the implementation of the above-mentioned rights of artists that remain unclear. The Amendment Act states that the authors of the underlying works will be entitled to receive royalties equal to the royalties received by the assignee of such rights, for utilization of such work in all forms other than communication of the cinematograph film to the public in cinema halls. However, the Amendment Act does not explicitly state who will be liable to pay the royalty to the authors of the underlying works. There is also lack of clarity on who would be liable to pay performers their royalties. Since the authors of the underlying works will be entitled to receive royalties equal to the royalties received by the assignee of such rights, one may assume that the assignee will be responsible for payment of royalties to the authors of underlying works. The assignee could be the producer of the cinematograph film. Or it can be argued that a broadcaster that is exploiting the cinematograph film is responsible for payment of royalties to the authors of underlying works. Still another option could be that it is the responsibility of copyright societies to collect royalties from the assignee and pay the same to the authors of underlying works. However, due to the lack of an express provision in relation to responsibility for payment of royalty, there is considerable confusion on this aspect of the Amendment Act. Therefore, contracts need to be structured and drafted in a manner that addresses these issues of payment of royalties and the rights and obligations of various parties involved.

There is also lack of clarity in the Amendment Act on how the royalty payable to the authors of underlying works is to be calculated. If there are multiple authors of an underlying work, will the royalty be equally divided between each of the authors and the assignee? Or will the assignee be entitled to 50% of the royalties and all the underlying authors share the remaining 50% of the royalties? Also, when there are music and lyric rights in a song, will the music and lyric rights be treated as separate underlying works, and therefore the music composer separately shares the royalty with the assignee for the music right and the lyricist separately shares the royalty with the assignee for the lyrics? None of these questions have been adequately addressed in the Amendment Act. The calculation of payment of royalty to performers too has not been expressly addressed in the Amendment Act.

Also, the Amendment Act has granted moral rights to performers. However, while the Amendment Act states that the legal representatives of authors of a work can exercise the moral rights, there is no mention in the Amendment Act of the legal representatives of performers being entitled to exercise such moral rights.

The Amendment Act will definitely have an impact on the entertainment industry. Producers may have to share their profits with underlying authors or they will need to pass on the responsibility of payment of royalties to the broadcasters. The agreements between broadcasters and producers and the underlying authors will have to be carefully drafted to address the issues of sharing of royalties between various artists and the assignee.    

The Amendment Act has been a step in the right direction to address the issues faced by the authors of the underlying works and to implement the observation made by Justice Krishna Iyer. However, the Indian legislature will need to frame rules to plug the deficiencies in the Amendment Act regarding the implementation of its various provisions.

Seema Sukumar is a Senior Associate

With J. Sagar Associates, based out of Bangalore. She can be contacted at seema@jsalaw.com.

 

 

By Seema Sukumar

 

Case Notes – Bharat Aluminum Restores Pro-Arbitration Regime

By Dipankar Vig

In its genuine effort to restore the pro-arbitration regime in India, the Constitutional Bench of the Hon’ble Supreme Court of India has delivered a conclusive judgement on the role of Indian courts in international commercial arbitrations rendered in a foreign seat. (“Bharat Aluminum”).

The Arbitration & Conciliation Act 1996 (‘the Act’), an enactment based on the UNCITRAL model has always provided for two regimes of dispute resolution depending on the seat of arbitration. Part-I provides for the domestic as well as international arbitrations where the seat of arbitration is in India and Part-II contains provisions for recognition and enforcement of awards rendered in a foreign jurisdiction.

The Bharat Aluminum case has overruled the apex Court’s earlier interpretation laid down in the case of Bhatia International, which was subsequently upheld in the case of Venture Global Engineering and Indtel Technical Services.

  1. Decision in Bhatia International, Venture Global and Indtel Technical Services

The Bhatia International ruling gave the Indian Courts a right to set aside an award made in a foreign seat. In Venture Global, applying the same principle, the Court set aside a London Court of International Arbitration (‘LCIA’) award rendered in London.

Therafter, in Indtel Technical Services, the Court held that it could appoint arbitrators in the case of a deadlock, even though the arbitration was to be conducted in a foreign seat.

  1. Highlights of the Bharat Aluminum Case
  1. Applicability of Part- I of the Act

The Hon’ble Supreme Court has categoricallly laid down that Part-I of the Act is applicable only to the arbitrations which take place within the territory of India and it would have no application to international commercial arbitrations rendered in a foreign seat. In other words, the Indian Courts will not be allowed to exercise their powers under Part-I of the Act in respect of arbitrations having a foreign seat.

  1. Interim Reliefs by Courts

The Hon’ble Court further held that in a foreign seated international commercial arbitration, no application for interim relief would be maintainable under Section 9 or any other provision, as the applicability of Part-I of the Act is limited to all arbitrations which take place in Similarly, no suit for interim injunction would be maintainable in India, on the basis of an international commercial arbitration with a seat outside India.

  1. No Annulment of Foreign Awards

The Hon’ble Court has clarified that the regulation of conduct of arbitration and challenge to an award would have to be done by the courts of the country in which the arbitration is being conducted. Such a court is then the regulatory court possessed of the power to annul the award.

Previously, a foreign award could be set aside on the ground that its enforcement would be opposed to “public policy”, in the context of Section 34 of the Act. However, subsequent to this judgement, a foreign award cannot be set aside in India under Section 34 of the Act.

  1. Prospective Application

The Hon’ble Court also held that the amended position shall apply prospectively from the date of judgement i.e it shall apply only to arbitration agreements made after September 06, 2012.

By this landmark judgement, the Hon’ble Supreme Court has put an end to the unwelcome judicial interference in foreign seated arbitrations and has put to rest the host of inconsistent judicial decisions on arbitration.

A Look at India’s Employee Privacy Policy in a Global Context

Introduction

Companies today increasingly employ workers across multiple jurisdictions. For the sake of equality and efficiency a multinational prefers to apply a single uniform set of human resource (“HR”) standards to its entire global employee base. However, HR uniformity becomes difficult when different countries impose different HR laws. These dilemmas are especially troubling in the realm of employee privacy.

This article outlines the approaches to employee privacy pursued in the United States and European Union. Following that is a snapshot of employee privacy in India, which has not yet committed to the U.S. or EU approach. The discussion will examine which policy direction would be most beneficial for India. It will be shown that on balance, India’s best interests will be served by following the U.S. model, which fully protects employee privacy while preserving the regulatory flexibility India needs to attract and retain foreign direct investment.

Divergent Approaches to Privacy: European Union and United States

The European Union’s policy stance is clear: privacy is a human right and government involvement is a must. The European Privacy Directive of 1995 is a guidance document for the 26 EU nations, which all now have their own laws and enforcement arms—Data Protection Authorities. This heavily regulated approach, which requires companies that process data to register their activities with the government, creates serious concerns for multinational companies from the U.S. that operate under a much different, and perhaps more practical, approach.

Nuances between EU countries exist, but generally speaking in Europe employers cannot read workers’ private e-mails, and personal information cannot be shared by companies or across borders without express permission from the data subject. These types of regulations hamstring companies doing business in Europe with unending red tape that may or may not have any actual impact on the given individual, known in E.U. privacy parlance as the “data subject.” In fact, a study from the Ponemon Institute showed that despite the absence of stringent privacy laws in the United States, “U.S.-based multinational firms scored higher than their European counterparts on five of eight common privacy practices, including having a dedicated privacy officer and better data security.”

Data privacy in the United States is regulated in a sector-specific manner. The Federal Trade Commission (FTC) is the lead regulatory agency tasked with protecting consumer privacy rights through its authority to prohibit unfair or deceptive acts or practices. Laws are on the books that do require prior consent for certain personal information. For example, a U.S. employer must obtain the prior written consent of a job applicant to access the applicant’s credit report for purposes of completing the background investigation stage of the hiring process.

The current legal framework surrounding employment privacy law, including the National Labor Relations Act (“NLRA”), helps to refine HR privacy policies and provides ample safeguards against corporate abuse of private, or personal, information. And without a broad-based policy directive from the government, U.S. companies can do a more efficient and effective job of moderating how, when, why and what sensitive personal information is used.

For example, the National Labor Relations Board (“NLRB”) recently released its second report to help guide HR departments when crafting their social media/privacy policies. One point emphasized that such policies must be “narrowly tailored” so as not to prohibit union organizing activity protected under the NLRA. This means that even though the employee may surrender his or her privacy rights to certain information, the way in which the company can use such information is limited.

In the U.S. employee privacy is protected not only by the U.S. Constitution and federal statutes but state constitutions and state statutes. For example, states grapple with the subtleties of when and how an employer may interview job applicants and monitor employee email, Internet use, and physical space.

In the U.S. more than in the E.U., employers have legal obligations that compel them to engage in employee monitoring. For example, a U.S. employer may need to investigate the transmission of an item of sexually-oriented Internet humor among its employees to defend against claims of a “hostile work environment.” Alternatively, an employer may need to install a surveillance camera at a worksite parking lot to guard against potential liability from “security negligence” (the failure to ensure security for employees and others in the workplace).

Even when employer monitoring is not legally required it can be a necessary business practice. Banks commonly use surveillance cameras to guard against robberies. Companies in the business of transporting goods may need to track their vehicles with GPS location monitoring systems.

The U.S. government takes privacy seriously, but its approach differs from the European approach in large part because it relies more on self-regulating corporate codes of conduct. Only when a company deviates from an applicable code will a U.S. government agency intervene with an enforcement action. That way companies have the flexibility they need to adopt privacy policies appropriate for their particular situations.

India’s broader privacy framework

India’s labor laws do not at present address rights surrounding employee privacy, let alone follow the employee privacy policies of the E.U. or U.S. However, general privacy laws were set forth in the Information Technology Act of 2000 (“IT Act”), which provided legal recognition for e-commerce and sanctions for computer misuse. Subsequently, India has passed legislation in 2008 and then again in 2011 to further develop its broader privacy policy objectives.

In an attempt to broaden the enforcement scope of the law, India passed the IT (Amendment) Act of 2008, which incorporates two new sections of the IT Act: most notably, Section 43A to provide a remedy for persons whose personal data is compromised by a security breach.

Under section 43A, “bodies corporate,” which includes a corporation[s], firm[s], association[s], sole proprietorship[s], and any other associations or individuals engaged in “commercial or professional activities,” can be liable for failing to maintain “reasonable security practices and procedures” to protect “sensitive personal data and information.” “Sensitive personal data” was not defined in this Amendment. Furthermore, absent a contract, reasonable security practices and procedures were also not specifically defined and were left for the central government to prescribe. Following these Amendments, Section 43A fell under criticism for its broad definition of “body corporates” and absence of clarity on several other fronts, such as whether an Indian call center was required to obtain a foreign customer’s consent before collecting the individual’s personal data (the answer turned out to be no).

The latest announcement attempted to address some of this criticism, when in August 2011 the Government of India issued the Information Technology (Reasonable security practices and procedures and sensitive personal data or information) Rules, 2011 (“Data Privacy Rules”).

First, in order for a body corporate to comply with India’s privacy regime, it must implement security practices and procedures which include a “comprehensive documented information security programme and information security policies.” Such policies must contain managerial, technical, operational, and physical security control measures commensurate with the information assets being protected.

Second, the Data Privacy Rules define “sensitive personal data and information” to include:

  • passwords;
  • financial information such as bank accounts, credit and debit card details;
  • physiological and mental health condition, medical records;
  • biometric information;
  • information received by body corporate under lawful contract or otherwise;
  • user details as provided at the time of registration or thereafter; and
  • call data records.

And lastly, India’s Data Privacy Rules also clarify that a body corporate must get the consent from the provider of information and identify the purpose for collecting such data.

Although India has made strides in clarifying its data protection and privacy policies, these efforts are far from complete and comprehensive given the challenges jurisdictions must face with international information exchange through social media and cloud computing.   First and foremost, the Data Privacy Rules are to include Indian companies only. Furthermore, an exemption was added for Indian outsourcing entities under contract with a legal entity outside of India.

Additionally, India’s definition of “sensitive personal data and information” is defined narrowly, and does not include information in the public domain or information accessible under the Right of Information Act. The Data Privacy Rules’ consent requirement is also less stringent than it appears at first glance. Under the rules, a body corporate must only receive consent from the person or entity that provided the information, not from the individual to whom the information relates.

The result is an Indo-centric policy that does not quite yet affect cross-border communication of multinationals. The Data Privacy Rules could be read as the Government of India’s attempt to demur on the issue of privacy protection in the global context. It is no surprise to see India take this stance given the impact such policies have on business, especially multinational companies that exchange information and data on a daily basis from one country to another. If a multinational with operations in a dozen countries were required to comply with a dozen different sets of privacy laws the potential liability and administrative burden would be potentially enormous. The risks may well discourage the company from investing in a certain nation.

India requires a high level of foreign investment to maintain adequate GDP growth. Any new layer of regulation that discourages such investment could be damaging to its overall economy. Therefore it would be strategically wise for the Indian government to keep regulatory burdens such as privacy laws as flexible and streamlined as possible.

Cultural Underpinnings of Privacy Policy

A nation’s culture forms the tenets of its privacy policy. In European nations individuals tend to be more skeptical of corporations than governments. For example, European employees have high expectations of privacy in the workplace, and personal information is preferably kept personal. The European emphasis on worker privacy may be a natural result of its traditionally left-leaning political orientation, which has long supported workers’ rights.

In the United States, by contrast, the culture is relatively more supportive of free enterprise and distrustful of government. Efforts to restrain government power can be traced as far back as the Federalist Papers.  Consequently, expectations of workplace privacy are viewed in a different light in America. For example, an American employer can be found liable for not investigating a claim of sexual harassment by one employee against another. In the context of an employee’s Internet privacy, the expectation is that emails, Facebook posts and Tweets from company computers are not private, and that work computers and mobile devices are monitored. On the other hand, American employers are legally required to maintain strict confidentiality for employee data such as credit reports and health care information, which could be damaging to workers if inappropriately accessed or misused.

So far India’s treatment of privacy protection has not followed the rigid, pervasive, pro-employee regulatory approach of the E.U. This may reflect a cultural preference for the more flexible, contextual, balanced approach of the U.S. If so, India’s instincts are good. As explained above, a fast-growing emerging economy is better positioned to attract foreign investment if it adopts legal standards that investors can readily meet. One way a nation can maintain such reasonable standards is to preserve flexibility in its privacy laws.

Conclusion

Technologies such as mobile telephones, cloud computing, and social networking have blurred the line between workplace and personal activity. As a result, it is now more difficult to safeguard employee privacy while protecting business interests.

One way to resolve this policy challenge is to adopt laws that definitively favor one side or the other. The EU approach does this by favoring employee rights through a strict and highly regulated privacy regime. However, this approach could rapidly multiply a company’s liability without necessarily producing any practical benefits for employees. At the same time, such an approach could discourage companies from investing in the employee-biased countries.

Given the fluid nature of the above technologies and the novel nature of the related issues of workplace privacy, it will take time and thoughtful discussion to strike the right balance between the privacy interests of labor and the business interests of management. In this complex and subtle legal environment a flexible approach would be more accommodating. Self-regulatory corporate codes of conduct, backed by the threat of government enforcement, have worked well to protect privacy so far. As long as these codes are permitted to evolve with changing business needs and privacy expectations they will likely continue to serve us well in the future.

For this reason the U.S. approach seems preferable for a country such as India. By relying on self-regulation implemented through HR policies, India may find that its employees enjoy just as much privacy protection as their counterparts in the EU. At the same time, India would not need to risk alienating foreign investors. Indeed, American and European companies alike could continue to invest in India without fear of increasing their India-based liability or triggering conflicts with their home country laws.

Michael Green is a Manager at the U.S.-India Business Council (USIBC) responsible for the Life Sciences and Legal Services portfolios. Michael can be contacted at mgreen@uschamber.com.  

 

 

Michael Green