Month: August 2019

Reining in VC and Private Equity firms: Is it time to have a strict code of conduct?

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The recent events that have unfurled with India’s Coffee King VG Siddhartha, CCD founder, is a clear example of the expectation gap between the Venture Capital and Private Equity firms on the one hand and the promoters and founders on the other hand.

It is not that the promoters need the investors most. In fact, the investors and promotors, both need each other. Investors have surplus funds to be invested in the promising start ups and promoters need assistance, guidance and funds for setting up their business. The investors enter into the relationship with an expectation in mind and the promoters live with a different expectation or sometimes the promoters are not able to match up to the expectation of the investors. That is where the gap arises and precisely this is where Siddhartha got struck up.

It seems one of the private equity partners was forcing him to buy back shares. He wanted to dilute the holdings in Mindtree and buy. But it seems he also faced trouble from income tax department that blocked him from selling Mindtree shares. This forced Siddhartha to borrow money from personal sources to partially buy back the shares.

The investors make deals, find exits and raise capital with a five-year horizon. The investors usually try to come out of any investment within these five-year and make as much money as possible. If they overshoot this notional five-year term, then the investor get restless and put as much pressure on the promotor as possible to get an early exit unscathed. Heavy competition among the investors have risen the expectation bar among the investor circle. Spotting pockets of excellence and growth has been a challenge for investors. From due diligence to exit planning the investors plan out meticulously to get an “x return” on the investment which will be higher than their benchmark returns. The total value of buyout across the globe in the year 2018 was $582 billion which was about 10 percent growth over the previous year. So, we see a steady growth year on year of the private equity investor space. The expectation by the investors also sees a steady growth year on year.

Investors sometimes do not restrict themselves to just injection of funds but also extend to input of managerial persons, structuring and running the company. It is a typically pure commercial relationship between the investor and the promoter where the investor is just interested in getting a substantial return on his investment and the promoter interest extends to not just return, but also managing, branding, employee return etc. For the promoter he looks at the business as his child and would like to see it grow long term. The Investor on the other hand is looking for quick returns.

In most of the case, the promoters become minority shareholders in their own company with the external investor holding a majority chunk. The promoters are also outnumbered in the board by the investors. On multiple occasion the promoters are left as just salaried employees in their company. From a position where they had the liberty to run the business and take decisions to be a salaried employee or being outnumbered in the decision of the board is a big fall from the heights. All these plays on the mind of the promoter both emotionally and sometimes financially too. The investors further go strength to strength by consolidating their shareholding by having “Pre-emptive Rights” and “Right of first Refusal”. Thus, diluting their stakes from the company is also not a viable option for the promoters. The investors also insist on having the right to call for extraordinary shareholders meeting and/or to introduce a shareholder’s resolution at their choice. The investors further insist on having a tight leash on maintaining the books of accounts. The investors also insist on having the Affirmative shareholders vote even when they go below 50% shareholding in the company. The investors literally make the promoters dummies in their own company leading to lot of pressure and stress on them.

But we, the guardians of the legal system, have foreseen all these. We have adequate protection in the law for the minority shareholders. Chapter XVI of the Companies Act 2013 has adequate protection for the minority shareholders. Application to Tribunal for relief in cases of oppression (Section 241), Powers of Tribunal (section 242).

But despite all the provisions of the law, as minority shareholders, the promoters are oppressed and come under severe stress by the investors. This is exactly what may have happened to Siddhartha who was forced to buy out the shares to meet the investor expectations of a decent return on investment. Siddhartha having failed to meet the investor expectation, shareholder expectation etc was forced to take the extreme step. Is it time to rein in the investors? Is it time to have a strict code of conduct for the investors?

K Satish Kumar is a keynote speaker, author, the Global Head of Legal and Chief Data Protection Officer of Ramco Systems. Among the many awards he has received, the coveted are “Top 50 Legal Leaders 2019” by Legal IP Gorilla in Singapore,  “GC PowerList India 2018” by London-based Legal 500 , “Legal Counsel of the Year -2018” by INBA. He is actively involved in many pro bono activities through Chennai Lawyers. The author can be reached at getksk@gmail.com.

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

3 Mins Read

Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Taxing the global digital giants: it’s easier said than done

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

Listen to the Article (6 Minutes)

Last week, US President Donald Trump had another meltdown on Twitter. This time it was directed against the French. The French parliament had approved a Digital Services Tax of 3 percent on revenues deemed to have been earned in France. It was aimed at ensuring digital giants such as Facebook and Google, who pay little or no tax, are made to pay.

Trump used the tool of his diplomatic overtures in communicating his displeasure – Twitter. He tweeted, “France just put a digital tax on our great American technology companies. If anybody taxes them, it should be their home Country, the USA. We will announce a substantial reciprocal action on Macron’s foolishness shortly. I’ve always said American wine is better than French wine!’. Never mind the fact that Trump has been railing at big tech companies and their non-payment of taxes anywhere, the French action was enough to send him into a tizzy and threaten duties on French wine.

With the advent of the digital economy, digital giants have emerged. Amazon, Google and Facebook straddle the world. Users have taken to these platforms like ducks to water and are interacting and transacting online more than ever before. However, the sore point is not the growth of the digital economy, nor is it the profits being made by these companies. The problem is that they seem to pay very little tax in the economies in which they operate, or indeed anywhere.  In the United States, Amazon paid $0 in taxes in 2018 – its profits were $11 billion. The Indian exchequer saw Facebook and Google make over Rs 10,000 crore, from which the exchequer earned Rs 200 crore as taxation.

How does this work? A digital MNC can offer its platform to Indian audiences who log on, put up content and interact. The MNC’s advertising subsidiary based in Cayman Islands (a low-tax country) will sell the audience (270 million strong) to advertisers. The revenues accrue in Cayman Islands, tax is paid there. And the Indian exchequer gets nothing. Since no product is created, the rules of transfer pricing do not apply.

A taxation system put in place for manufacturing industries and the trade in products seems unable to cope with digital transnational corporations whose services are delivered from anywhere. The international taxation system is based on a simple principle – multinational corporations (MNCs) would be taxed in the country where it creates value. Which works perfectly well when you deal with a car manufacturer who produces different parts of the car in different countries, but it breaks down when it comes to dealing with digital giants that make nothing, and use the ‘content’ created by those who use its platforms to make profits. How do you tax an intermediary who does offers their very valuable service for free, and pays for this service by selling personal data of its users as packages to advertisers? At the core is nations demanding a chunk of taxes for value created on these platforms by their citizens, who use and consume it.

And, this is the question that has been bothering policymakers across the world. Most of these policies revolve around taxing advertising income. India currently taxes advertising revenue earned by companies like Google and Facebook at 6 percent. The G20 is looking at ways of taxing these giants. Dubbed the ‘GAFA’ tax – Google, Apple, Facebook, and Amazon Tax – nations are looking at how to charge these giants tax on revenues. India too is mulling such taxes.

There is a problem when corporations don’t pay tax anywhere. While creative accounting and manipulating existing systems to avoid tax may be great for shareholders – Jeff Bezos is among the richest people in the world – it has a grave impact on the social welfare of nations that they are based in. When you and I can pay tax, when start-ups and small businesses can pay tax – there is no reason why loopholes exist that allow companies like Google, Facebook and Amazon to get away with paying nothing.

Harini Calamur writes on politics, gender and her areas of interest are the intersection of technology, media, and audiences.

Read Harini Calamur’s columns here.

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

3 Mins Read

Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Direct selling dilemma: Decoding the Delhi High Court ruling and its impact on e-commerce firms

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

Listen to the Article (6 Minutes)

On July 8, 2019, a single-judge bench of the Delhi High Court issued interim injunctions in favour of the direct selling companies Amway, Modicare and Oriflame. The court restrained several e-commerce companies, including Amazon, Flipkart and HealthKart, from advertising or offering for sale the products of these direct selling companies on their respective platforms. The court ordered the e-commerce players to withdraw all such product listings, except where the sellers/merchants of these products furnish written consent letters from their manufacturers authorising online sale. The court’s orders arose out of a set of seven suits filed by the direct sellers against e-commerce players and merchants.

In its judgement, the Delhi High Court analysed several important issues with regard to the roles and responsibilities of e-commerce companies under Indian law. The court also examined the legal immunity available to such companies for products listed on their platforms by third-party merchants. The court’s observations on these matters may have far-reaching consequences for not only e-commerce companies but also any ‘intermediary’ that offers a platform, marketplace or forum to users online.

Prior consent for online sale

Direct selling companies had argued before the court that, as per certain guidelines issued by the Central government in 2017, all persons, including merchants on e-commerce platforms, are prohibited from selling their products online unless they have prior written consent from the direct sellers. In their defence, e-commerce companies argued that the said guidelines are not law, but merely administrative orders and, therefore, not mandatory. In any event, e-commerce companies argued that these guidelines apply only to direct selling entities, and not to third parties, and particularly not to marketplaces.

The Delhi High Court ruled in favour of the direct selling companies and held that, although called ‘guidelines’, the restrictions on online sale were binding executive instructions that have the impact of law. The court noted that e-commerce companies had been repeatedly notified of the guidelines by direct selling companies and government agencies such as the Food Safety and Standards Authority of India (FSSAI) and the Department of Consumer Affairs. Despite such cautionary notices, the court observed that the defendant platforms had chosen not to comply with the guidelines.

Trademark infringement and loss of goodwill

Direct selling companies argued that unauthorised sale of their products on e-commerce platforms amounted to trademark infringement, resulting in the dilution of the reputation and goodwill of their respective brands. In support of this argument, these companies alleged that the defendant e-commerce platforms routinely listed products that used the name and marks of the direct sellers in a deceptive manner. Direct sellers also alleged that e-commerce entities and merchants deliberately re-packed, re-labelled, or otherwise tampered with sealed products before delivering them to consumers. They submitted that online merchants often sold products on a non-returnable/non-refundable basis, which contradicted their own consumer-friendly return and refund policies.

In their defence, the e-commerce players argued that direct sellers had no right to control or regulate the sale of their respective products after selling them to their distributors/resellers. They relied on Section 30 of the Trademarks Act, 1999, which codifies the doctrine of international exhaustion and creates an exception to the general rules of trademark infringement. The doctrine of exhaustion states that once a given product has been sold under the authorisation of the owner of the intellectual property therein, the rights of such owner are exhausted. The owner can no longer exercise his rights over those goods.

Again, the court ruled in favour of the direct selling companies. The court held that, in the present case, the passing of ownership over goods was conditional upon the buyer adhering to the terms and conditions imposed by the manufacturer. The court further held that a defence under Section 30 of the Trademarks Act, 1999 would apply only where there is no change or impairment to the nature or quality of the products. Notably, the court observed that any change in the contents of a product, the related services, and warranties or applicable refund and return policies would constitute impairment. Based on reports submitted by several court-appointed commissioners, the court found blatant and extensive tampering of products by the defendant companies. It therefore concluded that the allegations of the direct selling entities were warranted, and that the sale of direct sellers’ products on e-commerce platforms constituted, among other things, trademark infringement.

Intermediary liability

While discussing the liability of the defendant e-commerce platforms, the court noted that these entities are not mere passive intermediaries, but are, in fact, massive facilitators. The court discussed in detail the plethora of support and ancillary services provided by these e-commerce platforms to sellers. However, it did not elaborate on whether the provision of such value-added services renders these entities ineligible for the protection conferred on intermediaries. Instead, the court simply observed that this issue would need to be adjudicated at trial.

Nevertheless, the court analysed the existing legal framework governing intermediary liability and concluded that the defendant e-commerce entities would need to implement the policies and regulations that prohibit unlawful or infringing content. The court emphasised that as these policies are not mere ‘paper policies’, they need to be implemented in earnest. The court held that should e-commerce entities fail to implement and comply with their own policies, they would be taken out of the ambit of the safe harbour provided by the Information Technology Act, 2000.

On this issue, the Delhi High Court deviated from the ruling of the Supreme Court of India in Shreya Singhal v. Union of India by implying that e-commerce entities had knowledge of the impugned products, although these entities had not received court orders with this information. The court instead relied on notices issued by direct sellers and State authorities (i.e. FSSAI and Ministry of Consumer Affairs) to attribute such knowledge to the defendants. While this appears to be a major departure from the Shreya Singhal judgement, this verdict is unlikely to result in a significant change in India’s intermediary liability regime. When read holistically, the court’s ruling appears heavily influenced by the active and involved role that e-commerce entities play in re-labelling or tampering with products. It doesn’t appear that the court intends for this higher threshold to apply to all intermediaries.

Ancillary services

The court did not specifically hold that a company that provides value- added services (such as packing, logistics and payment collection) would be disqualified from protection as an ‘intermediary’. However, the court clearly tried to distinguish between a passive intermediary and an intermediary that provides various support services or is otherwise actively involved in underlying transactions. This approach could be indicative of a growing reluctance of courts to treat all intermediaries and platforms alike.

Whatever the outcome of the case, the court’s interim ruling should warn all marketplace providers to sit up and take notice. These businesses would be best advised to re-evaluate the extent of ancillary support services that they provide to merchants. Any illicit activities, even if ancillary in nature, may weaken the overarching intermediary status sought to be enjoyed by e-commerce platforms.

Probir Roy Chowdhury and Yajas Setlur are attorneys at J. Sagar Associates. The views expressed in this article are personal.

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

3 Mins Read

Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow