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How to get venture debt for a startup

By
Rachit Garg
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Startup
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This article is written by Gursimran Kaur Bakshi, from the National University of Study and Research in Law, Ranchi. The author of this article has explained what venture debt funding is and how to get one for a startup. 

Introduction 

In most cases, debts are bad. But some debts are good too. These good debts are used in financing the early years of a startup. A venture debt, also known as venture lending, is a type of debt financing, obtained by early-stage companies including startups to raise working capital or financing for short-term use. Unlike any other kind of debt funding, raising capital by venture debt does not require collateral. 

These days startups are gorging on venture debt financing. According to the data provided by Venture Intelligence (an Indian unicorn), venture debt investment has sharply increased in the first half of the year 2021, despite the overall lockdown on the economy during the COVID-19 pandemic. More than $170 million worth of venture debt deals has been entered into, as compared to $55 million in the half of 2020 and $64 million in another half of the 2020 year. 

Let’s first understand the concept of venture debt and how it can be obtained in a startup. 

What is venture debt 

There are usually two known methods through which a startup can raise capital, namely, through equity funding and debt financing. A third method could be the hybrid of both equity and debt funding. 

Different ways of raising capital 

Equity capital is the main source of raising capital in a startup and it is raised through venture funding which is a part of private equity. It is raised by the startup through investors who see great potential in the growth of the company in consideration of common or preferred shares in the company. 

In addition to equity capital, investors also help in debt financing which is an additional source of working capital for the startup. Thus, venture debt is usually raised alongside equity capital by a startup. Both are raised in the earlier stage of the startup. 

Unlike equity capital, debt financing works similarly to that of obtaining loans. Thus, the investor expects the amount to be repaid in the future with interest. The difference between the two is that equity capital remains the core method of funding in a startup whereas raising venture debt funds is used to get the working capital. 

The hybrid method of funding is considered more suitable in order to raise funds. However, in the current scenario, debt funding has been more preferred during the COVID-19 pandemic, where investors have become reluctant in raising equity capital. 

What is debt financing?

Debt financing refers to the method of raising finance to run the business and cover the operational cost at the early stage of a startup. To understand the different stages of a startup, please refer here. It is as early as the stage where the idea of a startup is born. The financing can be short-term or long-term depending on the requirements and needs. A short-term debt financing can be used to cover the day-to-day operations of the startup whereas long-term financing can be used to purchase assets like machinery and equipment.  

But in both cases, the investors are at risk. The risk is more in equity capital because the investors may not get anything in return if the company goes into liquidation. However, the investors still prefer to raise equity capital since they get the chance to be involved in the management of the company and hence, they can maintain their influence. 

The capital to raise venture debt is thus offered at the early and growth stage of the startup by venture capitalists and through other venture debt funds. The investors are allowed to be repaid for this kind of funding because the amount is usually not high and they are allowed to charge pre-determined interest over it. 

Further, it is difficult for the startups to give stakes to raise venture debts because they usually do not have substantive assets to avail of any other kind of financing. 

Who gives venture debt financing 

Venture debt funding can be given by venture capitalists and through specific venture debt funds. In India, venture debt funding is 15 years old and is well-established. However, debt financing still remains not much known perhaps, because of the strong influence caused by equity capital financing. 

Venture debt funding, as stated above, can either be made through institutional channels such as venture capitalist firms or that can also be made through individual lenders. In the former case, there is still a paucity of institutional funding. But at least, there is a growing number of venture debt funds to lend the money. 

No collateral is required in debt financing 

As mentioned above, this kind of debt funding does not require collateral which is a form of security requirement. The financing ranges from one to four years depending on the initial requirement of the company. In cases where collateral security is present, if the debt is not discharged, the security attached to it will be taken away by the debt lender. 

Since no collateral is required, the lenders are dependent on warrants that they receive on the company’s common equity. These warrants are given as a part of the compensation mechanism to mitigate the high default risk. The warrants are later converted into common shares at a per-share price of the last equity financing round. This has been explained in the latter part of the article. 

Venture debt funding versus venture capital funding 

You might be thinking since debt funding is much easier to get than venture capital funding, why do startups not focus on getting the same? The answer to this is that debt funding cannot be a replacement to venture capital funding. Venture capital is more generally used by startups who are with or without financial backing. 

In the case of debt funding, as already mentioned, the money is raised along with equity capital by venture capitalists. This means, to be able to get debt funding, venture capital must already be raised. Venture capitalists are eager to raise equity on the basis of the potential growth of the startup and it follows the high growth, high-risk strategy. Whereas that is not the case with the debt funding which sort of has a restricted purpose, that is to raise working capital or buy equipment. 

In raising venture capital, there is a giveaway on equity and investors earn more profits through this and the management is diluted by giving equity shares. Whereas, that is not the case in venture debt. Venture capital funding allows additional/add-on benefits, such as access to networking and facilitating partnership opportunities, however, that is definitely not the case involved with venture debt financing as it does not involve any add-on benefits. 

How to get venture debt for a startup 

There is no set way of getting venture debt financing for the startup. However, there are certain common steps that should be followed by startups who are looking forward to this kind of financing. 

How to secure venture debt funding 

To get venture debt financing, first, try to secure venture capital from an institution or individual. If you are able to secure venture capital, the same place can also give you venture debt. To get debt financing, it is important to have a solid business plan. 

What to include in a solid business plan

To get going, you need to have a business plan that must include sections on business description, about the product and the market analysis on it, potential competitions in the market and their analysis, sales and marketing strategy, ownership and management plan, operating plan, financial plan, and the executive summary.

Business description 

The section on the business description should be at the starting of the plan. It must include information on your idea and how it evolved into a business, what is the pain point of the market you are targeting, and how likely will you be able to achieve that. You should not extensively mention everything in an overview since that will be a part of the executive summary. 

However, you can mention an overview of the industry, what are the current trends of the market, where is your product going to stand in line with the current market trends, major competitions, and estimated sales. Since this would be the first section, it is advisable that you give everything with a positive approach that should have the capacity to set you apart from other competitors. 

Product and market analysis 

In the second section, the product should be described thoroughly along with how it would potentially respond in the market/industry you are targeting. This should demonstrate your in-depth understanding of the market where you are going to sell your product so you must be sure of your primary goals along with the estimates on the market response. 

Competition analysis

This part of the section is important for funding purposes because it entails a thorough analysis of your potential competitions and helps you portray a standard image of yourself before the investor. Since you may receive both direct and indirect competition in the market, you should write about every possible way in which you can face the same. It will decide your leverage over the other competitors in the market. Make sure to analyse the weakness and strengths of your product and of that of your competitors because this will be an indicator to persuade your potential funding sources. 

Sales and marketing strategy 

This part of the section should mention the sales and marketing strategy that you plan to apply to your product, the pricing tabs, and how you would be advertising/promoting your product. You must have thought of a unique way to sell your product (unique selling proposition), write that down here. Include all the benefits that your product is associated with that will persuade the customers to buy it. 

Ownership and management plan  

In any startup, the management team plays a vital role in attracting investors for various types of funding. That is why this Section is pertinent for any investor to be investing in your startup. Mention your internal and external management team, their resources, and the human resources available in general. Since investors’ decision depends on how well your management team is, make sure you mention their skills and how it will impact the working of the startup. 

Thus, this section should explain your ownership structure (legal structure of your business), internal and external management team structure, and human resources. There are various suggestions available on what this section can include. One of the suggestions is to have an advisory board as a management resource. This is to be adopted in startups whose primary goal is to attract funding.

An advisory board helps you in giving critical sides of your idea on which your startup is based. See, at the initial stage, you need different viewpoints on your startup to get an idea of where do you stand in the market and what is the gap between where you are and where you want to be. That is why an advisory board is necessary to give you that expertise that is missing in the startup. It will only enhance your business plan and help you attract better investors. 

You can choose how to set up an advisory board and include the number of members that should be there. An advisory board may play a pertinent role in increasing the confidence of the investor in you. 

Operational cost and financing plan

This portion is the most important for any kind of funding. This part can be divided into two, namely the operating costs plan and the financing plan. The operating cost mentions how your business will run, information about your employees, your assets (if any), how your product’s manufacturing takes place, how many employees would you be needing if the sales are increased, etc. It must deal with every aspect of the day-to-day operation of your business that will help the investor understand your business better. 

Further, the financing plan should mention three things, your current financing, your expected funding needs, and your projected income. Your project income will allow the investor to get an idea of your financing requirement and thus, you should mention all these details by including your income statement, the balance sheet, and the cash flow statement. These three documents are the most important. 

Executive summary  

An executive summary is the summary of the whole business plan wherein you highlight the main points of the business plan with keywords. Further, the appendix can mention other additional information on the business. 

About the underwriting process 

The consideration associated with venture debt is interest payment, fees, and warrant. There are venture debt lenders who are already ready to finance venture debt through an intense underwriting process. Underwriting takes place by an individual or institution who wants to assess risk associated with an investment, loan, or borrowing. 

Underwriting is a process of evaluating the risks associated with a particular borrowing. Underwriters have the duty to evaluate each loan, determine the collateral security that is available (if any), and see whether the borrower will be in a position to repay or not in the event of default. 

By assessing all these factors, the underwriters can establish fair borrowing rates for loans, create a market for securities, and in case the associated risk is too high, the loan may be refused. This writing process requires thorough and procedural research to arrive at a decision because the lender has to analyse various factors such as the viability of the product, the management team of the startup, and the investors who have already invested (if any).

Thus, it is similar to a vetting process that allows investors to arrive at an informed decision. 

Source of debt financing 

This may be categorised as private and public. Private sources may include individual lenders who are willing to be given debt financing based on a personal guarantee. Whereas, public venture debt financing can be availed through bank loans or bonds. This type of financing is called financial leverage. Other types of loans include microloans, business loans, credit cards, peer-to-peer loans (personal loans) and trade credits. Since venture debt funding is an alternative to the traditional type of funding you avail from banks, these can be granted by various debt funds established by various venture capitalist institutions/firms/individuals.

Lender’s repayment methods

The lender has to evaluate whether the startup would be in the position to raise equity rounds to repay the venture debt in the near future. This is because repayment can also be done through a warrant which allows the debt to be converted to equity at a later stage. But the equity involved here is less than that gained in a venture capital investment. 

Taxes on debt interest costs 

In debt financing, the repayment includes the principal amount and the interest. While the principal payment is usually not tax-deductible, the interest paid over it can be deducted under the income tax as it is considered within the category of expense. Hence, it can be claimed as a return. But this may vary according to different income tax laws of different jurisdictions. 

new legal draft

Advantages and disadvantages of venture debt 

The first perception of venture debt financing would be that it is easier to get because no collateral property is associated with it. However, that should be considered as a disadvantage. It is because if there is no collateral involved, it may not be a safer method of financing. Since this is similar to that of borrowing money through a loan, the lender may require personal guarantees. The personal guarantee can be in the form of personal assets such as your house, car, any other kind of investment that you have. 

You should go for debt financing where you have a high-growth business because then you require constant capital to enhance your business. Whereas, you can also opt for debt financing for short-term purposes where you can easily repay the same within a year or so of its maturity. But the startups should be vigilant about the effect these types of financing put on their credit rating.

Venture debt financing during COVID-19  

During the COVID-19 pandemic, as there has been an increase in venture debt financing, many funds have been established for the same. For instance, in India, to get this type of funding, various funds like Alteria Capital, Trifecta Capital, and Innoven Capital. These funds have provided venture debt to startups like Bigbasket, Dunzo, and Curefit to name a few. Other capital venture funds are also to be established by Ankur Capital and Unicorn India Venture to provide debt financing. Venture debt funding started 15 years ago in India and since then, it has enhanced the ecosystem of Indian startups who have been unable to gather funds at the initial stage. Even startups want to pass that valley of death stages of a startup wherein 90% of it fails. That’s where venture debt financing comes to the rescue. 

Conclusion 

Debt financing is a quicker method of getting funding for the startups but it involves various aspects that need to be given proper consideration before venturing into it. The same rule is also applicable to investors and individual lenders who are in the business of giving venture debt funding. Risk evaluation is something that both sides should equally consider before arriving at a decision. Lastly, since the venture debt financing is derived from the venture equity market, one needs to have a close follow-up of the same to understand the right time and the right method to get debt funding. 

References 

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Making Of ABC Family – acquisition of Fox Family Channel by Disney

By
Oishika Banerji
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0

This article has been written by Asmita Topdar pursuing the Diploma in M&A, Institutional Finance, and Investment Laws (PE and VC transactions) from LawSikho.

Introduction

Has Disney always been ahead of the curve as it has grown, expanded, and diversified its base through several acquisition deals in the past two decades? The first acquisition deal of Disney was in 1993 when Disney acquired Miramax. This was followed by the acquisition of Fox Family Channel in 2001, which post-acquisition derived the name of ABC Family. With the acquisition of Fox Family Channel, Disney became more omnipresent with its reach increasing to 81 million homes, giving full control over the programming of the ABC Family Channel. Recently the world has witnessed the megamerger in the media and entertainment business witnessed with the coming together of two leading studios – Disney and 21st Century Fox – when 21st century Fox was acquired by its rival Disney for a whopping $71bn in the year 2019. The acquisition deal resulted in adding massive hits like X-men, Avatar, The Simpsons, and Deadpool in Disney’s portfolio thereby uniting these characters with Disney’s Mickey Mouse, Marvel and Luke Skywalker. 

This article deals with the making of the ABC family and describes in detail the acquisition deal between the Fox Family Channel with Disney. Further, the article will throw light into the strategies and advantages which the deal brought to Disney and the reasons why the deal failed to live up to the expectations of Disney post the acquisition. 

Disney

Disney has been a top-notch company in the entertainment industry having its presence for more than 90 years. Having started its operation in the year 1926 by Walt Disney, the company has grown exponentially since then. Disney was the studio that introduced Mickey and Minnie mouse to the entire world. This cartoon helped Disney establish the image and popularity which it enjoys till date. Disney has diversified and expanded its base by entering several acquisition deals dating back to 1993 when it first acquired Miramax to strengthen its base. Besides acquisition deals, Disney continued with its global expansion by opening Disney Lands in different foreign lands. Disney has today reached the pinnacle in the global arena which is higher than what Walt Disney would have likely imagined. Disney acquired the Fox Family Channel in 2001 to have sole control over broadcasting its program and successfully reach 81 million houses. In 2019, Disney entered an acquisition deal to acquire 21st Century Fox. With the latest acquisition, ABC Family got reunited with its former Fox siblings. 

Fox family channel

Fox Family Channel was initially named as The Family Channel was formed by Christian Broadcasting Network (CBN). The International Family Channel was later purchased by  Rupert Murdoch-owned News Corporation in the year 1997 for $1.9 bn. The International Family Channel’s assets were split within News Corporation’s portfolio, The Family Channel was merged into Fox Kids Worldwide Inc., a joint venture between majority owners News Corporation and Saban (which each owned a 49.5% share in the company), and media investment firm Allen & Company (which owned the remaining 1%), which was subsequently renamed Fox Family Worldwide Inc. following the closure of the acquisition. Post the acquisition, The Family Channel was renamed as Fox Family Channel and its headquarters was shifted from Virginia and was integrated with the operations of News Corporation in Los Angeles. 

Making of ABC family – what was the acquisition deal between Fox channel & Disney?

The acquisition deal was consummated in the year 2001 when a definitive agreement was entered into between Saban Entertainment, News Corporation, and Disney for selling the entire stake of Fox Family to Disney. The deal was closed with a cash transaction amounting to $5.3 Billion. As part of the transaction, Disney acquired the Fox Family Channel, a fully distributed cable channel reaching 81 million U.S. homes; a 76% interest in Fox Kids Europe (Amsterdam Exchange: FKE), which had dedicated cable and satellite channels reaching 25 million subscribers in 54 countries and 15 languages; Saban Entertainment Inc., a production, distribution and merchandising company with one of the world’s largest libraries of children’s programs at over 6,500 half hours; and Fox Kids Latin America, the second most widely distributed satellite/cable network in the region. Fox Kids Network was excluded from this transaction deal. The vertical merger allowed Disney to expand and strengthen its consumer base by increasing the ability to offer media content through cable networks securing access to 225 affiliated stations, 8 TV stations, and 80% ownership of ESPN and the powerful Fox Channel network. The vertical merger had offered Disney the lower side of a whole service, namely the distribution process, thereby improving Disney’s content distribution. As part of the Agreement, the Fox Channel was later renamed ABC Family which became a subsidiary of Disney. On January 12, 2016, ABC Family was renamed as Freeform, and later in 2019, ABC reunited with its former Fox siblings as a result of the acquisition of 21st Century Fox by Disney.

Regulatory approval

  • What is Vertical Merger?

The Fox Family Worldwide and Disney acquisition is a vertical merger wherein two companies at different levels of supply chains are integrated. With the acquisition of Fox Family Worldwide, Disney enjoyed complete control over the distribution process of its media content reaching over 80 million houses. The deal was a merger between the production and distribution levels of the supply chain.

  • Approvals for Vertical Merger

The deal required antitrust approval from both domestic and international markets, where both the companies had their presence. Antitrust approvals in the US are subjected to vertical and horizontal merger guidelines and are regulated by the Federal Trade Commission (FTC) and the Antitrust Division of the U.S. Department of Justice (DOJ). On June 30, 2020, FTC and DOJ released new Vertical Merger Guidelines replacing the DOJ’s Non-Horizontal Merger Guidelines from 1984. The new guideline outlines their enforcement policies and practices for assessing vertical mergers, acquisitions, and joint ventures. The Vertical Merger Guidelines need to be considered alongside the Horizontal Merger Guidelines from 2010.

Reasons for acquiring Fox family channel by Disney

Disney is the production company that was then looking to stream its programs through a network channel having wide distribution and reach among the viewers. Fox Family Worldwide’s channel network which had a wide distribution channel having access to 80 million houses with 8 TV stations and more than 200 radio stations was an interesting target company for Disney which could have served its purpose for the wide distribution process. The acquisition transaction provided Disney with an accessible place to stream its programs, advertisements, movies, TV shows among others, with complete autonomy over deciding the timing/schedule of the programs. The transaction was beneficial in synergizing the operation of the network channel with the products of Disney thereby strengthening the products individually. In the 1970s, the channel was among the top three networking channels in the US media industry which gave Disney the required reach and expansion over the distribution of its programs to the global viewers. The transaction was also beneficial for increasing returns on production. Evidence showed that television production companies cannot be profitable if they sell all their rights to a network. Thus, the integration of Disney and Fox Channel could aid in producing programs with high returns. 

Post-acquisition performance of ABC family

The post-acquisition performance of ABC was not up to par and did not live up to the expectations of Disney. Consequently, Disney engaged Blaisdell Consulting for recommending strategies and evaluating the situation of ABC. As per the report submitted by the consultancy firm, the situation at the ABC television network could be described as –

  1. ABC’s ratings had dropped considerably and with only 7 million viewers, it had fallen behind Fox and was ranked fourth among the national networks.
  2. Revenue from Disney’s media networks had decreased by roughly $400 million per year, which could largely be attributed to problems with ABC. 
  3. There was no hit program delivery by the network channel.

Previously, through the 1970s there were mainly 3 channels i.e CBS, ABC, and NBC, which would cater to the entertainment needs of the consumers. However, with time, the availability of alternative network channels for the consumers has increased which has resulted in the distribution of market share. This reduces the possibility of making huge returns and enables the high cost of restructuring for Disney. 

Conclusion

Disney acquired Fox Family Channel with the intention to broaden its scope and reach through the widened distribution of its programs among the viewers in the global arena. The Fox Family was renamed ABC Family after the acquisition. However, post-acquisition ABC Family was not able to live up to the expectations of Disney due to a drop in ratings, reduction in revenue, and no airing of hit shows in the channel. Blaisdell Consulting firm was appointed for evaluating the position of ABC who recommended for divestiture of ABC by Disney. However, ABC Family continued and was renamed Freeform on January 12, 2016. ABC reunited with its former Fox siblings after the recent acquisition of 21st Century Fox by Disney. 

Disney has benefitted from acquisition deals involving the Fox Family channel improving the ability of Disney to distribute its programs reaching larger viewership. Besides distribution, the deal has also helped Disney in acquiring 80% ownership of ESPN. The recent 21st century Fox acquisition has made Disney one of the biggest film-making and distribution companies in the US market today. 

References

  1. Disney buys Fox Family for $3B – Jul. 23, 2001. (2001, July 23). CNN Money. https://money.cnn.com/2001/07/23/deals/fox_disney/.
  2. Dolan, K. A. (2013, June 6). Beyond Power Rangers. Forbes. https://www.forbes.com/forbes/2001/1126/066.html?sh=54b87d0614c4.
  3. S A B A N Capital Group | Press. (2001, July 23). Saban Capital. https://web.archive.org/web/20090421070416/http://www.saban.com/html/press/010723.html.
  4. https://biblioteca.cunef.edu/files/documentos/TFM%20Hanxiao%20Zhang.pdf.

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Highlighting the aspect of external commercial borrowings in light of the new framework

By
Sneha Mahawar
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0
External commercial borrowing
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This article is written by Arya Mittal from Hidayatullah National Law University. The article deals with recent changes introduced by RBI master directions in relation to external commercial borrowings.

Introduction

India, being a developing country, has promoted the inward flow of foreign capital for many reasons. Some of the most prominent ways to bring foreign capital are a foreign direct investment, foreign portfolio investment, and external commercial borrowings. The current article deals with external commercial borrowings (ECB) and tries to answer certain questions like – What does ECB mean? Who is eligible for the ECB? What is the legal framework of the ECB? What are the recent developments in the framework and how is it important for the country? 

The concept of external commercial borrowings 

External commercial borrowings (ECB) refer to debt or borrowing by an eligible resident entity from outside the country from recognized lenders. The term has been defined in Section 2(iv) of FEMA (Borrowing and Lending) Regulations, 2018. 

Types of ECBs

ECBs can be broadly classified into foreign currency denominated ECB (FCY denominated ECB) and rupee-denominated ECB (INR denominated ECB). 

FCY denominated ECB

Here, ECB is raised in any freely convertible foreign currency. FCY denominated ECB includes Foreign Currency Convertible Bonds (FCCBs), Foreign Currency Exchangeable Bond (FCEB), loans including bank loans, trade credits beyond three years, floating/ fixed-rate notes/ bonds/ debentures (other than fully and compulsorily convertible instruments), and financial lease.

INR denominated ECB

Here, ECB is raised in Indian Rupee. It includes trade credits beyond three years, floating/ fixed-rate notes/ bonds/ debentures (other than fully and compulsorily convertible instruments), loans including bank loans, financial lease, and plain vanilla Rupee denominated bonds issued overseas.

Eligible resident entity

Eligible resident entities include: 

  1. Entities eligible for Foreign Direct Investment (FDI), 
  2. Port trusts 
  3. Units in Special Economic Zone (SEZ)
  4. Small Industries Development Bank of India (SIDBI) 
  5. EXIM Bank
  6. Registered entities engaged in micro-finance namely NGOs, not-for-profit companies, trusts, societies 

However, entities listed in the last category (point 6) are only allowed to raise INR ECBs.

Eligible lender 

To be an eligible lender, any of the following conditions should be satisfied:

  1. A resident of the Financial Action Task Force (FATF) or International Organization of Securities Commissions (IOSCO) compliant country.
  2. Regional and multilateral financial institutions where India is a member.
  3. Individuals who are foreign equity holders.
  4. Individuals subscribed to bonds/debentures listed abroad.
  5. Foreign branches or subsidiaries of Indian banks (subjected to certain conditions).

Advantages of external commercial borrowings 

Diverse investor base

The international arena helps the entities to get access to diverse investors as per their needs.

Debt-oriented funds

ECBs need not necessarily be equity-oriented i.e. it will not dilute the ownership of the existing members. This will not give voting powers to the lender and retain the control of the company’s existing stakeholders.

Lower interest rates

As a result of a diverse investor base, entities tend to get loans at lesser rates which they would not have got within the local limits.

Meeting larger requirements 

Since the scope for borrowing is expanded by crossing local limits, it helps the entities to meet their larger requirements which might not be possible within the local limits.

Boosts economy

The government can regulate the flow of funds more towards a particular sector of the economy which will boost the economy as a whole.

Analyzing the role of FEMA regulations 

Laws surrounding the regulation of ECB

Foreign Exchange Management Act, 1999, Foreign Exchange Management (Borrowing and Lending) Regulations, 2018, and Master Directions on External Commercial Borrowings, Trade Credits, and Structured Obligations issued by the Reserve Bank of India (RBI) provide for the regulation of ECBs. RBI has a right to issue Master Directions according to Section 10(4) and Section 11(1) of the Foreign Exchange Management Act, 1999.

In the current article, the scope of the study has been limited to the Master Directions issued by RBI which provided for a new ECB framework/policy. Directions issued on January 16, 2019, February 08, 2019, March 13, 2019, July 30, 2019, and April 07, 2021, have been taken into consideration. The major changes in the policy have been discussed. 

Objectives of the FEMA regulations 

The regulations aim at the following:

  • To regulate borrowing and lending transactions between a party residing in India and a party residing outside India.
  • To rationalize the existing framework of external commercial borrowings.
  • To strengthen the AML/CFT (Anti-Money Laundering/Combating the Financing of Terrorism) framework.
  • To improve the ease of doing business in India.

Prohibition on the drawing of ECBs 

Master Directions by RBI provides for restrictive end-uses i.e. a negative list that prohibits the utilization of ECB for certain purposes as enlisted below:

  1. Real estate activities.
  2. Investment in the capital market.
  3. Equity investment.
  4. Working capital purposes, except in the case of ECB raised from foreign equity holders, are used for working capital purposes, general corporate purposes, or repayment of Rupee loans and ECB raised for working capital purposes or general corporate purposes.
  5. General corporate purposes, except in the case of ECB raised from foreign equity holders, are used for working capital purposes, general corporate purposes, or repayment of Rupee loans and ECB raised for working capital purposes or general corporate purposes.
  6. Repayment of Rupee loans, except in case of ECB raised for repayment of Rupee loans availed domestically for capital expenditure and for purposes other than capital expenditure.
  7. On-lending to entities for the above activities, except in case of ECB raised by NBFCs for working capital purposes or general corporate purposes, for repayment of Rupee loans availed domestically for capital expenditure and purposes other than capital expenditure.

The route for drawing ECBs 

Automatic route

ECB up to USD 750 million or equivalent per financial year shall be permitted automatically if they are in compliance with other provisions of the framework. For startups, ECB is limited to USD 3 million or equivalent per financial year. This means that they will not require prior approval from the Reserve Bank of India within the prescribed limits. They need to submit Form ECB to Designated AD Category I bank who will be responsible for considering ECB proposal and also assuring its compliance.  Any non-compliance would attract penalties and adjudication under FEMA.

Approval route

Otherwise as stated above, an entity can raise ECB by requesting RBI. In such a case, they need to approach the RBI with Form ECB for examination with the help of their AD Category I bank. 

Overview of the changes in the new regulation 

Classification of ECBs

ECBs were classified into three categories and the same has now been done away with. Now, the ECBs are bifurcated into foreign currency denominated ECBs and Indian rupee-dominated ECBs.

Eligibility for borrowers

Entities were earlier classified into Track I, II, and III in order to avail ECBs. Now, the policy has been liberalized by allowing entities eligible for FDI to avail ECBs. As a result, even certain LLPs are now eligible to avail ECB which was previously not possible. 

Eligibility for lenders

Just like the borrowers, the lenders were also categorized in tracks. However, in the new policy, the eligibility of lenders has been diversified as discussed earlier.

End-use restrictions

Prohibition on drawing of ECBs as discussed above has been provided in the new framework.

Minimum average maturity period

Minimum Average Maturity Period (MAMP) has now been made uniform by prescribing a period of three years. However, there can be exceptions in the following cases:

  1. MAMP can be one year for manufacturing sector companies who raise ECBs up to USD 50 million or its equivalent per financial year.
  2. MAMP shall be five years in case ECB raised from foreign equity holder is appropriated for working capital purposes, general corporate purposes, or repayment of Rupee loans.
  3. MAMP shall be ten years in case ECB is raised for working capital purposes or general corporate purposes or on-lending by NBFCs for working capital purposes or general corporate purposes.
  4. MAMP shall be seven years in case ECB is raised for repayment of Rupee loans availed domestically for capital expenditure or on-lending by NBFCs for the same purpose.
  5. MAMP shall be ten years in case ECB is raised for repayment of Rupee loans availed domestically for purposes other than capital expenditure or on-lending by NBFCs for the same purpose.

It is important to remember that for points 2 to 5, MAMP should be mandatorily complied with and in these cases, foreign branches/subsidiaries of Indian banks will not be considered as eligible lenders.

All-in-cost ceiling

Like previously, the current framework also provides for a uniform all-in-cost of benchmark rate plus 450 basis points. Now, it explicitly stipulates that the proceeds of ECB shall not be used for payment of charges and interests. However, now, it provides for a cap of 2% over and above the contracted rate of interest on the outstanding principal amount in relation to prepayment charges.

Liability equity ratio

The new policy provides that the ECB liability equity ratio raised under automatic route cannot exceed 7:1 in case of foreign currency-denominated ECB (FCY-denominated ECB) raised from a foreign equity holder. However, this condition will not apply if the outstanding amount of all ECB, including the current ECB, does not exceed USD 5 million or its equivalent. 

Hedging requirements

In the previous framework, a hedging requirement of 100 percent was mandatory in the case of specified companies if the borrowings matured between a period of three to five years under foreign currency denominated ECB. Currently, the requirement is reduced to 70 percent and is applicable under foreign currency denominated ECB. However, now a new term has been introduced i.e. infrastructure space companies. As per the definition of the term, companies in the infrastructure sector, NBFCs undertaking infrastructure financing, Housing Finance Companies regulated by National Housing Bank, Holding Companies/ Core Investment Companies undertaking infrastructure financing, and Port Trusts shall be included in its ambit. It is the duty of the AD Category I Bank to assure that hedging requirements are fulfilled. Additionally, the provision also covers other operational aspects such as coverage, tenor and rollover, and natural hedge.

Form for reporting ECB

Earlier, Form 83 was submitted for reporting ECB whereas now Form ECB needs to be submitted to report ECB in case they need to raise the funds through the approval route.

SOP for untraceable entities

A new concept named Standard Operating Procedure (SOP) has been designed for untraceable entities. It states that AD Category I Banks should follow the prescribed procedure in case any untraceable entity is in non-compliance with the reporting provisions for eight or more quarters. It provides an action plan that will be followed in case any untraceable entity is found to be in non-compliance with the reporting provisions. 

Entities under restructuring

An entity facing a corporate insolvency resolution process or under a restructuring scheme can raise ECBs only if the resolution plan explicitly allows it to do so. Earlier, it was mandatory to take the consent of the Corporate Debt Restructuring Empowered Committee or Joint Lender Forum.

Late submission fee 

Borrowers now have an opportunity to regularise the delay in reporting of drawdown of ECB proceeds if they comply with ECB guidelines. The procedure for the same is as follows:

  1. Delay up to 30 calendar days from the due date of submission – Form ECB 2 along with INR 5000.
  2. Delay up to three years from the due date of submission/date of drawdown – Form ECB 2/ECB along with INR 50,000 per year.
  3. Delay beyond three years from the due date of submission/date of drawdown – Form ECB 2/ECB along with INR 1,00,000 per year.

It is important to remember that though the delay can be regularised non-payment of the late fees would attract penal action and adjudication under FEMA. 

Conclusion 

External Commercial Borrowings is one of the emerging sources for bringing foreign capital to India. With the introduction of a new framework i.e. Master Directions issued by the RBI, the norms have been relaxed substantially which has improved the ease of doing business in India. Provisions of the automatic route, increased scope for eligible borrowers and lenders, simpler classification of ECBs, regularising delays by submitting late fee reduced hedging requirements, etc. will hopefully prove to be a boon for the economy in the years to come. This will help to develop resident entities which will boost the economy as a whole. 

References 

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Phoenix Arc Private Ltd. v. Spade Financial Service Ltd. : understanding the term “financial debt” under IBC

By
Rachit Garg
-
0
Insolvency and Bankruptcy Code
Image Source - https://rb.gy/rxhcrx

This article is written by Ronika Tater from the University of Petroleum and Energy Studies, School of Law. In this article, she discusses the criteria of financial debt with the support of provisions and case laws. It also provides an analysis of the recent case on the same subject.

Introduction

The Insolvency and Bankruptcy Code, 2016, (hereinafter referred to as the “Code”) was enacted as the earlier legislations were cumbersome, insufficient, and favoured the corporate debtors thereby resulting in huge outstanding debts to banks and financial institutions. Hence, the Code is a collection of laws on insolvency and bankruptcy that facilitates the resolution of corporate bankruptcy in a time-bound manner, promotes entrepreneurship, security of creditors, and balances the interest of all stakeholders. 

What do we understand by financial debt

A ‘financial debt’ has an inclusive and non-exhaustive definition as stated in Section 5(8) of the Insolvency and Bankruptcy Code, 2016 that defines the term ‘financial debt’ as a debt consisting of interest which is paid against the consideration for the time value of money. Moreover, financial creditors consist of those people whose relationship with the entity is based on pure financial contracts such as a loan or debt security. The following are some of the criteria included in the definition of financial debt are below-mentioned:

  • Money borrowed in anticipation of the payment of interest.
  • Amount raised by acceptance through any acceptance credit facility or its dematerialised equivalent.
  • Amount raised by any note purchase facility or by the issuance of bonds, notes, shares, debentures, loan stock, or any other instrument.
  • Amount raised by forwarding sale or purchase agreement or any other transaction having the similar commercial effect of a borrowing.
  • Amount consisting of any liability of any lease or hire purchase contract which may be termed as finance or capital lease as per the Indian Accounting Standards or any other similar standards.
  • Any receivables sold or discounted regardless of any receivable sold on a non-recourse basis.
  • Any derivative transaction entered intending to protect against or benefit from fluctuation in any rate or price and for calculating the value of the derivative transaction only the market value should be considered.
  • Any counter-indemnity obligation consisting of a guarantee, bond, indemnity, documentary letter of credit, or any similar instrument issued by the bank or financial institution.
  • Amount of any liability consisting of guarantee or indemnity for any of the above-mentioned items.

Further, to have a better understanding of the term financial debt, it is essential to understand the term time value of money. As per the Black’s Law Dictionary, the “time-value” means that the price is associated with the length of time for which the investor should wait until the investment matures or any related income is earned on the same.

Case analysis of Nikhil Mehta v. AMR Infrastructure Ltd.

The case of Nikhil Mehta v. AMR Infrastructure Ltd, (2017) states the vital definition of ‘financial creditor’, ‘financial debt’ and time value of money. The National Company Law Tribunal (NCLT) while rejecting the application on the ground that the amount claimed to be unpaid in the following does not come under the ambit of the respective definition. However, on appeal, the National Company Law Appellate Tribunal (NCLAT) observed the amount claimed to be unpaid is within the scope of the relevant definition.

Facts

The applicant, Nikhil Mehta along with other applicants had filed an insolvency application against AMR Infrastructure Ltd. for the unpaid assured returns. The applicants were promised by the builder to be paid monthly until the possession of real estate units was handed over to them. The applicant brought the above case under the Code as the amount was in the form of an assured return and the failure to make such payment entitled the applicant to initiate a proceeding against the builder.

Issue

Whether the insolvency application on the ground that the assured return promised to be paid to the applicant and any default by the corporate debtor comes within the ambit of the financial debt or not?

Judgment

The NCLT rejected the application on the ground that the transaction in the case was of the nature of a sale of goods regardless of being like the debt. Hence, the default by the corporate debtor did not satisfy the criteria of financial debt. However, an appeal of the following order was made in front of NCLAT to decide whether the sale and purchase agreement between the parties is like debt. The NCLAT observed that the consideration amount was every month until the possession is handed over. Thus, according to the time value of money against the consideration. Moreover, the applicants, in this case, were investors and the corporate debtor raised the amount by the nature of sale and purchase agreement which has a commercial effect of borrowing. Hence, the amount invested by the applicants falls within the ambit of financial debt as per Section 5(8) of the Code.

Recent amendment

The Insolvency and Bankruptcy Code (Amendment) Act, 2018 was included to balance the interest of various stakeholders especially the interests of home buyers and Micro, Small and Medium Enterprises (MSMEs) to promote resolution over the liquidation of the corporate debtor and to streamline the provisions relating to the eligibility of resolution applicants. Moreover, the term commercial effect of borrowing under Section 5(8)(f) of the Code included home buyers as financial creditors (FCs). Hence, the home buyers can initiate a corporate insolvency resolution process (CIRP) against builder developers as FCs.

What do we understand by operational creditor

The maintainability of the application for initiating corporate insolvency proceedings depends on the applicant to satisfy the tribunal that it falls either under the definition of ‘financial creditor’ or ‘operational creditor’ under the Code. Section 5(20) of the Code states that any person against whom an operational debt is owed or has been legally assigned or transferred. Section 5(21) of the Code defines the term operational debt as a claim consisting of goods and services including employment or a debt for the repayment of dues arising as per the law and payable to the central government, state government or any local authority.

The distinction between operation creditor and financial creditor

Financial creditors are those creditors where the relationship with the entity is related to any sort of credit facility such as a loan or debt security. Operational creditors are those where the entity comes from a transaction on operations. Hence, the Code provides various instances where a creditor has both a financial transaction as well as an operational transaction with the respective entity.

Case analysis of Phoenix Arc Pvt. Ltd. v. Spade Financial Service Ltd.

In February 2021, a three-judge bench of the Supreme Court in the case of Phoenix Arc Pvt. Ltd. v. Spade Financial Service Ltd ( 2021) held that a collusive transaction does not lead to the creation of financial debt under the Code. The Court also stated that a transacting party who is not a financial creditor cannot sit at the table in meetings of the Committee of Creditors (CoC). It also provides the meaning of the term ‘related party’ in consideration to the corporate debtor as such parties are excluded from the CoC process. To that end, the Court highly emphasized the purposive interpretation of the Code and its objectives and philosophy.

Background of the case

The applicants initiated the CIRP against the AKME Projects Ltd, the corporate debtors in the NCLT for the exclusion of two entities i.e, AAA Landmark Pvt. Ltd. and Spade Financial Services Pvt. Ltd. from the CoC process on the ground that they are related parties. The facts of the case stated that Spade had a memorandum of understanding with the corporate debtor where some amount was outstanding from the corporate debtor to Spade. Accordingly, NCLT observed that Spade and AAA do not qualify as financial creditors. It also stated that as per Section 21(2) of the Code, a financial creditor who is a related party of the corporate debtor has no right of representation, participation, or voting in the CoC.

In an appeal before the NCLAT, the Tribunal stated that Spade and AAA are “admittedly” financial creditors of the corporate debtor. It also stated that they are related parties and shall be excluded from the CoC process. Aggrieved by the NCLAT ruling, both the parties appeared before the Supreme Court.

Issues

  1. Whether Spade and AAA are financial creditors of the corporate debtor as prescribed by law?
  2. Whether Spade and AAA are related parties of the corporate debtor?
  3. Whether Spade and AAA have to be excluded from the CoC meetings?

Judgment

The Supreme Court analysed the three issues to come to the finding of the case. Firstly, the Supreme Court referred to the case of Pioneer Urban Land and Infrastructure Ltd. v. Union of India (2019), where emphasis on the term of the time value of money was made. The Court noted that when a transaction is collusive it creates an illusion that the money has been paid to a borrower to receive consideration in the form of the time value of money. However, the real fact is that the parties have entered the transaction with a different or an ulterior motive. In similar words, it means that the real agreement between the parties transacting is something other than advancing a financial debt. Hence, this is against the principle of the Code as it leads to deprivation of benefits to the bona fide creditors of the company. In this particular case, the companies headed by Mr. Arun Anand and Mr. Anil Nanda were transacting in collusion and they do not constitute a financial debt, thereby resulting in exclusion from participating or voting in the decisions of the CoC.

Secondly, while dealing with the issue of the related party under the Code, it stated that the provision has a wider interpretation. If any party is a related party or so related to the corporate debtor they are not permitted in the CoC decisions. Hence, Section 5(24) defines a list of relationships to explain all kinds of inter-relationships between the financial creditor and the corporate debtor. Considering the particular case, the relationship between Mr. Arun Anand and Mr. Anil Nanda is based on the influence exercised by each party on the other’s group of companies. The collusive nature of Mr. Arun Anand was seen to guide the affairs of the corporate debtor. The Court held that Spade and AAA are related parties of the corporate debtor as per the purpose of this Code.

While considering the last issue, the Court relied on the principle, object, and the purpose of the IBC and stated that the exclusion under the first provision of Section 21(2) of the Code is not only related to the debt but also the existing relationship between a related party financial creditor and the corporate debtor. It is important to observe that the default rule states that only those financial creditors that are the related parties in the present would be disqualified from being included in the CoC. In the facts of this case, the relationship between the parties did not attract the prohibition as mentioned in the provision but the Court affirmed the decision of the NCLAT wherein it excluded Spade and AAA from the CoC due to their unfair means to enter the CoC. Accordingly, the Supreme Court dismissed the appeal. 

Conclusion

The definition of financial debt is an inclusive and not an exhaustive definition, hence, the judiciary has the power to interpret and consider other situations which may be included as financial debt. The ruling in the case of Phoenix Arc Pvt. Ltd. v. Spade Financial Service Ltd is a welcomed step in the ongoing process to clear the legislation provided in a short period, but still, some loose ends remain to be unanswered. This case also explains what constitutes financial debt under the Code. Further, it would also be interesting to look at how a financial institution may include an operational debt or partly operational or partly financial.

References

Students of LawSikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skills.

LawSikho has created a telegram group for exchanging legal knowledge, referrals, and various opportunities. You can click on this link and join:

Follow us on Instagram and subscribe to our YouTube channel for more amazing legal content.

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The principle of equal treatment in international arbitration

By
Shoronya Banerjee
-
0
Image Source https://rb.gy/oujk0i

This article has been written by Snehil Balani, pursuing the Certificate Course in International Commercial Arbitration and Mediation from LawSikho.

Introduction

The principle of equal treatment has a rich history in modern legal thought that is inextricably linked to the right to a fair trial. This equality has been described as the “fundamental aim of material justice” such that “the same rights must be granted to all parties, and there must be a constant drive to equalize eventual unevenness among the parties to the extent that it may influence the possibility of a fair outcome of the trial.”

The UNCITRAL Model Law on International Commercial Arbitration (“Model Law” hereinafter) provides for the “equal treatment of parties” under Article 18 and states that “The parties shall be treated with equality and each party shall be given a full opportunity of presenting his case”. Article 18 is often described as the “Magna Carta of arbitral procedure.”

The New York Convention 1958 on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention” hereinafter) does not explicitly state about the principle of equal treatment but under Article V(1)(b) refuses to recognise and enforce awards where “party against whom award is invoked was not given proper notice of appointment of the arbitrator or of the arbitration proceedings or was otherwise unable to present his case”. This article is said to imply the principle of equal treatment under the New York Convention. This principle of equality between parties and procedural fairness applies to the entirety of proceedings and not simply to oral proceedings or proceedings on the merits.

Rights of equal treatment during different stages of the arbitral process

For simplification and a better understanding of the readers, the author will describe the rights of a party to equal treatment during the arbitral process with respect to different stages of the arbitral process: 

Notice of arbitration

The party against whom the arbitration proceedings are requested by the claimant has the right to get a notice of the arbitration proceedings. The arbitral proceedings in respect of a particular dispute commence on the date on which a request for that dispute to be referred to arbitration is received by the respondent. This is enshrined under Article 21 of the Model Law and various national laws such as Section 14 of the English Arbitration Act 1996 and Section 21 of the (Indian) Arbitration and Conciliation Act, 1996. The Model Law under Article 34(2)(a)(ii) and the New York Convention under Article V(1)(b) provides for setting aside the arbitral award if a proper notice of arbitration was not given.

In the case of A v. B, a dispute arose in relation to two contracts for the sale of crude oil. Each contract was made between the same parties, incorporated the same general terms and conditions, was governed by English law and contained an LCIA arbitration clause. B wanted to commence two separate LCIA arbitrations against A but provided only a single notice of arbitration to A. The England and Wales High Court concluded that B’s request for arbitration was invalid as no notice was provided by B to A for the commencement of the second arbitration proceeding.

Appointment of arbitrator(s)

The ability to choose one’s own judge has eloquently been described as “the very essence of arbitral justice.” The appointment of an arbitrator is probably one of the single most important decisions during an arbitration. Procedural equality for the appointment of arbitrators ensures that parties have “the same rights and amount of influence in the nomination process.” Thus, the parties must have equal rights for the appointment of the arbitral tribunal.

A combined reading of Article 18 and Article 34(2)(a)(iv) of the Model Law conveys that if the appointment of an arbitral tribunal was against the principle of equality, then an arbitral award by such tribunal may be set aside under Article 34 of the Model Law. The New York Convention incompletely mentions the same under Article V(1)(d). Incomplete because it needs the law of the country where the arbitration took place to have a provision regarding ‘equality of disputing parties in order to render an award unenforceable. 

The French Cour de Cassation in the case of Sociétés BKMI et Siemens v. Société Dutco (“Dutco case” hereinafter) set aside an arbitral award rendered in a three-party dispute where each of the two respondents asserted the right to appoint their own arbitrator, rather than making a joint appointment. This resulted in 2 nominations from the respondents and 1 nomination from the side of the claimant. The court found this against the principle of equality and stated that the “principle of equality of the parties in the designation of arbitrators is a matter of public policy.”

Written submissions

The Model Law under Article 24(2) provides that “the parties shall be given sufficient advance notice of any meeting of the arbitral tribunal for the purposes of documents”. This ensures that equality is maintained between parties and they are given ‘sufficient time’ to prepare their written submissions. The lack of equality of time between the parties which results in a party being “unable to present his case” is a ground for setting aside of an arbitral award under Article 34(2)(a)(ii) of the Model Law and Article V(1)(b) of the New York Convention.

Evidence

Article 24(3) of the Model Law provides that “All statements, documents or other information supplied to the arbitral tribunal by one party shall be communicated to the other party. Also, any expert report or evidentiary document on which the arbitral tribunal may rely in making its decision shall be communicated to the parties”. So, the other party has the right to be communicated about the evidence presented by the opposite party. This article also applies to the written submissions mentioned above as it uses the term “all statements, documents”. However, there is no right given to the parties to present any evidence. The Model Law under Article 19(2) confers a power upon the arbitral tribunal to “determine the admissibility, relevance, materiality, and weight of any evidence.”

Exceptions

– There exists no obligation to transmit to the other party documents that are either inadmissible or those that have not been presented to the tribunal. The inadmissibility exception is implied in the Model Law itself as it states that “evidentiary documents on which the arbitral tribunal may rely shall be communicated to the parties.”

– Withholding of evidence from one party is only permissible under reasons of strict confidentiality or for reasons relating to public safety or witness protection.

Hearing

Right to be heard

Article 18 of the Model Law provides that “each party shall be given a full opportunity of presenting his case”. The Model Law under Article 34(2)(a)(ii) and the New York Convention under Article V(1)(b) provides for setting aside of the arbitral award if a party was “unable to present his case”. So, a parties’ right to be heard evolves from these articles of the respective laws.

The Swiss First Civil Law Court in the case of X v. Y annulled an arbitral award on the basis that the appellant’s right to be heard was violated as the tribunal while determining the issue, did not take into consideration the main arguments submitted by the appellant. The court stated that the right will be violated when “inadvertently or by misunderstanding, the arbitral tribunal does not take into account some statement of facts, arguments, evidence and offers of evidence submitted by one of the parties and important to the decision to be issued.”

In another case, the Hamilton High Court (New Zealand) in the case of Coromandel Land Trust Ltd. v Milkt Investment Ltd. set aside an arbitral award because the tribunal unilaterally fixed a hearing date and refused requests for adjournment of the hearing. The court found that the court did not give the party a reasonable opportunity to present its case. 

Limitation

The Swiss Federal Supreme Court in re TAG v H Company held that the right of the parties to be heard does not include a right to be heard orally, so long as this rule is consistently applied and is not fundamentally opposed to the wishes of the parties. The Model Law itself provides that oral proceedings are not mandatory under Article 24(1). 

Right to a fair trial

Whether or not proceedings are fair, according to established case law, must be assessed by reference to the proceedings as a whole and not only on the basis of hearings. This right imposes a duty upon the tribunal to be neutral and fair towards the parties of the dispute. It requires the tribunal to be independent and impartial. This is one of the fundamental principles of any dispute or trial which ensures that the end goal i.e., legitimacy and faith towards the justice system is met.

Limitation

There must be a connection between the alleged unfair treatment and the arbitral award. If the unfair treatment does not reflect in the decision of the arbitral tribunal, then it would not be considered as a breach of the duty imposed upon the arbitral tribunal. So, there must be a “causal link between the alleged unequal treatment and the outcome of the arbitration.” The Court of Appeal at Katowice, while mentioning the above limitation stated that “an arbitrator’s lack of impartiality only violates Article 18 of the Model Law if it results in inequality between the parties.”

Party equality v. party autonomy

On one hand, the autonomy of the parties is one of the core principles of the whole arbitration process through which parties are free to determine the applicable laws, free to determine the manner in which the proceedings will be held, etc. On the other side, the principle of party equality is fundamental for arriving at the decision in a fair and equal manner. But what will happen if the parties use their power of autonomy in order to make some of the provisions of equality inapplicable to the arbitral proceedings? Is it possible?

No, the parties cannot do so. The courts have always put the principle of party equality above party autonomy. Deviations based on consent are permissible, but only where the effect of the deviation does not significantly harm one of the parties. The human rights laws of the seat of the arbitration cannot be waived by consent of the parties or by virtue of the tribunals’ inherent or other powers. 

The same was done by the French Cour de Cassation in the Dutco case, where it suggested that “a party cannot waive its right to appoint an arbitrator”. Having considered the legal basis as to why mandatory fair trial guarantees supersede contractual autonomy, it should be stressed that from a fair trial perspective fairness aims to secure the interests of the parties and the proper administration of justice.

Equity v. equality

Even though equality is a fundamental right empowering the parties, parallel to this right comes another concept which implies that ‘no right is absolute. This has been highlighted through different exceptions and limitations in the above paragraphs. But there is another concept which prevails over the principle of equality and acts as a limitation to the right. This is the concept of ‘equity.’

The concept of equity ensures a balance between both parties as sometimes the parties are not always on the same footing. For eg., a dispute arose between parties A and B. A calls 2 witnesses and B calls 7 witnesses. It does not imply, however, that each party must be allocated an identical period of time for examination-in-chief (or direct examination) and cross-examination. In such circumstances, the concept of equity will be followed and party B (while direct examination) might be given more time as it has more witnesses. Therefore, quantitative equality is not the same as substantive equality (equity). Indeed, a blind and mechanistic allocation of equal time could risk causing substantial injustice to parties that are, in fact, differently situated. It leads to little justice.

Conclusion

The principle of equal treatment is one of the fundamental principles of international arbitration and the rights it confers can be observed at any and every stage of the arbitral process, be it the initiation of the arbitration proceedings or the outcome of the proceedings. The gravity of its importance can be ascertained from the fact that an arbitral process commences the time a notice of request for the initiation of the arbitral proceedings is given to the respondent which is one of the rights conferred to the parties under the principle of equal treatment. And these rights are available to the parties throughout the arbitral process.

Also, the fact that it is put above the principle of party autonomy which is one of the basic aspects of the arbitral process exhibits its importance. The principle of equal treatment is not absolute as it comes with some limitations and exceptions which ensure smooth functioning of the arbitral process along with a rightful balance between both parties. The principle ensures and upholds the basic and fundamental principles of human rights in order to come at a fair, unbiased, and neutral decision.

References

Students of LawSikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skills.

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What legal steps can a wife take if the husband is cheating

By
Diganth Raj Sehgal
-
0
Adultery
Image source: https://bit.ly/36SiIRX

This article is written by Gursimran Kaur Bakshi, a student at the National University of Study and Research in Law, Ranchi. This is in continuation with Part I of the article. The author in this article has explained all the legal recourse available to a wife against the husband who was found to be cheating on her. 

Introduction 

Cheating may have the same meaning for both spouses. However, in reality, there is a difference and that does come down to a lot of things. In a marriage, women are often dependent on the husband for financial needs. This is not to stereotype women but to state the actual reality. It is not because women cannot become financially independent; a lot of women are. However, marriage often brings a lot of limitations for women such as leaving the job to take care of the family.

Imagine a situation. You are a working woman but decided to leave the lucrative job to manage your household and children. Let’s say you were not forced to do this. Not all women are forced to; some choose it. And after leaving that job and dedicating your time to the growth and welfare of your family, you get to know that your husband is being unfaithful to you. You find him cheating on you with some other woman.  

Being someone who has made a lot of sacrifices, you feel humiliated. At the same time, you decide to not stay with him anymore. Now, what options do you have? Can you sue your husband for cheating on you? Let’s explore all the possible legal recourses you can take against your husband. 

What should you do when you find your husband cheating on you?

Cheating by a spouse has unfortunately become frequent these days. You might have heard of the story of how the Indian cricketer Mohammad Shami was found to be cheating on his wife with other women. This episode became nasty because the wife uploaded his personal chats with other women on social media. 

By large, cheating by a spouse is a matter of personal affair and it should remain the same. That is why it is not considered a crime in India. Marriage is a social institution that is based on mutual trust and understanding. When the spouse decides to cheat on the other, that trust is broken. But would that give the better half the right to sue the cheating spouse? 

The answer is probably no, and the answer will remain negative even if the husband is indulging in adultery. Let’s see why. 

Cheating means sharing affection, both emotional and sexual, with someone else other than your wife and without her consent. It depends on the circumstances. However, this general definition is not the same as the definition of cheating under Section 415 of the Indian Penal Code, 1860 (IPC). In a case where the husband is cheating on his wife with another woman, he requests the wife to hand over her jewellery which he will use to pay his debts. But instead gives the jewellery to the woman with whom he had an illicit affair. This would amount to cheating under Section 415. Hence, this Section will not have its application in matrimonial cases.

What evidences can be used to prove cheating?

  • Call records, emails, and texts could prove against cheating. But this should not be done at the cost of interfering with someone’s privacy. 
  • Photographs. 
  • Property papers. 
  • Bank transactions, if both spouses have a joint account.
  • Witnesses, if any. 

Should you hire a detective to find out about your husband’s extramarital relationship?

The answer to this is probably no. So, if you know about your husband’s affair and you have evidence for the same, a better approach is to confront him. Currently, there is no law in India that regulates the hiring of private detectives. Hence, the legitimacy of private detection agencies is unclear in India. The Private Detective (Regulation) Bill, 2007, which was supposed to govern the same has been withdrawn from the Parliament. 

Most importantly, hiring a detective will interfere with the fundamental right of the husband. The right to privacy, liberty and human dignity is protected under Article 21 of the Constitution of India. These rights will be jeopardised when a detective will try to gather the information through any means, illegitimate or not, by spying on that person, interfering in the private sphere and activities of the person. Right to privacy became a part of Article 21 in Justice KS Puttaswamy v. Union of India (2018). 

Moreover, the detective can be punished under Section 66E of the Information Technology Act, 2000 for the violation of privacy and any kind of online anonymous conversation to gather any information is also punishable under Section 507 of the IPC for causing criminal intimidation. 

Should you sue your husband for adultery?

The answer to this is you cannot sue your husband for adultery. Adultery can be considered as the aggravated form of cheating wherein the male spouse engages in sexual intercourse with a woman who he knows to be the wife of someone else. Currently, adultery is not a crime in India. It was defined in Section 497 of the IPC as:

“Whoever has sexual intercourse with a person who is and whom he knows or has reason to believe to be the wife of another man, without the consent or connivance of that man, such sexual intercourse not amounting to the offence of rape, is guilty of the offence of adultery, and shall be punished with imprisonment of either description for a term which may extend to five years, or with fine, or with both. In such a case, the wife shall not be punishable as an abettor”.

Section 497 which penalised adultery has been held unconstitutional in Joseph Shine v. Union of India (2018) by the Supreme Court because:

  • Only the male was held liable. 
  • The woman had complete immunity.  
  • The provision is gender-biased. 
  • It did not punish the husband indulging in an extramarital affair with an unmarried woman. 

Hence, with or without the provision, the effective use of this provision would be limited. 

Does your husband’s cheating amounts to domestic violence?

The answer to this is probably yes. Let’s explore how. 

The Protection of Women Against Domestic Violence, 2005 is one of the most important legislation for the welfare of women who are in a married relationship or who are in a relationship similar to that of marriage (live-in relationship) under Section 2(f).

Under Section 3, the definition of domestic abuse includes:

  • Bodily harm, endangering the health or the well-being both mental and physical. 
  • Physical, verbal and emotional, sexual and economic abuse. 
  • Physical abuse means all those acts which cause bodily pain, harm, or danger to life, limb, or health or impair the health or development of the woman including assaults, criminal intimidation and criminal force. 
  • Verbal and emotional abuse can be understood as insults, humiliations, name-calling or ridiculing especially with regard to not having a child or a male child and repeated threats to cause physical abuse to any person who is related to the woman.
  • Sexual abuse means the conduct of a sexual nature that abuses, humiliates, degrades or violates the dignity of the woman. 
  • Economic abuse includes depriving of all/any economic or financial resources to which the woman is entitled under the law or custom or payable under the Court order. It shall also include the resources payable out of necessity including household necessities, maintenance, Stridhan, payment of rental related to the shared household. 
  • Further, it shall also include moveable and immovable property, shares, securities and bonds and everything else that the woman is entitled to by the virtue of the domestic relationship. 
  • Harassment, harm, injury with a view to coerce her to meet unlawful demands for any dowry, property, or valuable security. 

Since the above meaning of domestic abuse has a wider connotation, it is possible to include cheating committed by the husband within the ambit of different types of abuses provided that there is a link between cheating and inflicting cruelty and that link is established through substantive evidence. 

What to do when your husband is forcing you for dowry while he is cheating on you?

Cheating cannot be the sole reason to prosecute the husband under Section 498A of IPC as it per se does not amount to cruelty. This was held in K.V Prakash Babu v. State of Karnataka (2016). To make the husband liable under the abovementioned Section, there must be a direct causal link that cheating by the husband has resulted in mental cruelty which is the reason to drive the wife to commit suicide. Hence, there is a high degree of substantive proof associated with this. This was observed in Ghusabhai Raisangbhai Chorasiya v. State Of Gujarat (2015).

With the substantive proof, the accusation that the husband has indulged in an illicit relationship can go against the wife as this will amount to mental cruelty on the husband. In R v. J (2018), the Court observed that false accusation of extramarital relationship will be a ground for divorce. 

What to do if you do not want to divorce your husband?

Seek counselling 

This may be the most unconventional option, but partners can apply for couple counselling to pacify things between them. But this can only be pursued on a mutual consensus between the two. There are a lot of couples consulting agencies and therapists which can be opted by couples for either a short-term or a long-term. Apart from couple counselling, the partners can individually see a therapist if they are dealing with mental health issues because of the agony. 

Filing a petition for the restitution of conjugal rights 

If the wife thinks that the marital discord can still be solved but the husband is not willing to do so, she can file a petition for restitution of conjugal rights. This is a way through which the courts order the couples to cohabit together. 

Legislations

Hindu Marriage Act, 1955

Special Marriage Act, 1954

Parsi Marriage and Divorce Act, 1936

Divorce Act, 1869

Sections 

The wife can file a petition for the restitution of conjugal rights can be filed under Section 9 of the Hindu Marriage Act. But the husband cannot be forced to cohabit.

The wife has to file a petition as per the format mentioned here. This format is common but basic things may change as per the circumstances. 

The wife may consult a lawyer and then draft the petition to be filed before the district Court. 

Under Section 22 of the Special Marriage Act, a petition for restitution of conjugal rights can be filed by the wife before the district Court. 

Under Section 36 of the Parsi Marriage and Divorce Act, 1936, a petition for the restitution of conjugal rights can be filed by the wife. 

Under Section 32 of the Divorce Act, 1869, the Christain wife can file a petition for the restitution of conjugal rights. 

How to file a petition for divorce or separation against the husband?

Cheating is specifically not a ground of divorce. But the wife can divorce the husband on mutual consent, judicial separation, or through a divorce petition on the ground of adultery before the Court. Also, though adultery is not a criminal offence, civil remedies are still available against the same. 

Divorce under Hindu Law 

Legislations 

Adultery as a ground for divorce 

Divorce based on mutual consent 

Judicial Separation 

Hindu Marriage Act, 1955

Under Section 13(1)(i) a petition for divorce can be filed in a format mentioned here. This format can be used for filing divorce petitions in general. 

Under Section 13B, a mutual divorce petition can be filed by both parties in the format mentioned here. 

The format for judicial separation under Section 10 is mentioned here. 

Special Marriage Act, 1954

Under Section 27(1)(a), the wife can file a petition for divorce on the ground of adultery in a form mentioned here. 

Divorce based on mutual consent can be filed under Section 28 in a format mentioned here.

Section 23(1)(a)

Divorce under Muslim Law

Under customary laws 

  • Talaq-i-Tafweez and Lian are the different forms of talaq available to women under Muslim personal law. 
  • In Talaq-i-Tafweez, the right to pronounce talaq is delegated from the husband to the wife either temporarily or permanently. The wife thus pronounces talaq on behalf of the husband. 
  • In Lian, the woman is entitled to divorce her husband on the ground that he has alleged that the wife has indulged in adultery (Zina). The District Court has to first determine whether the allegations made by the husband were justified or not. 
  • Khula is a form of divorce at the instance of the wife. The wife can give divorce to the husband by returning the consideration/Mahr. To exercise the right to Khula, the woman can pronounce unilaterally and she does not have to go to Court. 
  • Mubarat is a form of divorce based on the mutual consent of both the husband and the wife.

Under Dissolution of Marriage Act, 1939

Under the Dissolution of Marriage Act, 1939, adultery is not a specific ground to obtain a decree of divorce. However, if the husband, because of his affair or otherwise also, inflicts cruelty on the wife, this will be a ground for divorce under Section 2(viii).

Divorce under Parsi Law

Legislation

Adultery as a ground for divorce 

Divorce on mutual consent 

Judicial separation 

Parsi Marriage and Divorce Act, 1936

Under Section 32(d), a divorce petition can be filed by the wife. 

Under Section 32B, both husband and wife will have to agree on a mutual divorce petition. 

Under Section 34, the wife can apply for judicial separation from the husband.

Divorce under Christian Law 

Legislation

Adultery as a ground for divorce 

Divorce on mutual consent 

Judicial separation on the ground of adultery 

Divorce Act, 1869 and Indian Divorce (Amendment) Act, 2001 

Section 10(1)(i) and Section 11.

The petitioner will have to make the adulterer a co-respondent in a petition for divorce under Section 11. The format for the same is mentioned here.

Under Section 10A, parties can file for mutual divorce in a format that can be referred to from here.

Under Section 22, the wife can apply for judicial separation on the ground of adultery. The format for the same can be present here. 

Divorce under Jewish Law

The personal laws of jews in India are unfortunately not codified. Thus, to seek a remedy under this would be difficult. 

What to do if the husband makes false counter allegations of cheating on the wife 

The Court in Vinita Saxena v. Pankaj Pandit (2006) defined mental cruelty as “wilful treatment of a party which causes suffering in body or mind either as an actual fact or by way of apprehension in such a manner as to render the continued living together of spouse harmful or injurious in that circumstance”.

Making false and scandalous allegations against the wife against her character and accusing her of unchastity is a ground for divorce based on mental cruelty. In Vijay Kumar Ramchandra Bhate v. Neelam Vijaykumar (2003), the husband had alleged that his wife was having an affair with her neighbour in the written statement. These accusations were indecent. The Court held that the quality, magnitude and consequence of the allegation has caused mental pain and suffering to the wife. This was a reasonable ground to seek divorce on the ground of mental cruelty.  

Can you claim maintenance from the husband? 

Types of maintenance 

Hindu Marriage Act, 1955

Hindu Adoption and Maintenance Act, 1956

Special Marriage Act, 1954

Parsi Marriage and Divorce Act, 1936

Divorce Act, 1869

Criminal Procedure Code, 1973

Pendente lite- maintenance can be claimed during ongoing legal proceedings for divorce or mutual separation. 

Under Section 24, the wife can file an application in this format, for maintenance during a divorce or judicial separation proceedings. Provided that she is unable to maintain herself during the same.

  

Section 36

Section 39

Section 36

  

Permanent- an application for permanent alimony is usually filed by the divorce petition or that on mutual separation or judicial separation has been decided by the Court. 

Under Section 25, an application for permanent alimony or maintenance can be filed in a format that can be referred to here. 

  

Section 37

Section 40

Section 37

  

Alimony and maintenance in the form of monthly allowance etc.

          

Section 125

This is a secular provision and married women of any religion can seek maintenance.

The format of the application is mentioned here.

Maintenance by husband if he resides with a concubine 

  

Section 18(2)(e).

The wife is entitled to maintenance even if she is living separately from her husband 

        

How to claim custody of the children? 

Usually, the custody of the minor child remains with the mother. However, if the child is with the father, the mother can do the following:

Legislations 

Sections 

Hindu Marriage Act, 1955

To get the physical custody of the child, a petition can be filed for the same to the District Court under Section 26.

Special Marriage Act, 1954 

The husband can apply under Section 38 through a petition to get custody of the child. 

Guardians and Wards Act, 1890

Another legislation that governs guardianship of a child is the Guardians and Wards Act, 1890. To get the guardianship of the child, an application can be made under Section 9 and Section 10 to the District Court.

Parsi Marriage and Divorce Act, 1936 

The Court, under Section 49 of the Parsi Marriage and Divorce Act, can make an interim order of custody and maintenance of the child on a suit, whereas, during the final order, a petition for the custody of the child can be filed before the Court.  

Divorce Act, 1869

In the case of judicial separation under Section 22, the Court can order interim custody to the wife under Section 41 before making a decree for the separation. The Court can also make an order for custody after making a decree for judicial separation under Section 42. 

Muslim law

In Muslim Law, it is a settled principle that the mother is entitled to the custody of the minor male child till the age of 7 years old and the minor female child till she attains puberty. The mother will be entitled to this right until and unless she decides to divorce her husband and remarry. This position of the law was highlighted in Unknown v. Sekh Jiayur Rahaman @Bakul (2016).

Conclusion 

There is no doubt that the law will protect women at every stage of their marital relationship. However, this can also not be denied that cheating and infidelity is a matter of personal affairs and the state cannot interfere and regulate the same. That is why the penalising provision on adultery was held unconstitutional. 

Thus, it is imperative that both spouses must discuss their differences before choosing a legal recourse. Other than this, the parties can opt for counsellors which will help them to solve their marital discord to an extent. Lastly, it is advisable that neither spouse should indulge in illegitimate means to seek revenge against each other. 

References

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What constitutes a game of skill and a game of chance

By
Diganth Raj Sehgal
-
0
Image source: https://bit.ly/3wlGPEu

This article is written by Yash Kapadia. This article answers the question as to what constitutes a game of skill and chances through various examples including judicial dictums. 

Introduction

Let’s be crystal clear and honest, gambling laws in India are said to be extremely complicated and open-ended with vague words used which lead to difficulty in easy interpretation. The primary reason for this drawback is that the governing laws are extremely outdated which were formed before the independence of India. Gambling laws in India were usually governed by the Central Act called Public Gaming Act, 1867. 

However, after India’s independence and the Constitution coming into effect in 1950, betting and gambling were made a part of Entry 34 of the State List. In layman’s terms, it meant that the State Governments in India will have the power to formulate laws regarding betting and gambling laws for their respective states.

Coming back to our topic, if we take a glance through the Public Gaming Act, 1867 we learn that any game of skill will not be treated as gambling or illegal but any game of chance will be treated as gambling and will be illegal. However, today when we speak of gambling we understand it in the traditional sense as well as the modern sense which includes physical and online gambling. However, post-independence most states adopted their acts by including amendments to the Central Act. 

There are various gambling laws in our country. First, which is governed by the Central Law. Secondly, which is governed by the State laws and lastly laws which differ based on being physical or online game & a game of skill or a game of chance. 

Through this article, we shall dive into the deep waters of what constitutes a game of skill and a game of chance and after a ten to twelve-minute read, we shall have a clear picture of how to differentiate between both of these.

Games of skill and games of chance

In a bare-bones version, ‘gaming’ is envisaged to be “a practice or act of gambling. An agreement between two or more persons to play together at a game of chance for a stake or wager which is to become the property of the winner, and to which all contribute. The elements of gaming are the presence of price or consideration, chance and prize or reward.” 1

Meaning

  • A “game of skill” is based mainly on the mental or physical level of expertise of a player, rather than a chance. One of the most significant benefits of a game of skill is that it provides freedom to the players to explore their capabilities in the sport. These games invigorate the players to get accustomed to a certain set of rules while looking for ways to improve and implement different strategies through consistent practice. It is false that the game of skill does not have a chance component, in fact to a certain extent they do. However, it is the individual skills that determine the success rate. Example: Chess, Carrom, Rummy, Teen Patti, Horse Racing and Fantasy Sports are said to be games of Skill. 
  • A “game of chance” however is determined mainly by a random factor of any type. In games of chance, the usage of skill is present but a higher level of chance determines success. Games like playing cards, roulette, rolling a dice, or even picking a numbered ball are reflected upon as chance-based games. It is pertinent to note that players here do not have control over the outcome of the result.  Example: Blackjack, Roulette. 

All games, naturally, consist of elements of chance and elements of skill. To determine whether any game is a ‘game of chance’ what essentially needs to be arrived at is that, the element of chance predominates over the element of skill.2 In a nutshell, a game of chance is defined to be a game in which chance rather than skill determines the outcome.3

The difference between skill and chance

There is some major differentiation between any game of skill and a game of chance. To begin with, the primary difference lies in “who” the said player is playing against. If the supposed player is playing against the house (in simpler words the casino itself is called the house), the player is involved in a game of chance. However, on the flip side when the player is pitted against other similar players, it is looked upon to be a game of skill. Moreover, if any individual can successfully, without any doubt prove that a particular game involves the use of skills like statistics, math and strategies majorly, along with a slight factor of luck or chance, the game would be categorized as a game of skill.

There are currently a bunch of games like Ludo, online rummy that are currently trying their level best to persuade in order to get it classified as a game of skill. It can be conveniently stated that the debate over which set of games are based on skills and which ones are not will go on for quite a time with no end date till a proper method of resolving this issue is thought of. 

The good part about this complicated situation is that there are various judicial dictums, especially by the Hon’ble Supreme Court of India on matters relating to classifying particular groups as games of skills and games of luck. The same is discussed below.

How the Judiciary solved this complicated puzzle?

There have been numerous cases filed by groups and gaming organisations to classify them as a game of skill to get legal status and never be termed as illegal. However, when the Hon’ble Courts of India are posed with difficult questions, an answer to those follows with eloquent explanation to their interpretation of that particular subject matter. The Courts have, from time to time, weighed skill and chance carefully in each game to determine the predominance of one over the other and decide whether betting in such games would amount to gambling. Below are some landmark judgements passed by Indian Courts which put a full stop to the confusion between games of skill and chance. 

It has been held in Manoranjithan Manamyil Mandram v. State of Tamil Nadu (2005)4 that whether a game is considered to be one of chance or skill is a question of fact to be decided on the facts and circumstances of each case. 

Rummy as a game of skill

The Hon’ble Supreme Court, in the case of State of Andhra Pradesh v. K. Satyanarayana (1968)5, interpreted the difference between the three-card game ‘Teen Patti’ and ‘Rummy’ and held that while the former was a game of pure chance, the latter required a certain degree of skill because one has to memorise the fall of the cards and the building up of Rummy requires considerable skill in determining which cards to hold and which one to discard. Therefore, it was held by the Apex Court that the game of rummy has a greater prevalence to qualify as a game of skill.

Horse Racing as a game of skill 

In the case of Dr. K.R. Lakshmanan v. State of Tamil Nadu (1996)6, the Hon’ble Supreme Court while dealing with the issue of horse racing, held that horse racing is neither to be considered as ‘gambling’ nor ‘gaming’, but a game of ‘mere skill’ and that the expression ‘mere skill’ would mean a substantial degree or prevalence of skill. This was interpreted so on the reasoning that horse-racing is based on the inherent capacity of the animal, the competence and proficiency of the jockey riding it, the form and physical fitness of the horse, the weight it can carry and the distance of the race which are all equitable facts capable of being assessed or studied by race-goers. Thus, it was held that the prediction of the result of the race is the result of knowledge, study and observation viz. skills and not a mere chance. 

Poker as a game of skill 

With reference to the game of Poker, the Hon’ble High Court of Karnataka, in the case of Indian Poker Association (IPA) v. State of Karnataka (2013)7, observed that Poker is a game of skill and that no license is required for conducting a game of skills, including Poker, in club premises meant for recreational purposes, as long as they are conducted in accordance with the law enacted by the State. It further held that since Poker is not included within the head of gambling activities under West Bengal Gambling and Prize Competitions Act, 1957, the officers of the law cannot interfere with such games.

However, the Hon’ble Gujarat High Court, had a contrary view in Dominance Games Pvt. Ltd. v. State of Gujarat (2017)8, while following the Supreme Court’s decision in K. Satyanarayana’s case (discussed above), has held that Poker is a “game of chance”. However, an appeal to this decision is pending in the same Court. 

To date, views are exchanged whether or not Poker is a skill-based game or not and in many cases online Poker is considered to be illegal. Various service providers and online sites have even modified the game in order to make it a more skilled game. To back this, certain sites have eliminated the luck of draw element from the game and for this reason, the skills of the players have become predominant in determining the winners of the game.

Fantasy sports- game of skill or chance 

In common words, fantasy sports games are games that involve users who draft fantasy teams based on certain pre-conditions from a selective list of players who are scheduled to play live games on a particular day. The users then have to pay an entry fee to enter a contest and enter a pool for distribution among the users after deduction of a certain fee by fantasy sports games providers (the App). The users generally draft their teams based on their application of knowledge, attention, experience and access to information regarding the relevant sport. The said user then collects points based on the draft team he has prepared to enter into the pool of competition. The users are further ranked based on the points their selected players accumulate in that particular contest as per a set of point-rules/scoring metrics pre-determined by the service provider.

While dealing with this issue of whether the fantasy sports like Dream 11 qualifies as a game of chance or a game of skill, various High Courts, after careful analysis of different facts and circumstances, have held it to be a game of skill. 

The Hon’ble Punjab and Haryana High Court in Varun Gumber v. Union Territory of Chandigarh (2017)9, has held that games such as horse, boat and foot racing, football, baseball, chess, golf are games of skill and significant judgement and not a game of chance. However, in a fantasy game, a participant user who builds a virtual team would require considerate skill, knowledge, judgement and discretion, as the participant has to estimate the relative value of each athlete/sportsperson as against all athlete/sportsperson available for selection. He is required to study the strengths and weaknesses of the athlete which would determine the result of the game and his chances of winning a contest. The Hon’ble Court further held that a better result in a fantasy sports game like Dream 11’s basically arises out of a user’s own exercise of superior knowledge, judgement and attention to detail. It was therefore held to have involved the element of skill which had a dominant influence on the outcome of the Dream 11 fantasy, therefore, not falling within the activity of gambling which was prohibited and was termed as a “game of skill”. An appeal was filed in the Supreme Court but the same was dismissed in 2019.            

A similar finding was also reached by the Hon’ble Bombay High Court in the case of Gurdeep Singh Sachar Vs. Union of India and Ors. (2019)10 wherein the Court observed that it was evident that the success in Dream 11 fantasy sports depends upon the user’s ability to exercise his skill based on superior knowledge, judgement and attention. Therefore, the result is not dependent on the winning or losing of a particular team in the real world game on any particular day. It is without an iota of doubt, a game of skill and not a game of chance. The Court held that “The attempt to reopen the issues decided by the Punjab and Haryana High Court in respect of the same online gaming activities, which are backed by a judgement of the three judges bench of the Apex Court in K.R. Lakshmanan (supra), that too, after the dismissal of SLP by the Apex Court is wholly misconceived.”

A Special Leave Petition was filed by the Union of India against the Bombay High Court judgement. However, it was dismissed by the Hon’ble Supreme Court. However, Hon’ble Justice Shri R. F. Nariman and Justice Shri S. R. Bhat gave liberty to the Union of India to file a limited review petition before the Bombay High Court with respect to the issue of Goods and Service Tax evasion in that case.

Another petitioner approached the same bench to seek a review of the same case However, this time around the Supreme Court irked a stern statement that: “It is reiterated that in accordance with our order dated 13.12.2019, the only scope of the review filed in the Bombay High Court is with respect to GST and not to revisit the issue as to whether gambling is or is not involved.”

Latest Case

The Rajasthan High Court in October 2020 in the case of Chandresh Sankhla vs State of Rajasthan (2020)11 dismissed a writ petition filed in the nature of a Public Interest Litigation and it opined that the issue of considering Dream 11, the fantasy sports game, having any element of betting/gambling is no more res integra in view of the judicial dictums and orders passed by the Bombay High Court, Punjab and Haryana High Court and SLPs (discussed above) that have been dismissed against the orders of these High Courts.

A Special Leave Petition12 was filed to sort out the ban of the online game Dream11. However, the same was dismissed and the judgement of Rajasthan High Court (discussed above) was upheld. The Apex Court was asked to consider a New York Supreme Court judgement (2020)13 which had to answer a similar challenge wherein it was held that the law challenged as unconstitutional on the ground that it violates the prohibition against gambling in NY Constitution, the Court was of the opinion that although participants in interactive fantasy sports contests may use their skill in selecting teams they no control whatsoever on how the athletes on their Interactive Fantasy Sports would actually perform in the real world. 

We can, therefore, state that relying on the aforesaid cases, the Courts have carefully evaluated the amount of skill involved in a particular game so as to not amount to gaming or ‘gambling’ as prohibited under the Indian gambling laws.

What constitutes game of skill and game of chance as per Judicial Dictums

 

Game of Skill

Game of Chance 

Plays against

Another similar player/user

The house

Driven by Player’s 

Mental, physical expertise

Randomised factor of any type

Requires

Practice, experience, tactics

Mostly chance/luck-based

Winning depends

Substantially on player’s skill

On mere luck

The result is 

Wholly certain

Wholly uncertain or doubtful

Example

Poker, Rummy, Fantasy Sports

Rolling of a dice, lottery, roulette

Way forward

We have definitely come a long way from outdated laws to systematic state governed laws but only in a few states. With a meteoric rise in the field of technology and online games now gradually taking over and most certainly preferred over physical ones, a set of laws and reforms can be formulated at the Central Level which shall lead to a rise in an emerging market like India. From a gambler’s point of view, with a set of rules and regulations in place, one does not have to worry about the laws they may be breaking. To be honest, India is a long way from being a gambling haven. 

If the service providers and online sites’ owners sit and come to smart conclusions with the Government which benefits the country as a whole then this process can be fast tracked. It is impossible to predict the future therefore only time will tell what the future beholds for the laws of gambling markets.   

Conclusion 

The whole shebang of this article was to ascertain what constitutes a game of skill and what would constitute a game of chance. We have, through definitions, interpretations in layman terms and through various judicial dictums ascertained which games require more skill than chance and what is needed to be proved in order to prove a game of skill and a chance. 

We have furthermore, cleared out doubts on which category fantasy sports lie in along with a Supreme Court judgement decided this week. The blurry image of these two terms has become clear and it is not a complicated subject. 

As mobile use, internet use, and the market of online gambling increases, the government starts to see the potential profit in regulating the market further to retain those profits earned within the country. Only time will tell in which direction the online gambling laws in India will take. A higher number of regulated states is not impossible in the current scenario. 

References

  1. Shri K. L. Mansukhani v. Senior Inspector & Ors., 1999 SCC OnLine Bom 843 and Black’s Law dictionary, 6th Edition, Pg. 679
  2. Refer to Para 24 of Shri K.L. Mansukhani v. Senior Inspector of Police & Ors., 1999 SCC OnLine Bom 843 
  3. Black’s Law Dictionary, 6th Edition (Page 679)
  4. AIR 2005 Mad 261
  5. AIR 1968 SC 825
  6. (1996) 2 SCC 226
  7. 2013 SCC OnLine Kar 8536
  8. 2017 SCC OnLine Guj 1838
  9. 2017 Cri LJ 3836
  10. (2019) 75 GST 258 (Bombay)
  11. 2020 SCC Online Raj 264
  12. Avinash Mehrotra vs State of Rajasthan [SLP (Civil) Diary No. 18478/2020]
  13. White v Coumo; 2020 NY Slip Op 00895 [181 AD3d 76]

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How Nestle can protect its brand name

By
Abanti Bose
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0
Image Source: https://rb.gy/5ehubi

This article is written by Sidharth Trehan, pursuing a Diploma in Intellectual Property, Media, and Entertainment Laws from Lawsikho.  

Introduction 

A brand name or a trademark symbolizes the origin, quality, and goodwill attached to a business or a private. It could be anything by which consumers identify a business or a brand.

The company “Nestle” is currently the leading and one of the biggest companies in the FMCG domain/segment. But the journey of this “company” referred to as Nestle did not start like this. Nestle as the company was formed in 1905 by the amalgamation of Anglo-Swiss milk company and Farine Lactee Henri Nestle. 

The company’s growth grew extensively during the first world war and followed by the Second world war, escalating its contribution beyond condensed milk and infant products. The company had a stronghold in the market. After 1950 Nestle started acquiring many corporations, including Cross and Blackwell, Findus, Libby’s, Rowntree Mackintosh, Klim, and Gerber. Therefore, Nestle is currently one of the most dominant players in the market, having stability and well-organized management that makes the company a leading brand in its sector.

Nestle and its intellectual property approach

Intellectual property, also known as “IP,” means intellect or creation of minds such as invention literacy, symbol, name, trademark, copyright and patent, and many other related rights. If summarised, Intellectual property “IP” means a bundle of all exclusive rights, both artistic and commercial. 

The re-organization of the company’s internal IP legal structure has allowed Nestlé to control and defend its patents and trademarks in a centrally coordinated manner. 

  1. Nestlé places high value on its IP and recognizes it as a significant financial asset, the legal protection of IP is a crucial element in maintaining this value. 
  2. IP is valued and guarded to the same extent as other valuable assets within the business. 
  3. Intellectual property rights are usually limited to non-rival goods, that is, goods that can be used or enjoyed by many people simultaneously – the use by one person does not exclude use by another. 
  4. The term “intellectual property” denotes the specific legal rights described and not the intellectual work itself.
  5. The company has organized the IP department to have at least one patent lawyer and one trademark lawyer in each area of the business.

Importance of trademark for a brand like Nestle

A trademark is a sign or a name capable of differentiating the goods or services produced or provided by one enterprise from those of other enterprises. 

A brand name is referred to as a trademark. A brand having its right on its name signifies that this particular name is associated with this specific company, and no one can claim the same in the future. Having a trademark registered means having a brand name written. In India, we can get anything registered for trademark such as:

Name

Letter

Sound mark

Phrase

Word

Graphic

The simple process of getting the trademark and brand name registered In India

Search for a Brand Name

It’s the first step to select a brand name that needs to be registered. 

Making the trademark application

TM1 needs to be filled followed with:- 

A Business registration concern.

An image of your brand logo 

If required, a proof of claim of the proposed mark being used in another country.

Filling the brand name registration application

This can be done by going to the registrar’s office or online and requires completion of 20 days. 

The registration application is examined.

When the application is received, it’s the role of the registrar to check whether the brand name complies with all the laws, and therefore it does not conflict with other existing registered or pending trademarks.

Publication in the ITM Journals

When the analysis is completed, the brand name is published in the IMT (Indian Trade Mark Journal) The time limit is 90 to 120 days.

Issuing of registration certificate 

Therefore the brand name is registered.

If there is no objection regarding the trademark, within 90 days, then the certificate is issued. 

Trademark of Nestle 

  • Reg. Trademark of Société des Produits Nestlé S.A. All rights reserved. 
  • People are permitted to browse the NESTLE “s website, reproduce extracts by way of printing, download them to a hard disk, or for distribution to other individuals. 
  • This is only to be done on the proviso that they keep intact all copyright and other proprietary notices and that the above trademark notice appears on such reproductions. 
  • No reproduction of any part of this website may be sold or distributed for commercial gain, nor shall it be modified or incorporated in any other work, publication, or website. 
  • The marks, logos, characters, and service marks (collectively “Trademarks”) displayed on this website belong to the Nestlé Group. 

Protecting its brand name

Any action against the registration of similar or identical marks

The method for registering an identical or a similar trademark is by using the defense of honest concurrent use, which is stated under Section 12 of The Trademark Act 1999. As per the law, the power of decision is with the registrar; therefore, the allowance of this trademark is with the registrar. Five factors have been mentioned to use “The defense of honest and concurrent use.” 

  • The use regarding duration, quantity, and area.
  • The explicit use of honesty of concurrent use.
  • The amount of confusion is likely to cause inconvenience to the people.
  • If there exists any evidence of such confusion.
  • The amount of inconvenience caused to any parties if the concurrent use is approved.

What are the special protections and rights associated with Nestle as a brand name? 

The Indian trademark law signifies protection to trademarks that are ‘well known in nature and safeguards or protects them from passing off or infringement. 

The TM Registry recognizes a well-known mark in India based on International, National, and Cross-Border reputation.

“The Trademarks Act 1999” protects well-known trademarks in two ways:

  1. Any action against the misuse of the well-known mark in nature.
  2. Any action against the registration of similar or identical marks.

Any action against the well-known mark in nature

The term “well-known mark” has been defined under Section 2(zg) of the Trade Mark Act 1999. By coming of a New Trademark Rule 2017, there has been a new procedure for claiming a trademark as a “well-known mark.”

As per the new rule, a person having a trademark under his use can file an application under Form TM-M stating to the registrar that the mark is to be a “well-known mark.” Therefore after the coming of the new rule, the “well-known mark” is protected and safeguarded against infringement and passing off. 

Provisions related to the protection of “well-known” trademarks

S.no

Provisions

Explanation 

1

The Rule 124 of “Trade Mark Rules 2017”

The rule allows the trademark owners to file for a grant of “well-known” mark to the registrar in Form TM-M.

2

Section 11(2) “protection of well-known marks across all classes.”

This clause states that the well-known mark shall be protected across all classes.

3

Section 11(6) “factors are taken care of while determining the trademark as well known.”

These are the consideration that needs to be determined as per sec 11(6):- 

  1. Knowledge about the TM in relevant sections of the public.
  2. The duration, extent, and geographical area in which the TM is used.
  3. The duration, extent, and geographical area in which the TM is promoted with respect to the goods and services to which it applies.
  4. Registration for registration of the TM to the extent they reflect the use or recognition of the mark.
  5. The record of successful enforcement of the rights in that mark, including the record stating that the TM has been recognized as well known by any court or registrar.

4

Section 11(9) “conditions not required for well-known mark registration.”

This section states conditions which are not required to grant a well-known mark. 

  1. That the mark has been used in India.
  2. That the mark has been registered.
  3. That the application for registration of the mark has been filed in India.
  4. That the mark is well known in or registered in any other jurisdiction other than India.
  5. That mark is a well-known mark in India.

5

Section 11(10) “Obligation on the Registrar”

The compulsion lies with the registrar that if there is any infringement or dispute regarding associated with a well-known mark against the identical ones and also must take into consideration the ill intention and wrong motive of the complainant or the opponent.

Any action against the registration of similar or identical marks

The method for registering an identical or a similar trademark is by using the defense of honest concurrent use, which is stated under Section 12 of The Trademark Act 1999. As per the law, the power of decision is with the registrar; therefore, the allowance of this trademark is with the registrar. 

Five factors have been mentioned to use “The defense of honest and concurrent use.” 

  • The use regarding duration, quantity, and area.
  • The explicit use of honesty of concurrent use.
  • The amount of confusion is likely to cause inconvenience to the people.
  • If there exists any evidence of such confusion.
  • The amount of inconvenience caused to any parties if the concurrent use is approved.

Conclusion 

A business running in any part of the world is only identified by its representation and significance. Its identity is the main representation in the market. Therefore this all concludes to trademark. The graphical representation helps to give a brand identity in the market, this helps the brand to be what it is, and the people can associate themselves with that brand. It is essential for every company to make necessary Standards to protect their brand name “trademark”. A brand name or a trademark symbolizes the origin, quality, and goodwill attached to a business or a private. It could be anything by which consumers identify a business or a brand. The most important strategy for any business is to seek protection for their brand name, logos under the statutory law of trademark and copyright at the same time.

References

Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skills.

LawSikho has created a telegram group for exchanging legal knowledge, referrals, and various opportunities. You can click on this link and join:

Follow us on Instagram and subscribe to our YouTube channel for more amazing legal content.

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How can Nestle patent the fennel flower

By
Abanti Bose
-
0
Image Source: https://rb.gy/cnxnha

This article is written by Vasundhara Thakur pursuing a Diploma in Intellectual Property, Media, and Entertainment Laws from Lawsikho.com.

Introduction

The fennel flower which is also known as Nigella Sativa and black cumin or Kala jeera is a flowering plant native to southern Europe and Asia, however, now it is cultivated and used worldwide due to its numerous usage and health benefits. Recently it was in the news after Nestlé, the largest food and beverage multinational company based in Switzerland tried to patent it. For a patent to be valid, it needs to be novel, having inventive step/s and must be of industrial use. It would be interesting to find the patent application by Nestlé whether the patent for the extraction of seeds of the fennel flower is a new invention or a mere discovery of nature. This article emphasises the patentability of the fennel flower by Nestlé and concepts of traditional knowledge and patents in this regard. 

What is a patent and how can Nestle patent the fennel flower? 

A patent is an exclusive right granted to a person who has invented a new and useful article or an improvement of an existing article or a new process of making an article. It consists of an exclusive right to manufacture the new article invented or manufacture an article according to the invented process for a limited period. Section 2 (1) (j) of the Indian Patent Act, 1970 defines invention. Concerning Medicine or drugs and certain classes of chemicals no patent is granted to the substance, even if that is new, however, a process of manufacturing the substance is patentable. The applicant for a patent must be the first inventor or a person who has derived title from them since the right to apply for a patent is assignable. The Applicant must give full disclosure of the invention and specify the precise limits of the monopoly claimed. The invention claimed must be novel and must not be obvious to those who are skilled in the art to which it relates.

Sections 2 (1) (j) and 2 (1) (ja) defines invention and inventive steps under the Indian Patents Act, 1970 according to the sections any product or process will be considered as an invention if it has an inventive step that is not obvious or does not possess any technological advancement in the existing and/or already available traditional knowledge. Thus, it is clear that Nestlé cannot get patent over the fennel flower per se, since it has been in use for a long period of time and has become quite common and known to the public at large which is exactly the opposite of the conditions required to get patent over a product or a process.

Traditional knowledge 

Traditional knowledge is knowledge and skill passed on from one generation to another or within a community forming a part of their cultural or spiritual identity. Although there is no specified definition of traditional knowledge internationally, it has defined in a general sense as knowledge and cultural expression that includes distinctive signs and symbols and in the narrow sense, it refers to intellectual knowledge that comes from intellectual activity in a traditional context, that includes know-how, practices, skills, and innovations as in agricultural, scientific, technical, ecological, medicinal and biodiversity knowledge.

In modern times the fennel flower is used and cultivated worldwide, however, its use can trace back to ancient times where it was used and associated with various cultural norms. The seeds of the Fennel flower also known as kala jeera(black cumin) and/or kalonji are customarily being used to enhance the food flavour as well as for medicinal purposes since the ancient ages and are now becoming part of the culture of India, Afghanistan, Italy, Middle East, Egypt, and China. In ancient Egypt it was used as food and medicine, while it was considered as a snakebite remedy in ancient China, it was hung over doorways to drive away evil spirits in the Middle East and it is also associated with the origin of the marathon. 

Considering these traditional usages of fennel flower by various cultures, it comes under the purview of traditional knowledge and makes it common and known to the public at large in contrary to the condition specified for granting a patent i.e. novelty. 

What was covered by Nestlé in its patent application? 

Nestlé filed the patent application regarding the specific way that can be used to extract thymoquinone, a natural compound of the fennel flower, and to protect the findings of research on the interactions between thymoquinone, or similar compounds, and the body’s receptors and how this interaction can help reduce allergic reactions to foods and the use of compositions that provide molecules that stimulate these receptors. 

Did Nestle try to patent the fennel flower?

SumofUs a non-profit organization published an online petition in April 2013 that Nestlé is trying to patent Nigella sativa or the fennel flower, known for its healing effects for curbing cancer, helps in alleviating asthma, and reliefs from pain. It was further stated in the petition that Nestle was trying to take control of this natural cure by preventing others from its usage while making a profit from the fennel flower that has been used for centuries in many households or as a homoeopathic remedy. It was further contended that Nestlé has fabricated the idea that it has discovered that fennel flower could be employed to alleviate food allergies while it has been in practice for thousands of years. They also affirm that Nestlé is attempting to gain a monopoly over the fennel flower that will grant them the power to sue anyone who would use it without the prior permission of Nestlé and instead of making an artificial substitute or making the remedy easily accessible and available to all nestle is looking to make a fortune out of it by turning it into some costly private drug. While some users on the MetaBunk forum have challenged the facts made by SumofUs in its petition they point out that the site has raised some important questions regarding the actions of the multinational corporations. 

Counterclaiming the averments made by SumofUs, Nestlé on its official website has clearly stated that it never intended to ‘own’ or tried to get a patent on the fennel flower. The patent claim was entirely based on the discovery by their scientists that thymoquinone found in the seeds of fennel flower stimulates specific receptors in the body that prevent food allergies. Although the patent wasn’t granted to them and now they are not pursuing it. However, even if the patent would have been granted to us that would not have prevented the use of fennel flower by any individual or entities for any purpose be it traditional or natural remedies. Nestlé stated that they believe in fair access and benefit-sharing of the raw materials, as described in the Convention on Biological Diversity of 1992 and Nagoya Protocol of 2010. Further stating that “the fennel flower is a natural species and nobody could or should benefit from its ownership”.

After this debate people started to question the patentability of natural elements and the role of intellectual property protection in such cases. Clearing this the Supreme Court of the United States in Molecular Pathology v. Myriad Genetics stated that “human DNA cannot be patented in its innate form because it is a product of nature. However, synthetic or artificial DNA made by humans could be patented”.

Similar instances where patent application was rejected

A patent application was filed by the applicant for their invention titled “Process for the production of recombinant proteins using carnivorous plants”. In the said application the applicant claimed that carnivorous plants can be used as a medium for protein production and the process that involved can genetically modify plants by transformation and protein was expressed in the digestive secretion of the genetically modified plant, hence, the invention concerns to collect an exogenous recombinant protein produced by the plant and not to the cultivation of plants. “The plant is subjected to chemical and optionally mechanical stimuli mimicking the capture of a prey and inducing activation of the system producing and secreting proteins by the said plant into traps, which does not form part of usual methods to culture plants and does not relate to agricultural methods”.

The Indian Patent Officer rejected the application stating that this invention has the potential to commercially exploit the carnivorous or insectivorous plants, that comprises the cultivation of the plant, inducement of the plant by chemical and mechanical stimuli for secretion of recombinant protein in traps. Further stating that the cultivation of the carnivorous plant used in a process according to the invention is carried out conventionally, taking into account the special features of the selected type of carnivorous plant. The methods of cultivation of the different types of carnivorous plants are well known to those working in the field. Therefore, this application was refused under Section 15 of the Patents Act, 1970 based on the grounds of Section 3(j) and Section 3(h) of the Act. 

It can be concluded from the above-mentioned patent application that any invention like Nestle’s in fennel flower extraction case, if there are traditional or alternative and known process is available and anyone tries to monopolise a method for the sole purpose of commercial benefit, then such inventions could deprive the general public of the use of a natural product that is available naturally without causing any further damage to the natural habitats. 

Conclusion

From the above discussion, it can be concluded that the fennel flower is a natural substance that has been known for thousands of years and has been used by many in various parts of the world. The researchers found numerous benefits to mitigate allergies through the use of fennel flower seeds, including respiratory allergies. Though patents are given for new inventions and discoveries it is pertinent to note that the known elements like thymoquinone, the compound found in the fennel flower are extracted even before any other inventions and its benefits and usage are known worldwide. Nestlé cannot patent the fennel flower itself, however, if it discovers something new like an invention to grow seeds of fennel flowers or any other discoveries which are unknown to the common public, Nestle can seek patent over such discoveries. The claim by Nestlé that it has discovered specific ways in which the body’s opioid receptor interacts with thymoquinone to reduce food allergies might seem like a new discovery, however, unknown the reason behind such reaction, we cannot disregard the usage that has been in use in many countries using it for such kind of health benefits.

References

Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skills.

LawSikho has created a telegram group for exchanging legal knowledge, referrals, and various opportunities. You can click on this link and join:

Follow us on Instagram and subscribe to our YouTube channel for more amazing legal content.

Download Now
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