CALL FOR PAPERS - JGLR SPECIAL ISSUE ON CORPORATE AND FINANCIAL LAW

JINDAL GLOBAL LAW REVIEW

Jindal Global Law Review (ISSN 0975-2498) is the flagship journal of Jindal Global Law School (JGLS). It is published bi-annually. As a double-blind peer reviewed journal, JGLR aims to publish inter-disciplinary scholarship at the intersections of legal theory, critical theory, political economy, international relations and the humanities. It lays emphasis on publishing work that is at the cutting edge of doctrinal, theoretical and empirical research. Each issue of JGLR, edited by subject-experts from the JGLS faculty, is themed on a contemporary topic to rigorously explore its legal, political, social, economic and policy dimensions. The inaugural issue of JGLR was published in September 2009. JGLR encourages scholars and researchers from disciplines other than the law to contribute their work to the journal.

MANAGING EDITOR:

Dr. Vishwas H. Devaiah, Associate Professor and Executive Director Centre for Intellectual Property Rights Studies, Jindal Global Law School

SPECIAL ISSUE: Developments in Corporate and Financial Law

GUEST EDITORS

1.   Arjya B. Majumdar, Assistant Dean (Academic Affairs) and Assistant Professor, Jindal Global Law School, Assistant Director, Michigan-Jindal Centre for Global Corporate and Financial Law and Policy

2.      

      Faiz Tajuddin, Assistant Professor, Jindal Global Law School, Assistant Director, Michigan-Jindal Centre for Global Corporate and Financial Law and Policy

SUBMISSIONS: 

Submissions can be in the form of articles and book reviews and should be emailed to us at jglr@jgu.edu.in in an MS Word *.doc (Times New Roman, font size 12, double spacing) format.

Articles should be of 8,000 to 10,000 words and book reviews should be of 3000 to 4000 words (including footnotes). All manuscripts should be in UK English and footnotes should conform to the requirements of The Bluebook: A Uniform System of Citation (19th ed.).

KEY DATES:

1.   Deadline for submission of full paper: 15^st July 2015

2.   Notification of acceptance:  30^th July 2015

3.   Publication of Journal: October 2015

Since JGLR follows a double-blind peer review process, it is imperative that contributors stick to the deadlines. For further information or clarifications, you may also write to us at abmajumdar@jgu.edu.in or ftajuddin@jgu.edu.in.

Concept Note

Through the 1980s and into the 21st century, a number of wide, sweeping changes have been witnessed in the way how corporations are governed. Whether it is the shareholder value maxim that emerged in the 1980s, or the corporate governance failures that led to the Sarbanes-Oxley Act of 2002 and the legislations it inspired, or the Dodd-Frank Act of 2010 which considers shareholder empowerment and enhanced executive pay disclosure, the law related to corporations is one that is in a constant state of flux.

A number of issues in corporate and financial law continue to generate lively debate amongst scholars across the world. This issue of the Jindal Global shall examine developments in corporate and financial law in the 21st century, the changes in perspectives and the law that have taken place in the last decade and how such developments may have a considerable impact in the manner in which corporations are governed in the foreseeable future. We welcome papers on the following themes:

1.       Corporate Jurisprudence

With Berle and Means’ seminal work in 1932, followed by Merrick Dodd’s response, the debate as to whether corporations exist for the sole purpose of maximizing shareholder wealth or also for the purposes of social welfare continues to rage. The application of the stakeholder primacy model in alternative forms of businesses such as community-based enterprises or microfinance institutions would be of considerable interest.

2.       Corporate Social Responsibility

Another issue that dogs current developments in the corporate jurisprudence is that of corporate social responsibility. Section 135 of the Indian Companies Act, 2014 mandates companies meeting certain requirements to compulsorily contribute to corporate social responsibility (CSR) activities, or explain the failure to do so. This mandatory provision in Indian law in question has been met with considerable resistance from the industry.

3.       Financial Sector Reforms

A vibrant and efficient financial sector is the prerequisite for a strong economy. The economic reforms and the second wave of liberalisation that India is presently embracing calls for more efficient and inclusive financial system. Additionally, the recent financial crisis has brought the deficiencies in the financial regulation to the fore. The policy makers in India seem to have taken note of these exigencies and thus have proposed changes in the financial sector regulatory structure by way of Financial Sector Legislative Reform Commission (FSLRC) report.

In the backdrop of the mentioned developments, it has now become pertinent to scrutinise laws and regulations in the financial sector globally in order to support and strengthen economies.

4.       Path-dependency in Corporate Governance

China and India and countries at similar positions are faced with similar challenges to maintain the aggressive rates of economic growth. While these countries attained economic independence in the late 1940s, each followed a different course in terms of growth. For example, China preferred to open up its economy to FDI much earlier and only in recent times, has it turned towards domestic capital. India, on the other hand, began by attempting to develop local talent and began focusing on foreign participation in 1991. The political and economic background and the resultant corporate governance paths undertaken by countries in the same vein of growth may be examined.

5.       Board Composition and Diversity

The constituent elements of the board of directors, as an agent for shareholders have been well established post the Sarbanes-Oxley Act of 2002. The introduction of independent directors and a committee structure at the board level and task specific requirements for committee composition have brought up interesting questions in both developed as well as emerging economies. At the same time, gender diversity on corporate boards has become a global issue. In countries such as the U.S., Australia, U.K. and more recently, Canada, regulations require listed companies to disclose their diversity policy in their annual reports.

6.       Related Party Transactions

A major issue faced by companies, particularly those with concentrated shareholding, is the diversion of assets for non-corporate use. Whether through managerial remuneration or through self-dealing, the abuse of related party transactions has been the subject of considerable study and concern for regulators in recent times. As mechanisms to combat the abuse of related party transactions, corporations are subject to disclosure norms, shareholder approval and anti-pyramid provisions. The efficacy of such provisions to prevent the abuse of related party transactions is of significant interest.

7.       Minority Shareholder Protection

Economies having a predominantly concentrated shareholding pattern in their corporations continue to grapple with the issue of opportunism of the majority shareholder vis-à-vis the minority shareholder. Thus arises a need to determine and assess the effectiveness of minority shareholder protection.

8.       Disruptive Technologies in Corporate Functions

With the advent of new technologies and more effective means of widespread communication, the classical concepts of registered offices, board and shareholder meetings are being replaced by newer practices of virtual offices and video conferencing. At the same time, newer ways of fundraising in the form of crowdfunding has emerged, perhaps bringing about a new form of shareholder dominance which was hitherto unknown. In the aftermath of the 2008 financial crisis, small businesses found it increasingly difficult to raise funds. As a response, crowdfunding has emerged as a viable alternative for sourcing capital to support innovative, entrepreneurial ideas and ventures. With the swift growth of the crowdfunding industry, risks associated with it have also come into sharp focus.

The above themes are indicative only and papers on related topics would also be appreciated. We welcome well-researched papers having an analytical, empirical, critical or practitioners’ perspective. 

CORPORATE AND FINANCIAL LAW COLLOQUIUM

Background

Corporations form the backbone of a country’s economy and the status of its commercial laws determines the robustness of its economy. Corporations not only assist in improving the local economy, they also play a key role in raising global capital and furthering investments, both domestic and foreign.

Like many other emerging economies, India has been on a path of rapid economic liberalization and accompanying growth. This growth has required equally strong corporate governance norms which have been implemented in India in the last ten years or so. Drawing from the recommendations of the Cadbury Committee Report and later, the Sarbanes-Oxley Act, the Securities and Exchange Board of India formulated and implemented corporate governance laws. However, the enactment of the Companies Act, 2013 brings to the proverbial corporate table, new issues on how companies are run, and more importantly, how they should be run. In addition, various sectors and areas of law are undergoing significant changes due to a variety of reasons, such as economic reforms, rethinking of institutional policy and implementation of appropriate regulatory mechanisms to deal with rapid socio-economic changes.

The Michigan – Jindal Centre for Global Corporate and Financial Law and Policy, Jindal Global Law School is proud to announce the Inaugural Corporate and Financial Law Colloquium to be held at the OPJGU campus from April 15^th, 2015 to April 17^th 2015.

The goal of this colloquium is to present an important opportunity for practitioners, academicians, law students, representatives of regulatory bodies, businesses, investors and stakeholders to engage and reflect on issues relevant to corporate governance and emerging legal, policy and regulatory challenges and developments in rapidly developing areas such as banking, competition and corporate fund-raising.. We welcome theoretical, empirical as well as practitioners’ perspectives.

Call for Papers

Abstracts are invited on a number of broad themes around which the conference will be organized. Selected papers pertaining to each theme will be discussed in a panel consisting of presenters as well as experienced members of the JGLS faculty. These themes, along with suggested sub-topics are as follows:

•           Competition Law

o   Growing trends in combination regulation

o   Emerging overlap between competition and intellectual property in the innovation industry

o   Competition compliance

•           Corporate Governance/CSR

o   Board liability and responsibility

o   Role of Corporate Gatekeepers - Merchant Banks, Auditors and Corporate Lawyers

o   Minority shareholder protection

o   Comparative Corporate Governance

•           Corporate Fund-Raising

o   Challenges for Indian corporates to raise money from international capital market

o   Comparison of raising finances through share issuances and through debt

o   Types of debt instruments available to Indian corporates

o   Considerations in determining mode of corporate financing

•          Contract Drafting

o   Fashioning remedies

o   Drafting clauses on dispute resolution - traps for the unwary

o   Indemnification

•           Insurance

o   The Insurance Laws (Amendment) Bill 2008

o   Developments in insurance regulation

o   Consumer protection in insurance

o   Insurance product oversight and governance

•           Banking

o   Competition in the Banking Sector

o   Regulation of Non-Banking Financial Companies (NBFCs)

o   The Sanctity of Debt-contract: Problems and Solutions

o   The Rise of E-banking: Role of Law

•           Islamic Finance/ Banking

o   Standardization of Contemporary Islamic Finance

o   Product Development in Islamic Finance

o   Islamic Microfinance 

o   Sharia-Compliant Infinitives to Islamic Finance  

Timing and Deadlines

The conference will run from April 15^th, 2015 to April 17^th 2015 (both days inclusive) and will be held at the O.P. Jindal Global University, Sonipat, NCR of Delhi, India.

•       Abstracts of not more than 500 words are required to be submitted via email by January 30^th, 2014 to Arjya Majumdar at abmajumdar@jgu.edu.in. Email submissions must have “Corporate and Financial Law Colloquium – Abstract Submission” as the subject header.
•          Authors of selected abstracts will be notified by February 15^th, 2015.
•          Selected participants must send in their confirmation of registration and draft papers (8,000 – 10,000 words) by March 20^th, 2015. Registration modalities will be informed to selected participants separately. Draft papers must be submitted in MS Word *.doc (Times New Roman, font size 12, double spacing) format, in UK English and footnotes should conform to the requirements of The Bluebook: A Uniform System of Citation (19th ed.).

Accommodation & local transfers

Jindal Global Law School will provide accommodation to the participants on the university premises. Transfers to and from the Delhi airport will also be provided.

Measuring the Independence and Performance of the Independent Director

by Mr Suraj Choudhary (B.A., LL.B (Hons.) 2009, JGLS

The inclusion of independent directors on the Board of Directors is considered integral to the corporate governance framework. In India, most of the companies are closely held by promoter groups from the same family. The average promoter shareholding in BSE 500 companies is estimated to be over 50%. Hence, in order to counter the dominance of promoters and business families, and to safeguard the interest of all other stakeholders, it has become critical to have an independent voice in the Boardroom.

In India, the concept of independent directors was first introduced through voluntary guidelines issued by the Confederation of Indian Industry (“CII”). In 2000, the recommendations provided in the Kumar Mangalam Birla Committee Report prompted the Securities Exchange Board of India (“SEBI”) to include clause 49 in the Listing Agreement, which made appointment of independent directors sine qua non for listed companies or companies intending to be listed; the Listing Agreement has no application to companies that do not intend to be listed.

The Companies Act, 2013, (the “Act”) has introduced the concept of mandatory independent directorship, thereby requiring all companies, irrespective of whether they are listed, non-listed, public or private companies. Section 149(6) of the Act has defined the term ‘independent director’ in relation to a company. Accordingly, an independent director means a director other than the managing director or a whole-time director or nominee director.

An independent director should have or have had no direct or indirect pecuniary relationship with the company, its holding, subsidiary or associate company, or their promoters, or directors, during the two immediately preceding financial years or during the current financial year. To make the definition more stringent, pecuniary relationships with group companies within the same promoter group are also be included as a parameter for determining the directors’ independence.

The Act proposes to limit the tenure of independent directors to two terms of five years each. The Act mandates at least 1/3rd of the total number of directors should be independent directors in a listed company.

The Act also provides that the performance evaluation of the independent directors shall be done by the entire board of directors, excluding the director being evaluated and a report of performance evaluation would be prepared. This report will determine whether the term of appointment of the concerned director should be extended.

Lacunae and Suggestions

The remuneration paid to the independent directors by the company is a key factor that may give rise to an inherent conflict of interest. It is important that the remuneration package of the directors is tapped as a potential instrument for maintaining independence of independent directors. This may be done by linking remuneration with the performance of the company. An independent director’s ability to act independently from management is directly proportional to the remuneration offered to him.

The existence of exclusive and capped compensation would add little or no value to the object behind the provisions enactment and would prove as a hindrance in the way of the directors seeking to add value to the company by exerting over and above what is required by them. Independent directors may also be reluctant to disturb the collegiality and conviviality of collective decision-making, thereby precluding themselves from effectively discharging their roles. After a thorough scrutiny, it emerged that Satyam’s board of directors had unanimously approved a proposal to acquire two firms promoted by Raju’s family — Maytas Infra and Maytas Properties. The Serious Fraud Investigation Officer (“SFIO”) concluded that the independent directors were kept in the dark by A. Ramalinga Raju. Some of the independent directors later stated the approval for Maytas was not unanimous because it was subject to certain conditions.

Quick on the heels of the Satyam imbroglio, came the scandal where the very whistle blowers of corporate governance were found guilty of insider trading. One such case is that of Mr. V.K. Kaul, an independent director in a pharmaceutical major, who was found guilty of insider trading by the Securities Appellate Tribunal (“SAT”).

Further, the Act provides for two terms to change the composition of the boards which leaves room for persons, who have been on the Board for long tenures, to potentially serve further two terms as independent directors of the company. Therefore, the changes that the Act seeks to bring in independent functioning of the Board will come into effect ten years down the road in listed companies, which already have independent directors on their Boards. Moreover, the one year provided to companies to appoint independent directors is too short, and may prevent thoughtful appointments in the first tenure.

In India, we place an unrealistic expectation from our independent directors which needs to be tempered in the face of current laws. Relying overly on a singular metric as the key gate keeper may not safeguard stakeholders' interests. We continually need to remind ourselves that the only role of the independent director is to make sure that the rights of the minority and small shareholders is not abused and that is what he should be judged for.

It is also suggested that the requirement of performance evaluation for directors be made mandatory. The importance of performance evaluation of independent directors is such that the Standing Conference of Public Enterprises (“SCOPE”), the apex body of public sector undertakings (“PSU”), is developing a matrix for rating the performance of independent directors in PSUs. Such evaluation report of the independent director may be based on his attendance and contribution to the board/committee meetings and such appraisal may be placed before the nomination committee for taking a decision for re-appointment. This process of critical analysis of the performance of independent directors will not only enable the directors to focus more on their area of weaknesses but it will also build on their strengths enabling them to add value to the company.

Option/Right to Exit

by Ms. Preksha Malik (B.A., LL.B. (Hons.) 2009 , JGLS

In January 2014, the Reserve Bank of India (“RBI”) permitted option/right to exist clauses in foreign direct investment (“FDI”) instruments by a notification amending the Foreign Exchange Management (Transfer or issue of security by a person resident outside India) Regulations, 2000 (“FEMA 20”). The welcomed step by RBI was in light of the clearance granted to call and put options and pre-emptive rights by Securities and Exchange Board of India (“SEBI”) through the notification dated 3^rd October 2013.

The Foreign Exchange Management Act, 1999 (“FEMA”) is the Act governing FDI in India, with RBI and Central Government as the regulatory authorities. Under Section 6(3)(b) and Section 47 of FEMA, RBI notified FEMA 20, which governs the nature of instruments that can be validly issued or transferred by a person resident outside India. Prior to the notification dated 6^th January 2014, FDI instruments with call and put options and pre-emptive rights, including tag-along, drag-along, right of first refusal and right of first offer, were treated as debt rather than equity and did not qualify as valid FDI instruments. In other words, instruments with optionality clauses would attract External Commercial Borrowing (“ECB”) Regulations rather than FDI Regulations and be subject to greater regulatory requirements. However, the clearance for option/right to exit clauses in FDI instruments was made subject to certain requirement and pricing guidelines, which were clarified in RBI notification dated 9^th January 2014.

The highlights of the January notifications are:

• Optionality clauses have been permitted for equity, compulsorily and mandatorily convertible preference shares and compulsorily and mandatorily convertible debenture.
• Minimum lock-in period requirements have been imposed, with the minimum lock-in period being one year or minimum lock-in period as prescribed under FDI Regulation, whichever is higher.
• The exit shall not be at an assured price.
• The regulations apply prospectively.
• RBI prescribed exiting pricing guideline for instruments with optionality clause issued/transferred under FEMA:
• Non-Resident + Listed Equity + Optionality clause
• Exit at market price.
• Non-Resident + Unlisted Equity + Optionality clause
• Exit at not more than Return on Equity based price as per the last audited balance sheet.
• Compulsorily Convertible Debentures (“CCDs”) and Compulsorily Convertible Preference Shares (“CCPs”) + Optionality clause
• Exit at price as per any internationally accepted pricing methodology duly certified by CA/Merchant Banker.

The acceptance of option/right to exit clauses by RBI is rooted in incentivizing FDI in India. Although, the acceptance came with the introduction of a dual scheme for without and with option instruments, the hitch in the notified dual scheme is magnified in case of unlisted equity that stipulates entry and exit at a price determined by Discounted Cash Flow (“DCF”) in case of without options, however limits the exit price to Return on Equity (“ROE”) in case of options. The scheme mandates a person resident outside India to enter at a price not lower than the estimated value of the entity, however, the exit price is limited by the book value of the entity. The scheme notified although approved option/right to exit clauses in case of unlisted companies, the financial unprofitable pricing guidelines have nullified the approval.

The acceptance of optionality clauses for equity, CCD and CCPS is a sign of a more liberalized FDI regime with a drawback of the dual pricing scheme. However, the present drawback with optionality clauses would be dealt with once the proposed FDI guidelines based on accepted marketable practices repeal all the existing pricing guidelines. The validation of optionality clauses coupled with the proposed pricing guidelines is expected to pump more FDI in India, thus benefiting the economy.

Foreign Direct Investment - Indian Civil Aviation Sector

by Parvati Parkkot, B.A., LL.B. (Hons.), 2009 JGLS

The civil aviation sector has benefitted economies and communities around the world. By providing connectivity, it enables the growth of economies, tourism, social development, as well as access to markets on a global platform. This sector is solely responsible for 56.6 million jobs and over USD2.2 trillion of global Gross Domestic Product (“GDP”). Currently, the Indian civil aviation sector (“Indian Sector or Sector”) is the 9^th largest aviation market. Presently, around 85 international airlines and 5 Indian airlines cater to the needs that arise from the Indian Sector. According to studies, India is likely to become the 3^rd largest aviation market by the year 2020. It is predicted that the “Indian Sector will cater to 336 million domestic and 85 million international passengers with projected investment to the tune of USD120 billion”.

The fast expansion of the Indian Sector can be attributed to the economic reforms and the progressive liberalization of the Foreign Direct Investment policy (“FDI policy”) pertaining this Sector. The FDI policy regulates any foreign direct investment made in India. As per the circular issued by the Department of Industrial Policy and Promotion (“DIPP”) in 2012, amending the Consolidated FDI policy of 2012, a foreign airline is permitted to invest up to 49% in the paid-up capital of Indian companies operating scheduled and non-scheduled air transport services through the Government approval route (“Amendment”). This Amendment has triggered a series of investment by foreign airlines into the Indian Sector.

The Amendment was approved by the cabinet due to the dire need of equity infusion into Indian airlines that were going through a severe lack of funds, needed for its operations. All key players in the Indian Sector welcomed the Amendment permitting investments by foreign airlines, because of the multifaceted crisis that the Indian Sector is currently suffering due to the increase in taxes on jet fuel, rise in airport fees, unaffordable loans, lack of infrastructure and aggressive competition. It was predicted that this Amendment in the policy would give a boost to the Indian Sector that was hit by a bane of financial struggles. The opening up of the Indian Sector to investments by foreign airlines has led to an influx in foreign investment, as discussed further in this article.

FDI Policy on Civil Aviation

The FDI Policy contains various provisions for the procedure to make investments in India and also provides the maximum limit of investments.

• Present FDI Policy pertaining to the Indian Sector
• The Amendment issued by DIPP permits foreign airlines to invest up to 49% in the paid-up capital of an Indian company operating scheduled and non-scheduled air transport services on the following conditions.
• It has to be made under the Government Approval Route
• The 49% limit will include FDI and Foreign Institutional Investor investment.
• Investments made must be in accordance with the relevant regulations of the Securities and Exchange Board of India, such as the Issue of Capital and Disclosure Requirements Regulations, the Substantial Acquisition of Shares and Takeovers Regulations, and any other applicable rules and regulations
• A Scheduled Operator’s Permit will only be granted to a company that is (a) registered and has its principal place of business within India, (b) whose Chairman and at least two-thirds of the directors are citizens of India, and (c) the substantial ownership and effective control of which is vested in Indian nationals.
• All foreign nationals that are likely to be associated with a company engaging in air transport as a result of such investment must be cleared from a security aspect prior to his/her deployment.
• Clearance from the relevant authority in the Ministry of Civil Aviation must be obtained for importing any technical equipment into India as a result of such investment.
• Implications of Amendment in FDI Policy.
• This relaxation in the FDI policy allows influx of equity into the Indian Sector but at the same time ensures that majority ownership of the airline company remains in the hands of Indian citizens.
• Indian companies are allowed to invest in more than one Joint Venture (“JV”) with international players, as is evident from the fact that Tata Sons have been permitted to set up a low-cost carrier with Air Asia and a full-service carrier with Singapore Airlines.
• FDI allows international players to tap into India’s quota of seats to any destination as determined by the bilateral agreement between India and that country.

Financial Arrangements to Facilitate Entry of Foreign Investors into the Indian Sector

One of the main reasons behind the success of the Indian Sector is the various business partnerships between independent airline companies. This has made the Sector highly consumer-friendly by becoming more accessible and more efficient.  Cooperation between airlines has led to “greater choice, lower fare and improved service quality”. Financial arrangements between airlines provide for co-operation between airlines.

• Strategic Alliances. Foreign Airlines can enter into strategic alliances with Indian airlines by investing in the equity of the Indian airlines. An example is the Jet-Etihad deal, discussed further in this article.
• Mergers. Under this arrangement, two or more airlines combine in order to form a new airline. Until the passing of the Companies Act, 2013 this method was not a commonly adopted method as the Companies Act, 1956 permitted a foreign company to merge into an Indian company, but the vice versa was not permissible.
• Joint Venture with Indian Company. Under this arrangement, a separate business entity is formed which is jointly owned by a foreign airline and at least one of the Indian companies which operates scheduled and non-scheduled air transport services. This can be done in a two-way JV where a foreign airline will hold at most 49% of equity of the joint venture and the Indian airline will hold the remaining stake, or a three-way joint venture where the foreign airline will hold at most 49% of equity of the joint venture while the remaining two Indian owners of the joint venture hold the remaining stake of equity.

Drawbacks of Investing in India

One of the biggest concerns while investing in India is the rampant presence of corruption amongst government officials and the requirement of lengthy procedural approvals from various Government officials. Moreover the increasing budget deficit, and slow growth rate of India’s GDP are major causes of worry for foreign investors. India is infamous for its uncertain political climate and because of this there is a concern of unwarranted changes in policy if a different party comes to power. Despite these drawbacks the three deals discussed in the next section are a testament to the optimism that the Amendment will stand the test of time.

Major Deals in the Civil Aviation Sector

Following the Amendment, several significant deals have taken place in the Indian Sector. This has helped give the Indian Sector a new lease on life. Three major deals that have been approved by the Government are the (a) Jet-Etihad deal, (b) the three-way JV between Tata Sons, Air Asia and Telestra, and (c) the two-way JV between Tata Sons and Singapore Airlines.

Strategic Alliance between Jet Airways and Etihad Airways.

Etihad Airways, an Abu Dhabi based airline, picked up 24% stake in Jet Airways for INR 2058 crores. Naresh Goyal, a non-resident Indian (“NRI”), will hold a 51% stake in the airline, in part through his holding company, Tailwinds, registered in the Isle of Man, while the remaining 25% will be publicly held. DIPP ruled that Mr. Goyal’s personal shares will not be treated as an FDI despite his NRI status, however he needs to restructure the holding pattern to ensure that the shares held by Tailwinds and Etihad do not exceed 49% of the total number of shares.

Joint Venture between Air Asia, Tata Sons and Teletra Tradespace.

Air Asia entered into a JV with Tata Sons and Telestra Tradespace. While Air Asia will hold 49% of the shares, Tata Sons and Telestra will hold 31% and 20% shares respectively. Air Asia has invested INR 81 crores in the JV. The new company, called Air Asia India, will be a low-cost domestic carrier.

Joint Venture between Tata Sons and Singapore Airlines.

The Foreign Investment Promotion Board cleared a JV between Tata Sons and Singapore Airlines. Singapore Airlines is investing USD 49 million and will have a 49% stake in the venture, with Tata Sons holding the rest.

Cashing Potash

by Mr. Shivam Sinha, B.A., LL.B (Hons.), 2009 JGLS

Introduction

“Cartel is an agreement among competitors not to sell their product below a fixed price that will generate monopoly profits for the parties to the agreement.”

Another definition provided by Competition Commission of India (“CCI”) is “Cartels are agreements between enterprises (including association of enterprises) not to compete on price, product (including goods and services) or customers. The objective of a cartel is to raise price above competitive levels, resulting in injury to consumers and to the economy. For the consumers, cartelization results in higher prices, poor quality and less or no choice for goods or/and services.” Cartels are formed to maximize profit and maintain market standing. There has been a cartel operating in potash market which has come to light recently as it has affected the global potash trade. Though cartels are not harmful every time, but in this particular scenario, they are.

Potash Cartel

The main stakeholder in this cartel operating in Canada is Potash Corp., which is the largest manufacturer of potash in the world. Mosaic and Agrium, together with Potash Corp. have formed a firm called Canpotex that exports nearly 35% of the total potash exports in the world. This works as a cartel for them and on similar lines works Belarussian Potash and Co., which is the firm used by Belarus and Russia (second largest exporters of potash in the world i.e. 30%). This can be termed as ‘conscious parallelism’ i.e. “decisions by competitors to charge same price, to adopt the same pricing system or to engage in some other kind of conduct, the most troublesome case being what has come to be called ‘oligopoly pricing’ or the consciously parallel decisions of a few dominant sellers in an industry to maintain the same high noncompetitive price.”

Potash market has been working as a duopoly i.e. two firms operating and dominating the market. The combined market share of the two geographic markets sums up to 70% of the total global exports. Recently, there has been decline in the demand of potash around the world, the cartels have reduced the production and escalated the prices approximately to the tune of 400% since 2008 in order to maintain domination and profit.

Establishing the Antithetical Relationship

“Under a competitive scenario, the price of potash would decline from $574 in 2011 to $217 by 2015 and would subsequently increase to $488 by 2020. With an unchanged Canadian cartel policy, the price of potash will steadily increase from $574 in 2011 to $734 in 2020. On average under the current cartel scenario the price of potash would be doubled or $321 more expensive per ton than under the competitive scenario from 2011 to 2020”

In view of the above, it is evident that the formation of the aforementioned cartels has severely affected the prices of the potash worldwide and will continue to do so if left unchecked. Cartels are antithetical to competition. They prove to be a roadblock in the efficient working of the market. 

The price differences between competitive scenario and cartel scenario shows the extent of exploitation by the Canadian firm, Canpotex. Since Canada has no antitrust provisions with regard to exporting norms, it has not paid any heed to this situation. Moreover, due to a recent refusal of a takeover bid, Canadian Government has fueled concerns worldwide as it refused BHP Billiton (an Australian firm) to buy Potash Corp. This acquisition (if allowed) would have affected the cartel in place and would have led to effective competition that would result in heavy loss of revenue which Canada has been generating through this industry.  Canada seems to have given a green light to such practices and by ignoring the effects being caused worldwide. As per Section 45 of Canadian Competition Act “No person shall be convicted of an offence under subsection (1) in respect of a conspiracy, agreement or arrangement that relates only to the export of products from Canada”. The law clearly protects any such establishment in place and there seems to be no solution until amendments are made.

Indian Scenario

India is an agrarian economy since time immemorial and even today when India is among the fastest growing economy in the world, 72% of India’s population is in the agriculture sector which accounts for 21% of India’s GDP (gross domestic product). Being an agrarian country, fertilizers are imported at large scale and subsidies are also provided on the same. The global potash cartel which is centered in Canada, Russia and Belarus, has resulted in steep rise of potash price import. This increase in prices has majorly affected the developing countries such as India since it has been striving hard to become self-sufficient in food production.

“CUTS, a consumer advocacy firm, have appealed to the competition watchdog to undertake an investigation under Section 19 of the Competition Act. Under the Competition Act, the CCI can initiate action for an act taking place outside India that has or is likely to have an appreciable adverse effect on competition in India vide Section 32 of the Competition Act (applying the effects doctrine) against the global potash cartel.” India will be majorly affected if steps are not taken to breakdown these cartels it is still at a developing stage and requires potash on a large scale.

“There is no international competition law prohibiting export cartels but competition law can be used by large developing countries to mitigate the cost of international anti-competitive cartels or transactions that victimize them.”

India can use its extra territorial reach under Section 32 of the Competition Act in order to rectify the situation at hand but India is in an uncertain position as it cannot utilize domestic laws in place for preventing such activities. This is because neither  can it initiate any action for imposing sanctions without risking further increase in the prices of potash nor can it cut down its imports as it requires potash in large quantities for sustenance.

Further, owing to such non-substitutable needs it recently got into a deal with Canpotex for 1.1 million ton of potash to be delivered in 2014. This dependency has led to protracted existence of such cartels.

“Indian competition law allows the CCI to take action even if such events are not taking place on Indian soil, and this could become a beacon case. Competition law is a relatively new tool in many developing countries and international cooperation between the competition authorities of those countries is still in its infancy, but the attempt by Potash Corp. to eliminate the potential competition and reinforce its grip on a world market so crucially important for agriculture may be the trigger that will spur China and India into action, singly and jointly. If this happens, it could be the beginning of a new era for the governance of world markets.”

If it would have been a competitive scenario, the benefits would have been universal. India would save a lot on its potash imports which could be used efficiently for other developments in the country.

Conclusion

Cartels are a hindrance in free trade and result in exploitation. It is a moral and ethical wrong-doing which proves to be a contrary to the notions of development “Global food demand is expected to increase by up to 80 per cent in the next 40 years as the world's population reaches 10 billion people. That means food production must rise by nearly 2 percent annually, about double the current production rate, and fertilizer will be needed in abundance.”

In the presence of such cartel and absence of any competitive characteristics, exploitation of the one in need is bound to take place. There is an urgent requirement for setting up a global competition body overlooking such scenarios which have little or no solution in domestic laws and cannot be subjected to scrutiny by other nations. It can be adequately established from the scenario above that cartels are major hurdle towards fair competition and can be regarded as antithesis of competition.