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New Wave in Digitizing Registration, Licenses and Reporting under various Labour Laws in India: The Growing Importance of Shram Suvidha Portal

About the Portal:

The Ministry of Labour & Employment developed a single unified Web Portal in Shram Suvidha Portal (Portal) for online registration of units, reporting of inspections and submissions of annual returns. As an initiative on pilot basis, the Ministry has selected the Chief Labour Commissioner (Central) organization, the Employees State Insurance Corporation (ESIC), Employees Provident Fund Organisation (EPFO) and Directorate General of Mines Safety (DGMS) to utilize the portal covering 16 Labour Laws. As of now 8 State Governments and NCR of Delhi have voluntarily adopted registration under the Portal for return filing and filing inspection reports under various labour laws (which also includes returns under the Factories Act, 1948).

Services offered by the Portal:

This integrated portal operates through a common Unique Labour Identification Number (Shram Pehchan Sankhya) for each establishment. The employers are allotted Labour Identification Number (LIN) after registration on web portal. The enforcement agency uploads the data of inspection on the web portal which is updated periodically. This web portal also provides for filing of single harmonized annual return by the employers.

Registration under the following legislations is provided under the Portal:

  1. Contract Labour (Regulation and Abolition) Act 1970; [Mandatory]
  2. Building and Other Construction Workers Act 1996; [Mandatory]
  3. Inter-State Migrant Workmen Act 1979; [Mandatory]
  4. Employees Provident Funds and Miscellaneous Provision’s Act 1952; and
  5. Employees’ State Insurance Act 1948.

For ease of compliance of Labour Laws, the portal reduces the number of registers to be maintained to 5 in place of 56 registers which were earlier provided under the following central labour/rules:

  1. The Building and Other Construction Workers (Regulation of Employment & Conditions of Service) Act, 1996
  2. The Contract Labour (Regulation & Abolition) Act, 1970
  3. The Equal Remuneration Act, 1976
  4. The Inter-State Migrant Workmen (Regulation of Employment & Conditions of Service) Act, 1979
  5. The Mines Act, 1952
  6. The Minimum Wages Act, 1948
  7. The Payment of Wages Act, 1936
  8. The Sales Promotion Employees (Conditions of Service) Act, 1976
  9. The Working Journalists and Other Newspaper Employees (Conditions of Service) and Miscellaneous Provisions Act, 1955.

Necessary amendments in various rules via the Ease of Compliance to Maintain Registers under various Labour Laws Rules, 2017 were made to give effect to the services of the Portal. The Registers can be maintained in a software available for download at the Portal. Annual Returns under the Factories Act, 1948 for participating states can also be filed online on the Portal.

The Portal also offers self-certification/declaration by start-ups recognized by the Department of Industrial Policy & Promotion (DIPP) under the start-up action plans of various state governments and also the central start-up action plan.

Further Amendments being rolled out to make registration through the Portal mandatory for;

  1. Contract Labour (Regulation and Abolition) Act, 1970

Vide notification number G.S.R. 829(E) dated September 4, 2018, the Ministry of Labour and Employment has published the Draft Contract Labour (Regulation and Abolition) Central (Amendment) Rules, 2018 which states that the registration of principal employer, and the procurement of licence for a contractor are now to be mandatorily done through the Portal.

Apart from this payment of the registration or licence fees, renewal fees etc shall be made by the e-payment system. the Certificate of registration shall also be generated electronically. Further under the notification number S.O. 4259(E) dated September 4, 2018, applications regarding registration and licensing under the said Act must be made online through the Portal till the said draft rules are finalized.

  1. Inter-State Migrant Workmen (Regulation of Employment and Conditions of Service) Act, 1979

Changes sought to be made vide the Draft Inter-State Migrant Workmen (Regulation of Employment and Conditions of Service) Central (Amendment) Rules, 2018 [G.S.R. 830(E) dated September 4, 2018] also make registration through the Portal mandatory. Further under the notification number S.O. 4260(E) dated September 4, 2018 registration through the Portal is mandated till the draft rules are finalized for this legislation as well.

  1. Building and Other Construction Workers (Regulation of Employment and Conditions of Service) Act, 1996

Similarly, compliances under the Building and Other Construction Workers (Regulation of Employment and Conditions of Service) Act, 1996 are also made to be mandatorily carried out on the Portal. The Building and Other Construction Workers (Regulation of Employment and Conditions of Service) Central (Amendment) Rules, 2018 [G.S.R. 828(E) dated September 4, 2018] has been notified to this effect.

Benefits under the Pradhan Mantri Rojgar Protsahan Yojana to employers registering through Shram Suvidha:

The Pradhan Mantri Rojgar Protsahan Yojana (PMRPY) Plan Scheme seeks to incentivise employers for generation of new employment. All employees earning wages less than INR 15,000/- are made eligible for this benefit wherein originally, the Government of India (GoI) would pay the employer’s contribution towards the Employees’ Pension Scheme (EPS) for three consecutive years. However, effective from April 1, 2018, GoI will pay the full employer’s contribution under EPS and also Employees’ Provident Fund (EPF) for a period of three years for all such employees.

To avail this benefit, it has been made mandatory to obtain registration under EPFO and also have a LIN allotted to the establishment under the Shram Suvidha Portal, the LIN shall be the primary reference number for all communication to be made under the PMRPY Scheme.

Our thoughts:

It is not difficult to foresee that the gradual push towards digitization of labour law compliances is gaining momentum in India, and several incentives are being offered for early adapters of the same.

Author: Mr. Avaneesh Satyang


Notifications G.S.R. 828-830(E):

Notifications S.O. 4259 (E) and 4260 (E):

Ease of Compliance to Maintain Registers under various Labour Laws Rules, 2017:

Pradhan Mantri Rojgar Protsahan Yojana Plan Scheme:

Shram Suvidha Portal:


BSE Startup Platform and Revised Listing norms at National Stock Exchange

Many initiatives have been undertaken in the recent years for facilitating direct listing and consequent public trading of startup securities in India. In January 2010, Prime Minister’s Task Force recommended to set up a dedicated stock exchange for small and medium enterprises[2], which eventually led to the genesis of the SME Exchanges, NSE EMERGE and BSE SME platform. In our earlier Handbook on Initial Public Offering: SMEs, we have provided an overview of various SME platforms, benefits of SME listing and SME IPOs, list of documentation and comparatives of fees.

The rationale behind boosting SME listing could be manifold, from the perspective of all stakeholders in the ecosystem, i.e. the investors, growth stage companies, and the exchanges. The biggest impetus would be the greater access to sophisticated investors and wider portfolio base and investment opportunities for investors of both ‘Main Board’ and SME Exchange Platforms. This is also attractive from the perspective of providing exit opportunities to eligible existing investor base. As mentioned by the Managing Director of NSE, Mr. Vikram Limaye, “… a lot of money has been invested in start-ups and some investors in these companies may want to exit in the next 12-14 months…it is only appropriate for them to list in India and give an opportunity for the domestic investors to participate in their growth,”[3]

However, for various reasons, the SME platforms have not taken off or seen the traction that was envisaged during their formation. The eligibility criteria of companies with less than INR 25 crore in equity capital and those which have raised less than USD 4 million in external funding have been often cited to be the most crucial one of them. Many of the Startups[4] would have already raised large amounts of external funding from the now extensive venture capital and private equity fund base. Minimum promoter holding requirement is another set back as more often than not, a post Series B or Series C entity would have a diversified capital table where the initial subscribers’ holding could be much lesser than the required norms, with investors collectively or individually holding largest single block stakes in these companies. However, these companies might still not be matured enough to have met the eligibility criteria of the traditional IPO routes for accessing capital markets.

It is in this background that discussions around revising the listing criteria for Startups started at various levels. On 27 November and 28 November 2018, BSE and NSE, respectively, released the revised norms. We have provided the details of these below.

BSE Notice No. 20181127-23 dated 27 November 2018 on Introduction of BSE “StartUp Segment”.

The applicability seems to be for “Start-up Companies” in the identified sectors of “IT, ITES, Bio-technology and Life Science, 3D Printing, Space technology, E-Commerce, Hi- Tech Defense, Drones, Nano Technologies, Artificial Intelligence, Big data, Enhance/Virtual Reality, E-gaming, Exoskeleton, Robotics, Holographic Technology, Genetic Engineering, Variable Computers Inside body computer technology and other Hi-tech based companies”.

The criteria as notified by BSE are as follows:

  • Company should be registered as start-up with Ministry of Small and Medium Enterprises / Department of Industrial Policy and Promotion (MSME/DIPP). If not registered as Start-up with MSME/DIPP then the company’s paid-up capital should be minimum Rs. 1 crore.
  • Company should be in existence for a minimum period of 2 years on the date of filing the draft prospectus.
  • Preferably there should be an investment for a minimum of 2 years (at the time of filing draft prospectus) in the Company by:
    • Qualified Institutional Buyer or QIB[5]; or
    • Angel Investors/ Accredited Investors[6]
  • Company should have a positive net-worth.
  • Company should not have been referred to National Company Law Tribunal (NCLT) under Insolvency and Bankruptcy Code, 2016.
  • No winding-up petition must have been accepted against the Company by the NCLT.
  • None of the promoters/directors of the Company must have been debarred by any regulatory agency/agencies.

However, in addition to the above, compliance with LODR requirements and Chapter IX of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018 [SEBI (ICDR) Regulation] is also mandated, with respect to conditions applicable for listing of SME Companies, viz. minimum application size, number of allottees etc.

NSE Circular No. 2/2018 dated 28 November 2018 on Listing Criteria for the Technology Startups on the SME Platform.

As mentioned in the Circular, “In order to facilitate technology startups with potential growth business model, to raise equity and list on Stock Exchange, NSE has formulated a criteria for listing such technology startups. These listed companies shall be operating within the regulatory framework as specified under Chapter IX of SEBI ICDR Regulations, 2018 and LODR requirements as applicable to SME Exchange.”

The major criteria as listed in the Circular are as follows:

  • As conditions precedent adherence must have been made to the provisions of Securities Contract (Regulation) Act, 1956; Companies Act, 2013; SEBI Act, 1992 and regulations prescribed therein.
  • Company must be incorporated in India under the Companies Act.
  • The post issue paid up capital of the company (at face value) shall not be more than Rs. 25 crores.
  • There must be a 3 years of track record of either:
    • applicant seeking listing; or
    • promoters/promoting company, incorporated in or outside India with at least 3 years of experience in the same line of business and shall be holding at least 20% of the post issue equity share capital individually or severally; or
    • Proprietary / Partnership firm and subsequently converted into a Company
  • Annual revenue of at least Rs. 10 crores and the issuer must have shown growth of at least 20% in the past one year. (Annual growth may be exhibited in the form of number of users/revenue growth/customer base)
  • Net-worth of issuer must be positive.
  • Must meet one of the following criteria:
    • At least 10% of pre-issue capital to be held by QIBs as on the date of filing of draft offer document; or
    • At least 10% of its pre-issue capital should be held by a member of the angel investor network[7] or private equity firms and such angel investor network or Private Equity Firm should have had an investment in the start-up ecosystem in 25 or more start-ups their aggregate investment is more than 50 crores as on the date of filing of draft offer document.

The criteria of minimum QIB, angel network or private equity holding is interesting as this now could give a clear pathway to the Startups from very early stages on who to raise funds from. A diligence on the investors would also become necessary in such scenarios.

  • The Company must not have been referred to the erstwhile Board for Industrial and Financial Reconstruction (BIFR).
  • No petition for winding up must have been admitted by a court against the Company.
  • No material regulatory or disciplinary action by a stock exchange or regulatory authority in the past three years must have been brought against the Company.
  • Further the following disclosures will be required to be made:
    • Any material regulatory or disciplinary action by a stock exchange or regulatory authority in the past one year in respect of promoters/promoting company(ies), group companies, companies promoted by the promoters/promoting company(ies) of the applicant company.
    • Defaults in respect of payment of interest and/or principal to the debenture/bond/fixed deposit holders, banks, financial institutions by the applicant, promoters/promoting company(ies), group companies, companies promoted by the promoters/promoting company(ies) during the past three years. In this regard, an auditor’s certificate shall also have to be provided.
    • Litigation record, the nature of litigation, and status of litigation pending against the applicant company, promoters/promoting company(ies), group companies, or companies promoted by the promoters/promoting company(ies).
    • Status of criminal cases filed or nature of the investigation being undertaken with regard to alleged commission of any offence by any of the Company’s directors and its effect on the business of the company, where all or any of the directors of issuer have or has been charge-sheeted with serious crimes like murder, rape, forgery, economic offences etc.

As may be noted, both the BSE and NSE Notice and Circular refer to the applicability of the SEBI (ICDR) Regulations.

Under Chapter IX of the SEBI (ICDR) Regulations, 2018 certain common criteria, irrespective of the SME Exchange sought to be listed in must be met. These are:

  • the amount for general corporate purposes, as mentioned in objects of the issue in the draft offer document and the offer document should not exceed 25% of the amount being raised in the issue;
  • promoters must hold at least 20% of the post-issue capital of the Company. However, if the post-issue shareholding of promoter is less than 20% then alternative investment funds, foreign venture capital investors, banks, or public financial institutions may contribute to meet the shortfall in the minimum contribution. In any case, the promoter cannot hold less than 10% of the post-issue capital;

This brings back the concerns related to minimum promoter holding as discussed above.

  • the minimum promoters’ contribution as mentioned above shall be locked-in for 3 years; any promoter shareholding in excess of the above shall be locked in for 1 year;

This could be a major concern for QIBs given their internal constraints, for instance, fund exit requirements.

  • apart from promoters’ pre-issue capital, the entire pre-issue capital held by persons other than promoters shall be locked in for 1 year, however this lock in period will not apply to share allotted to employees, shares held in an ESOP trust, and equity shares held by a venture capital fund or alternative investment fund (categories I and II) or foreign venture capital investor, provided that such equity shares must be locked in for a period of at least 1 year from the date of purchase by such investor.
  • entering into an agreement with a depository for dematerialisation of its specifies securities already issued and proposed to be issued;
  • all existing equity share capital must be fully paid up or forfeited;
  • all securities held be promoters must be in dematerialised form;

SEBI’s intent to relax listing norms for Startups seems to be in the pipeline[8] and it remains to be seen whether the realities of the Startup ecosystem are considered and reflected in the revised norms.

Authors: Ms. Sohini Mandal and Mr. Avaneesh Satyang

[1]BSE Circular dated November 27, 2018: Available at

NSE Circular dated November 28, 2018: Available at

[2] As defined and categorized under the Micro, Small & Medium Enterprises Development (MSMED) Act, 2006

[3] Yuvraj Malik, “NSE in talks with Sebi to tweak start-up listing norms”, as reported in on 2 March 2018

[4] As registered with DIPP under the Startup India Action Plan

[5] As defined in Regulation 2(ss) of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018: includes venture capital fund, alternative investment fund, scheduled commercial bank, foreign portfolio investor, et al.

[6] The concept of accredited investor is found in US securities law, which is similar to angel investors in India, only persons meeting the minimum net-worth criteria, professional experience and expertise requirements are recognised as accredited investors.

[7] By angel investor networks, the notice makes reference to angel funds, which are a sub-category of category-I alternative investment funds registered with SEBI, and angel investors are persons who propose to invest in angel funds and meet the net-worth, expertise, and experience criteria as specified under the SEBI (AIF) Regulations, 2012.

[8] PTI News, “SEBI To Relax Listing Norms For Startups, Rename it ‘Innovators Growth Platform’”, as reported in on 9 December 2018

99 problems of the Music Industry- Can Blockchain technology be a panacea?

The music industry peaked in 1999, owing to sales of CDs and DVDs. The music industry had been on a downward spiral till the last couple of years but the Global Music Report released by IFPI (International Federation of the Phonographic Industry) reported a growth of 8.1% in 2017, expanding it to 17.3 billion Dollars.[1] According to the report the streaming industry was the frontrunner in the growth of the industry, accounting for around 29% of the total revenue at 6.6 billion Dollars. All forms of digital revenue combined amounted to around 9.4 billion Dollars.[2] While these numbers should curb the claims that the Internet and digitization are killing the music industry, it cannot be denied that certain music industry troubles from the vinyl era still plague the music industry.

While the number of people accessing and streaming music has gone up exponentially, the industry’s revenue and the royalty earned by the artist have not increased proportionately. Various factors could be attributed for the same. Given the peculiar nature of legal rights in a song, there are multiple rightful owners of royalty revenue in a song, the record label, the artists involved and the lyricists. In many suits regarding non-payment of the royalty due, the defendants have claimed that it was the inability of the defendants to figure out the right holders which resulted in the non-payment of royalty. In the Spotify case[3] it was highlighted that as there is no single or uniform database with respect to music and right holders, it was difficult for players like Spotify to pay the royalties, leading to lengthy litigations which affect the music label as well as the artists involved. Further, at times funds end up being paid to the wrong party.[4]

It is noteworthy that often the artists involved in creating music are unaware till the release of tracks (and even beyond that) whether their work was ultimately used in the released music or not. Since the specific details of the streaming deals are shrouded through non-disclosure agreements, the artists and their managers find it difficult to ascertain if they are being paid their fair share.[5] Given the fact that a listener just needs a few taps on his phone to access the music of his choice, it is preposterous that there is so much friction involved in the artists getting their due.

In early 2000s, the music industry fought tooth and nail, to fight peer to peer file sharing platforms such as Napster and Limewire as such platforms were being used to distribute illegal copies of music. In fact, Napster saw the highest user growth for any company owing to such practices, leading to massive losses for the music industry.[6] While the bigger culprits such as Napster and Pirate Bay have been ‘nabbed’ the music industry is still reeling under the effects of digital piracy. The digital restrictions (or rights) management system introduced in the early 2000s has been largely ineffective even though scrambling of DRM is prohibited under the law.[7] For example, the Section 65A And 65B were inserted in the Indian Copyright Act, 1957 through the 2012 amendment restricting people from circumventing any such digital rights management systems or tampering/removing of any such information contained in the copyrighted works.[8]

Lastly, lack of funds is a major concern for budding artists and independent record labels. Younger artists claim that big record labels are unwilling to nurture new artists, rather they are interested in picking up already established artists. Hence, an artist is required to be ‘big’ even before record labels notice them. Further, even independent record labels which initially grew with the motto of helping budding artists, are now unwilling to share the revenue with the artists because of lack of funds.[9]

Is Block-chain the Panacea?

Blockchain has been the buzzword across the globe since Satoshi Nakamoto published his paper on Bitcoin and block-chain in 2008. Tech enthusiasts, private entities and even regulatory bodies (such as India’s TRAI) have been lapping up block-chain as a solution to many problems. The popularity of the idea of block-chain can be gauged from the fact that a company’s shares surged by around 400% just because it added the term “blockchain” to its name.[10]

A blockchain is a distributed ledger or database that is not stored centrally (a departure from the tradition hub and spoke model); it can have duplicate copies on multiple devices across the world.  Information is added to this database in so-called blocks, each of which holds a unique code, that is generated cryptographically on the basis of older blocks and a timestamp. Once the data is recorded, the new block is linked to the ‘chain’ of older blocks. A blockchain can take various forms. It can be permissioned, i.e. one may not be allowed to join the network as a node unless specifically permitted to do so. Similarly, the rights granted to a node could vary, while some could be allowed to just view the data, others could be allowed to modify the information on the ledger.

A distributed database could be an answer to the lack of transparency in the music industry and the corresponding issues. The digital rights information along with the metadata for any piece of music could be updated by a permissioned node (say a record label or a copyright society). Information on the blockchain could be updated instantly that is, the same information would also be available to all nodes automatically. Some initiatives like Mycelia also allow for storing of meta-data such as tempo, key etc, hence a piece of music can easily be differentiated from its cover or ‘radio edit’ version.[11] The information contained in the blockchain could be freely accessible to everyone while only select participants would be allowed to modify the data. This could lead to drastic improvements in transparency and hence the quantum of royalties received.

The blockchain discussed above could be coupled with a content distribution network (CDN) thereby decreasing the friction as well as the number of middlemen involved. Further smart contracts or blockchain 2.0 could be used for smooth licensing and distribution of music. Smart contracts can be used to establish and enforce IP licenses and allow the transmission of payments in real time to the right holders. The information about IP rights a song or an image, could be encoded in digital form. For example, Ujo uses Ethereum blockchain for payments, rights management, and identity storage for artists. Effective digital rights management would involve a threefold approach a) access control, b) cryptography to restrict the data from being saved in a plain text format and c) digital watermarking techniques to identify legitimate copies of files. The same could be achieved through a well-designed blockchain based CDN. Attempts at achieving the same through various pilot projects such as Mycelia have demonstrated limited success as the acceptability of a particular crypto-currency, seriously limits the target audience. Yet, the limited success of such progress is proof of the fact that such ideas are becoming mainstream.

It has been widely accepted that people resort to pirated versions of a work, primarily when they are unable to access the content (preferably at a reasonable price) as evidenced from the fact that the leak of the Orange Is The New Black episode had no significant impact on Netflix. While the subscription model of Netflix could be the primary reason behind the failure of such ransom demand, yet it cannot be denied that allowing for micro payments on a content distribution network would expand the audience base of such networks.  A digital ecosystem could allow for micro-metering for viewing/accessing content and the user could pay for the same though micro-payments. The micro-metering could be achieved by the blockchain recording the components of the work that were used, defining the tiniest consumable unit of the work.[12] Low transaction costs in involved in blockchain couple with permissibility of really small denominations using the corresponding crypto-currency would allow for micro-payments.

Lastly, funding / investment –a crucial step between start-up and venture capital investment – is a major challenge in the music industry. Blockchain technology promises to solve some of these issues. Through tokenization, artists can crowdfund their projects by issuing/selling tokens to fans. The artists can use these funds to cover the expenses related to recording, touring, marketing and producing music videos instead of relying on traditional music labels for the same. As the fans own tokens issued by the artist, they would benefit from the success their favourite artist achieves. The transparency inherent in distribution of music through a blockchain based platform would improve investor’s ability to monitor the artists’ activities, sales figures and also the opinions of the fans. The possibility of having an accelerator model for artists would open up the sector to new sources of capital seeking highly scalable businesses for seed or venture capital.

Rights holders, especially music labels and copyright societies find it difficult to enforce their IP rights due to other factors such as difficulty in identifying acts of infringement as well the costs and efforts required follow the legal procedures for enforcement of rights. These issues are exacerbated for independent labels. A few start-ups such as Binded are helping photographers enforce their rights in the digital space. When a photographer uploads an image on Binded’s[13] portal, the same is registered with the copyright office and times-tamped on Binded’s blockchain. Similarly, other start-ups allow for reverse image searches to look for infringement of images online. Copytrack[14] would even take control of the legal proceedings on behalf of the photographer whose work has been infringed (in consideration of a share to be received from the damages/settlement amount). Old players like Kodak have managed to capture the minds of the new-age audience through the launch of their image protection, distribution and licensing solution KodakOne[15]. KodakOne makes use of its native token, KodakCoin (using the Ethereum hash function).

Needless to say, given the complexity of music as a work of art, having similar procedures in place to track infringement of musical is a tougher task. But given the success of music recognition apps such as Shazam, it is not difficult to imagine a world in which management of rights of music artists and the enforcement of their rights can be done in a smoother fashion.

While, it cannot be denied that blockchain technologies can revamp the music industry take care of the artists’ woes, but there are multiple challenges that need to be tackled to make practical use of the technology in the music space. Global Repertoire Database (backed by music labels and tech giants from across the globe) which sought to create an alternate and comprehensive database for the music industry had a spectacular failure, clearly establishing that ideas which look great on paper might have little or no impact in the real world[16].

Unlike conventional means for digital rights management, where only the hub was required save the massive amounts of data, in the distributed ledger system, each node would be required to store a copy of the data. New standards and models have to be developed and widely accepted to make the blockchain based model tenable. Similarly, to achieve interoperability of various databases, common standards need to be accepted among the parties involved. Similarly, users (non-artists) have to deal with user registration and sharing of payment details to take advantage of micro-metering and micro-payments. The privacy of the user needs to be handled in a transparent manner, to make sure that the users are confident of the privacy/security measures. Lastly, resistance from existing aggregators and intermediaries who might end up losing their piece of the pie needs to be dealt with to ensure the successful acceptance of the blockchain technology by the music industry.

Author: Mr. Asis Panda

[1] Global Music Report 2018 available at–

[2] Ibid

[3] Wixen Music Publishing, inc v Spotify USA inc. 2:17-cv-09288-GW-GJS

[4] Fair Music: Transparency and Payment Flows in the Music industry, Rethink Music available at page 3

[5] Cooke C, Dissecting the Digital Dollar Part One: How Streaming Services are Licensed and the Challenges Artists Now Face (2015) Music Managers Forum report.

[6] Roxanna Maddahi, The Music Industry: From Piracy To Profits available at

[7] What happens with digital rights management in the real world? available at

[8] Also see Article 19 of the WIPO Performances and Phonograms Treaty, 1996 (WPPT)

[9] Richard Smirke, Beggars Group’s Martin Mills on Why He’s Abandoning the 50/50 Streaming Split, Billboard available at


[11] Catherine Jewell, Mycelia: shaping a new landscape for music April 2016 available at

[12] Jack Loechner, The Forces Of Blockchain available at




[16] Klementina Milosic, The Failure Of The Global Repertoire Database available at

Case Study: SEBI Settlement Order in the Matter of SREI Multiple Asset Investment Trust (a Category II AIF)

In this post, we look into the Adjudicating Officer’s (“AO”) Order dated November 29, 2017, in the matter of SREI Multiple Asset Investment Trust (“Fund”) and SREI Alternative Investment Managers Limited (“Investment Manager”) and the way the matter proceeded further, leading finally to a settlement on July 25, 2018 under the SEBI (Settlement of Administrative and Civil Proceedings) Regulations, 2014. The AO’s order cannot be considered to be conclusive because of the subsequent settlement order. However, a review of the entire saga provides some insight into how the Securities and Exchange Board of India (“SEBI”) interprets relevant provisions of the SEBI (Alternative Investment Funds) Regulations, 2012 (“AIF Regulations”).

Factual Matrix and Issues Raised before the AO:

The Fund had launched a scheme which was to primarily focus on financing brownfield assets which carries a lower execution risk as compared to greenfield assets. The following issues were dealt with in the proceedings before the AO;

  1. The Fund, instead of making investments of the amount raised from the investors, had gone on to grant loans to several entities, allegedly in breach of the AIF Regulations.
  2. Out of the investible corpus of the Fund, amounts in excess of 25% of the investible corpus were given to investee companies on two occasions, allegedly another breach of the investment conditions prescribed in the AIF Regulations.
  3. The Fund had acted in contravention of the decision of the investment committee of the Fund, and also had failed to follow the investment strategy as specified in their private placement memorandum.
  4. The Investment Manager failed in maintaining the minimum continuing interest of INR 5 crore in the Fund mandated in the AIF Regulations.

Summary of the AO’s order:

In the foregoing paragraphs the arguments on behalf of the Fund/Investment Manager and the reasoning adopted by the AO are summarized:

Issue 1: The defence taken by the Fund/Investment Manager was that the private placement memorandum of the Fund clearly stated that it was the Fund’s investment strategy to invest in forms of finance/loans to various companies. Further, the AO pointed out that the fund was registered as Category II AIF which included a “debt fund” that invests primarily in debt and debt securities. Thus, the Fund was not in contravention of Reg. 2(1)(b) of the AIF Regulations in giving loans as per its investment strategy.

Issue 2:  Reg. 15(1)(c) of the AIF Regulations require the investment commitment to not be more than 25% of the investible corpus of the Fund. According to the Fund, on the alleged date of investment (i.e. June 29, 2015), the investment commitment was indeed only 25%. However, post the investment (i.e. July 9, 2015), due to redemption of units of the Fund and distribution to investors, the total corpus of the Fund fell, and resultantly the investment commitment rose to about 28%. It was argued that since this was just an after-effect of the redemption of units, this was not an infringement of the said regulation. However, the AO ruled that the defence was inadmissible as they themselves had admitted to the investment being in excess of the 25% threshold post July 9, 2015.

Issue 3: According to the minutes of the investment committee of the Fund, and also as mentioned in the Fund’s private placement memorandum, the Fund had decided on the range of interest rates it would charge on their loans (14-16%), and also decided what the corpus of investment for each investee under the scheme would be (INR 50 crore–INR 200 crore). The Fund/Investment Manager took the defence that these ranges were only indicative in nature, and it was not intended that they would be strictly bound by them. However, the AO cited Paragraph 2(c) of SEBI’s Circular No. CIR/IMD/DF/7/2/2015 dated October 1, 2015 which prescribed that all managers shall carry out all the activities of the AIF in accordance with the placement memorandum circulated to all unit holders and amended from time to time in accordance with AIF Regulations and circulars issued by SEBI. It was decided that terms of the private placement memorandum must be complied with without any deviation, unless amended following the due process of law.

The AO here tried to propagate strict compliance of SEBI’s 2015 Circular to safeguard the interests of the investors. However, reference may be made to SEBI’s Circular No. CIR/IMD/DF/14/2014, dated June 19, 2014 which at Paragraph 2(b) states that only in cases of material deviations from the placement memorandum, the manager is bound to provide an exit to the investors. The investors are to be informed of any changes post-facto and are not bound to take prior approval. The strict compliance with placement memorandum that the AO’s order demands needs careful consideration, therefore.

Issue 4: Under Reg. 10(d) of the AIF Regulations, an Investment Manager is required to have a continuing interest in the Fund of not less than 2.5% or INR 5 crores (whichever is lower) in the form of investment. The defence taken was that the contribution of the Investment Manager reduced to INR 3.13 crore after some of its contribution was repaid to it as an investor of the Fund. The AO however decided that the continuing interest requirement had no exception and must be complied with at all times.

Developments after the AO’s order:

Interestingly, regarding the AO’s decision on whether the Fund could give out loans, the final settlement order dated July 25, 2018 published by SEBI indicates a different conclusion. The settlement order was prepared in consultation with the High-Powered Advisory Committee (HPAC) of SEBI. According to the said settlement order, a new show-cause notice dated February 2, 2018 was issued to the Fund for using the investible corpus for the purpose of giving loans.

Further, the Fund and Investment Manager were required to provide an undertaking by way of an affidavit, confirming that they would stop granting loans, the amounts given as loans shall be taken back and, in the future, there will be no loan activity. The reasoning for such conclusion is not captured in the settlement order.

Our Suggestions based out of the matter:

The AO’s order exhibits the strict nature of compliance demanded by SEBI with respect to AIFs in general. The following key suggestions are provided for all Funds and Investment Managers:

  1. It is highly advisable that appropriate protections through indemnities and limiting liabilities are provided in the fund documents for trustees, managers, or settlors. Furthermore, adequate insurance policies to protect the downside from such statutory penalties is also highly recommended.
  2. In light of the strict compliance demanded from the provisions of the private placement memorandum, it becomes increasingly important to draft them with extra attention to the investment strategies that will be adopted and to leave ample flexibility for the manager to execute the same.
  3. The order also reinforces focus and importance of regular monitoring of all regulatory compliances.


  1. Order of the Adjudicating Officer, dated November 29, 2017:
  2. Order of the Securities Appellate Tribunal, dated May 4, 2018:
  3. SEBI’s Settlement Order, dated July 25, 2018:
  4. SEBI’s Circular No. CIR/IMD/DF/14/2014, dated June 19, 2014:
  5. SEBI’s Circular No. CIR/IMD/DF/7/2/2015 dated October 1, 2015:

Authors: Mr. Avaneesh Satyang and Ms. Sohini Mandal

Treatment of Related Party and Related Party Transactions

Transactions between “related parties” are all too common and a host of legislations define the term “related party”. From law and tax stand-point, the requirement is to ensure reasonable judgment while making commercial decisions and to curb any undue advantages and misappropriation of assets, opportunities or information for personal profits that may be available by reason of “being related”. Various statutes have tried to address and regulate related party transactions by way of disclosures and pre and post transaction compliance. In this post, we have attempted to provide a brief overview of treatment of related party transactions (“RPT”) under various statutes.

There are other compliances, disclosure of methods of arriving at valuation for listed entities under SEBI (LODR) and Accounting Standards, which are we not touching upon.



Companies Act, 2013: The Directors of a Company are under a fiduciary duty to discharge the affairs of the Company in good faith. While acting in the authority of regulation of affairs of the Company, the Company may enter into transactions with related parties.

Who is a related party?

Section 2(76), Companies Act, 2013 r/w Rule 3 Companies (Specification of Definitions Details) Rules, 2014

Provides that in relation to a Company, a related party means: (i) a director or his relative; (ii) key managerial personnel or his relative; (iii) a firm, in which a director, manager or his relative is a partner; (iv) a private company in which a director or manager is a member or director; (v) a public company in which a director or manager is a director or holds along with his relatives, more than 2% of its paid-up share capital; (vi) anybody corporate whose Board, managing director or manager is accustomed to act in accordance with the advice, directions or instructions of a director or manager;(vii) any person on whose advice, directions or instructions a director or manager is accustomed to act; and (viii) any body corporate which is—(a) a holding, subsidiary or an associate company of such company; (b) a subsidiary of a holding company to which it is also a subsidiary; or (c) an investing company or the venture of the company;

Rule 3, Companies (Specification of Definitions Details) Rules, 2014 provides that related parties would include any director (other than independent director) or key managerial personnel of holding company or his relative with reference to a Company.

What transactions are prohibited as RPT?

Section 188:  Prohibits the following transactions, unless approved by the Board:

a)    Sale, purchase or supply of goods and services; b) Selling or otherwise disposing of or buying property of any kind; c) Leasing of property of any kind; d) Availing or rendering of services; e) Appointment of agent for purchase or sale of goods, materials, services or property; f) Appointment of such related party to any office or place of profit in the company, or its subsidiary or associate company; g) Underwriting of any securities or derivatives of the company.

What are the prescribed conditions for entering into related party transaction?

Rule 15 of the Companies (Meetings of Boards and Its Power) Rules 2014:

Board Approval: All related party transactions need Board approval.

RPTs can be entered into after obtaining Board approval. Companies Act, 2013 prescribes the conditions that should be met for approval.

Voting: A director, who is interested in a contractual agreement with a related party shall abstain himself from such meeting wherein discussion on such matter are taking place. This restriction is not applicable in instance where the company in which ninety per cent. or more members, in number, are relatives of promoters or are related parties.

Shareholders’ Approval: In the below-mentioned cases, in addition to board approval, the Company also requires a shareholders’ approval via an ordinary resolution:

a)    If the following type of transactions amount to at least 10% of turnover of the company or Rs. 100 crore, whichever is lower :-

i.    Sale, purchase or supply of goods or materials ;

ii.   Selling, buying or otherwise disposing of property;

iii.  Leasing of property;

iv.  Availing or rendering of any services, directly or through appointment of agent.

The limit specified above shall apply for transaction or transactions to be entered into either individually or taken together with the previous transactions during a financial year.

b)    Appointment to office of profit to a company, it’s subsidiary, associate or holding at a remuneration exceeding INR 2.5 lakh per month.

c)    Remuneration for underwriting subscription of securities or derivative of exceeding 1%.

What are the exemptions under RPT?

i) any transactions entered into by a Company in its ordinary course of business entered at arm’s length basis (as explained below).

ii) Board approval shall not be required for transactions entered into between a holding company and its wholly owned subsidiary whose accounts are consolidated with such holding company and placed before the shareholders at the general meeting for approval.

What are the compliance for related party transactions?

RPT provisions provide for the following types of disclosures

i)     Board Meeting: Agenda of the board meeting shall disclose details such as the name of the related party, the nature of the relationship as well as all material terms of the contract and all financial payments due.

ii)    Interested Directors Disclosure: All directors shall provide a disclosure in MBP-1 of his concerns and interest in other companies.

iii)   Board Report: The justification for any RPT must be given in the Board’s report to the shareholders.

iv)   Disclosures made in Register: All companies have to maintain one or more registers in MBP 4, and shall enter the particulars of the RPT.

What are the powers of the Audit Committee in relation to RPT?

Under Section 177(4) of the Companies Act, 2013 it is required that the audit committee (if any constituted in accordance with Section 177) approves or modifies the RPT, post scrutiny as per the provisions of the Act.

For the above, the audit committee has the power to obtain professional advice from external sources and have full access to information contained in the records of the company.

Any transaction of amount not exceeding INR 1,00,00,000/- entered into by a director or officer of the company without obtaining the approval of the Audit Committee and not ratified by the Audit Committee within three months from the date of the transaction, shall be voidable at the option of the Audit Committee and if the transaction is with the related party to any director or is authorised by any other director, the director concerned shall indemnify the company against any loss incurred by it.

What is the penalty for non-compliance?

Any contract or arrangement into by a director or an employee without obtaining the consent or ratification of the Board or by a resolution in the general meeting is voidable at the option of the Board and the director shall have to indemnify the company for any loss occurred.

Any director or any other employee of a company, who had entered into or authorized the contract or arrangement in violation of the provisions shall

(i)    in case of listed company, be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees, or with both; and

(ii)   In case of any other company, be punishable with fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees.

Related Person under Goods and Services Tax (GST) regime*

Under the GST regime, transactions between related persons are treated as Supply even if made without consideration. All transactions including those listed in Schedule 1 of the Central Goods and Service Tax, 2017 even if made without consideration are now taxed under the GST regime. The parties pay tax on the same and later claim it as an input tax credit.

What is the definition of Related Persons? Explanation to Section 15(5) of the Central Goods and Service Tax Act provides for the definition of Related persons

a)         persons shall be deemed to be “related persons” if––

(i)         such persons are officers or directors of one another’s businesses; (ii) such persons are legally recognized partners in business; (iii) such persons are employer and employee; (iv) any person directly or indirectly owns, controls or holds twenty-five per cent. or more of the outstanding voting stock or shares of both of them; (v) one of them directly or indirectly controls the other; (vi) both of them are directly or indirectly controlled by a third person; (vi) together they directly or indirectly control a third person; or (vii) they are members of the same family. 

b)         the term “person” also includes legal persons including entities incorporated outside India;

c)         persons who are associated in the business of one another in that one is the sole agent or sole distributor or sole concessionaire, howsoever described, of the other, shall be deemed to be related.

This definition has been adopted from the Customs Valuation Rules, 2007, Rule 2(2). The only modification appears to be that under the Customs Valuation Rules, Explanation II, the persons who are associated in the business of one another where one is the sole agent or sole distributor or sole concessionaire, have to meet one of the abovementioned seven specified criteria to qualify as being ‘related’; however, under the Act, the persons associated in the business of one another shall qualify as ‘related persons’ merely by virtue of being the sole agent or sole distributor or sole concessionaire.

What transactions will be treated as Supply and be taxed even when made without consideration? Schedule 1 of the Act, 2017:

1.      Permanent transfer or disposal of business assets where input tax credit has been availed on such assets.

2.       Supply of goods or services or both between related persons or between distinct persons as specified in section 25, when made in the course or furtherance of business:

        Provided that gifts not exceeding fifty thousand rupees in value in a financial year by an employer to an employee shall not be treated as supply of goods or services or both.

3.      Supply of goods—

a)      by a principal to his agent where the agent undertakes to supply such goods on behalf of the principal; or

b)      by an agent to his principal where the agent undertakes to receive such goods on behalf of the principal.

c)       Import of services by a taxable person from a related person or from any of his other establishments outside India, in the course or furtherance of business

How do you determine the value of taxable supply?

Section 15 of the CGST Act r/w Rule 2, 4 and 5 of the GST Valuation Rules

Section 15 provides for the determination of the value of taxable supply.

a)   the price actually paid or payable for the said supply of goods or services or both where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply.

Inclusions: all taxes, cess, amount to be paid in relation to supply, incidental expenses, interest or late fee, subsidies etc.

Exclusions: discounts etc.

Rule 2 provides for the determination of value of supply of goods or services or both between distinct or related persons, other than through an agent will be:

a.   be the open market value of such supply;

b.   if open market value is not available, be the value of supply of goods or services of like kind and quality;

c.   if value is not determinable under clause (a) or (b), be the value as determined by application of rule 4 or rule 5, in that order.

If the supply is of good intended for further supply the value shall, at the option of the supplier, be an amount equivalent to ninety percent of the price charged for the supply of goods of like kind and quality by the recipient to his customer not being a related person.

Provided where the recipient is eligible for full input tax credit, the value declared in the invoice shall be deemed to be the open market value of goods or services.

Rule 3 provides that if the supply is via an agent the value of supply shall be the open market value of the goods being supplied, or at the option of the supplier, be ninety percent of the price charged for the supply of goods of like kind and quality by the recipient to his customer not being a related person, where the goods are intended for further supply by the said recipient;

Rule 4 and Rule 5 provides for the determination of value based on cost and for the residual method for determination of the value of supply.

Treatment of Related Persons under Income Tax Act, 1961

(Please obtain the opinion of a tax expert)

What is the definition of Relative? Rule 2(41) of the Act, 1961 provides that a relative, in relation to an individual, means the husband, wife, brother or sister or any lineal ascendant or descendant of that individual.
For the purpose of calculation of business income:

How is Specified Persons defined?


Although Section 40 A(2) does not make specific reference to related party but disallows expenses or payments made to specified persons

These specified persons are as below:

a)    In case of an individual: relatives or associates or any person in whose business or profession the assessee himself or his relative has a substantial interest.

b)    In case of a company, firm, association of persons, HUFs; any director, partner, member of association, member of the family or their relatives, members of family or their relatives, any person in whose business or profession, as mentioned or relative has substantial interest, any individual, company or firm or association of persons or HUFs who have substantial interest in the business or profession of the assessee, any other company carrying on business or profession in which the abovementioned company have substantial interest.

–      Substantial interest means: In case of a company, beneficial ownership of not less than 20% voting power and at least 20% of the profits in any other case.

Interestingly, the Court In CIT v V.S. Dempo And Co. Pvt.Ltd336 ITR 209, has held that a subsidiary is not a related party for the purpose of section 40 (2)(b).  

What are associated enterprises and how are arms-length transactions determined?

Chapter X, Section 92 of the Income Tax Act, 1961 provide that any income arising from an international transaction shall be computed at arm‘s length price.

Section 92 A provides that associated enterprise in relation to other enterprise, shall mean an enterprise which participates, directly or indirectly, or through one or more intermediaries, in the management, control, or capital of the other enterprise. The same is determined on various thresholds such as:

a)       Voting power: directly or indirectly, holds shares carrying atleast 26% of voting power.The question arises hereon since contractually many entities provide voting rights to even preference shareholders. Since statutorily voting rights are now given to preference holders, thus may not be considered for the purpose of the limit of 26%.

b)       Loan advancement: if the loan advanced by an enterprise to another constitutes atleast 51% of the book value of total assets of the latter (the borrowing enterprise).

c)      Guarantee for borrowing: guarantees at least 10% of the total borrowings of another enterprise.

d)      Appointment of Management/ Managerial Personnel’s: if more than 50% of the Board of Directors or members of the Governing Board, or one or more Executive Directors or Members of the Governing Board of an enterprise is appointed by another.

e)      Dependability: If manufacturing or processing of goods or articles of an enterprise is wholly reliant on use of certain intangible assets of another or if atleast 90% of raw materials and consumables required for the manufacture or processing of goods or articles carried out by one enterprise are supplied by the other enterprise and the prices and other vital terms are fixed by the other enterprise;

f)       Sale of Manufactured Goods: if the goods or articles manufactured or processed by an enterprise are sold to another enterprise, and the prices and other vital terms are fixed by the other;

Control of another enterprise: if two enterprises are controlled by the same individual or by his/her relatives. On the other hand, if an enterprise is controlled by a Hindu Undivided Family (HUF) and the other enterprise is controlled by a member of such HUF or their relatives.

Further, Section 92F provides for the definition of arms length as the price which is applied or proposed to be applied in a transaction between persons other than associated enterprises, in uncontrolled conditions”

How Is the Computation of arms’ length price done?

Section 92 C of the Income Tax Act, 1961 provides for the methods of computation of arms-length for transactions with related parties, which are: (i) comparable uncontrolled price method;(ii) resale price method;(iii) cost plus method;(iv) profit split method;(v) transaction net margin method and (vi)such other method as maybe prescribed by the Board.

 Disclaimer: Related Party transactions, law, treatment in books of account, tax impact is very nuanced. This note is only from knowledge sharing perspective and any action to be taken should with an expert’s guidance.

Authors: Ms. Ayushi Singh and Ms. Sohini Mandal


Ecommerce: Intermediary’s liabilities and duties

The Delhi High Court in the case of Christian Louboutin SAS v. Nakul Bajaj and Ors.[i], (hereinafter Louboutin case) has dealt in detail the circumstances where an E-commerce platform could be considered as an intermediary and when it loses the safe harbour  under the Information Technology Act, 2000 (“Act”).

The facts of the case are as follows. The defendant has been operating a website named (“Website”) offering for sale, various luxury products including the plaintiff’s brand of luxury shoes under the brand “Christian Louboutin”. The plaintiff (Christian Louboutin SAS), claims that the Website gives an impression that it is in some manner affiliated, sponsored or has been approved by the plaintiff for selling the plaintiff’s luxury products. The plaintiff therefore claimed that the display of plaintiff’s product on the Website results in the infringement of trade mark rights of the plaintiff and dissolution of the luxury status enjoyed by its products and brands.

The defendant’s claimed that the Website is an intermediary, as it not selling the products, but is merely enabling booking of such products through its online platform and that it is only booking orders on behalf of the sellers whose products are being displayed on their platform.

E-commerce platform and their role as intermediaries

In an e-commerce marketplace platform, it usually displays the name of the sellers and assists the customers by providing reviews of the various sellers who are listed on the platform. It also provides for other services such as online payment, maintaining warehouses, delivery and the like. The question that arises is at what point can the platform can say it is only an intermediary.

Section 2(w) of the Information Technology Act defines an intermediary as an “intermediary, with respect to any particular electronic records, means any person who on behalf of another person receives, stores, or transmits that record or provides any service with respect to that record or provides any service with respect to that record and includes telecom service providers, network service providers, internet service providers, web-hosting service providers, search engines, online payment sites online auction sites, online- market places, and cyber cafes.”

In Google France SARL, Google Inc. v. Louis Vuitton Malletier SA & Ors. (hereinafter, ‘Google France’), one of the point noted it that “it is necessary to examine whether the role played by that service provider is neutral, in the sense that its conduct is merely technical, automatic and passive, pointing to a lack of knowledge or control of the data which it stores.”

The Google France case has laid out certain principles on the liability of intermediaries and the Louboutin case makes a reference to it. Below are some useful excerpts from the judgement:

  1. Exemptions from liability of intermediaries are limited to the technical process of operating and giving access to a communication network. Such an exemption is needed for the purposes of making the transmission more efficient.
  2. The activity of the intermediary is merely technical, automatic and passive – meaning thereby that the intermediary does not have any knowledge or control over the information which is transmitted or stored.
  3. The intermediary gets the benefit of the exemption for being a “mere conduit” and for “caching”, when it is not involved in the information which is transmitted/translated.
  4. If any service provider deliberately collaborates with the recipient of a service, the exemption no longer applies.
  5. In order for the service provider to continue to enjoy the exemption, upon obtaining knowledge of any illegal activity, the service provider has to remove or disable access to the information.
  6. In order to constitute a mere conduit, the service provider should not initiate the transmission, select the receiver of the transmission, or select or modify the information contained in the transmission.
  7. The storage of the information has to be automatic, intermediate and transient.
  8. The provider should not obtain any data based on the use of the information.
  9. For claiming exemption from damages, the service provider should not have any knowledge of the illegal activity, and upon acquiring knowledge, should expeditiously remove or disable the information.
  10. Service providers do not have a general obligation to monitor the information which is transmitted or stored.

In the case of  L’Oreal SA & Ors. v. eBay International AG & Ors.[ii], the Court of Justice of European Union held that an operator which provides assistance “which entails, in particular, optimizes the presentation of the offers for sale in question, or promotes them”, even if the operator has not played active role and he provides the above service, the operator can claim protection as an intermediary. However, the said intermediary, if upon becoming aware of the facts which lead to an inference that the offers made on the website were unlawful, failed to act expeditiously, then the exemption ceases.

It is essential to determine whether the service provider played an active role or not, and whether it has the knowledge or control over the data which is stored by it. Further, if the service provider has no knowledge, then upon obtaining knowledge of the unlawful activity, it should expeditiously remove the data or disable access, failing which the service provider may become liable.

In Inwood Laboratories, Inc. v. Ives Laboratories, Inc.[iii], the question of contributory negligence with regard to infringement of trademark by the online service provider and the manufacturer (famously known as ‘Inwood Test’) observed that “if a manufacturer or distributor intentionally induces another to infringe a trademark, or if it continues to supply its product to one, whom it knows or has reasons to know is engaging in trademark infringement, the manufacturer or the distributor is contributorially responsible for any harm done as a result of the deceit”.

In the Louboutin case, the Honourable High Court of Delhi, observed that the defendant had a membership fee to place an order for goods on the Website, guaranteed authenticity that the products procured and sold were from the international boutiques and luxury stores, shipping to customers would be only after quality checking.

The Court opined that the safe harbour provisions for intermediaries under section 79 of the Act is not absolute. An active participation by the intermediaries is to be examined and if there is an active participation then the ring of protection or exemption granted to the intermediaries would not apply.

With regards to trademark infringement, section 101 of the Trade Marks Act states “that a person shall be deemed to apply a trade mark when (a) the mark is placed, enclosed or annexed to any good which are sold or are exposed for sale, (b) when the mark is used in relation to the goods or services in any sign, advertisement, invoice, catalogue, business paper price list”. Further, section 102 states that “a person shall be deemed to falsely apply to goods or services a trade mark, who without the assent of the proprietor of the trade mark (a) applies such mark or a deceptively similar mark to goods or services or any package containing goods; (b) uses any package bearing a mark which is identical with or deceptively similar to the trade mark of such proprietor, for the purpose of packaging filling or wrapping therein any goods other than the genuine goods of the proprietor of the trade mark”. Therefore, when an ecommerce website actively participates and allows storing of counterfeit goods, it would be aiding in the infringement of the trademark.

In the Louboutin case, the Delhi HighCourt held that the defendant had not sold the plantiff’s products on its Website, though the Website did advertise and promote the plaintiff’s brand and products. The Court did not order for damages/ rendition of accounts.

The Court did give the following directions to the defendant on the activities of running the Website as an intermediary so as to (i) disclose the complete details of all its sellers, their addresses and contact details on its website (ii) obtain a certificate from its sellers that the goods are genuine (iii) If the sellers are not located in India, prior to uploading a product bearing the Plaintiff’s marks, it shall notify the plaintiff and obtain concurrence before offering the said products for sale on its platform (iv) If the sellers are located in India, it shall enter into a proper agreement, under which it shall obtain guarantee as to authenticity and genuinity of the products as also provide for consequences of violation of the same (v) Upon being notified by the Plaintiff of any counterfeit product being sold on its platform, it shall notify the seller and if the seller is unable to provide any evidence that the product is genuine, it shall take down the said listing and notify the plaintiff of the same, as per the Intermediary Guidelines 2011 (vi) It shall also seek a guarantee from the sellers that the product has not been impaired in any manner and that all the warranties and guarantees of the Plaintiff are applicable and shall be honoured by the Seller. Products of any sellers who are unable to provide such a guarantee would not be, shall not be offered on the Defendant’s platform (vii) All meta-tags consisting of the Plaintiff’s marks shall be removed with immediate effect.

It is certainly interesting to note the thought process of the Court and the direction that it took, in this judgment.

Author: Mr. Anuj Maharana


[i] Christian Louboutin SAS v. Nakul Bajaj and Ors., CS (COMM) 344/2018

[ii] L’Oreal SA & Ors. v. eBay International AG & Ors., Case C-324/09

[iii] Inwood Laboratories, Inc. v Ives Laboratories, Inc.,456 U.S. 844

Anti-dilution protection in shareholders agreement – Implementation under Indian laws

Anti-dilution protection is one term which is present in almost every investment transaction. From the perspective of the founders, especially in case of a start-up or an early stage company, it is very important to understand the implications of having such a provision in the shareholders agreement (SHA). Founders generally tend to agree to so-called “standard” terms in the SHA, when in dire need of the investment. An anti-dilution provision has to be reviewed closely in order to ensure it is not too harsh on the founders and also since the transaction documents set precedents for the subsequent round of investments. This article discusses some of the main methods of anti-dilution protection usually seen in transactions in India and some of the difficulties associated with actual implementation of such anti-dilution provisions.

What is Anti-Dilution Protection?

Before moving to anti-dilution, we need to understand the concept of dilution. Dilution is the decrease in the shareholding percentage of a shareholder in a company due to increase in the number of outstanding shares. For example, when a company receives subsequent round of investment, the shareholding percentage of the existing investors gets diluted. It is good to have the value of a company increase in subsequent rounds of funding. However, there might be situations when a company may not perform or grow as expected due to which the value of the share decreases. In such a scenario, anti-dilution protection is triggered by the existing investors to maintain their shareholding percentage in the company to a certain extent (which is explained below).

Essentially, anti-dilution protection is such protection given to the existing investors of the company when new shares are issued in a subsequent round at a price per share which is lower than the price paid by the existing investors. It is pertinent to note that anti-dilution protection is applicable only when shares are issued at a price per share which is lower than the price paid by the existing investors and not for every subsequent issue of shares. The reason being that, if shares are being offered to subsequent investors at a price per share which is higher than the price per share paid by the existing investors, even though their percentage shareholding in the company reduces, the value of the shares held by them increases.

Anti-Dilution Protection and its Variants

In India, the two commonly used forms of anti-dilution protection are: (a) Full Ratchet and (b) Broad Based Weighted Average.

Full Ratchet: Under this method, if shares are issued at a subsequent round of investment at a price per share that is lower than the price per share paid by the existing investors of the company, then the price of the shares/ conversion price of the existing investors will be revised to the price at which the new shares being issued. In such scenario, either additional shares will be issued to the existing investors for the surplus consideration after such price adjustment without the existing investors making any further payments or conversion price would be revised to the price of such shares being issued. Thus, the full-ratchet method does not consider the number of shares held by the existing investors or the number of shares being issued in the subsequent investment round, but only considers the price at which the new shares are being issued and the new price will be applied to all the shares held by the existing shareholders. Thus, the full ratchet method of anti-dilution protection is very harsh on the Company and the Founders as compared to the broad based weighted average method. Also, the shareholding percentage of the founders may get diluted to a very large extent if a full ratchet provision is implemented.

Broad Based Weighted Average: As compared to full ratchet mechanism, broad based weighted average method uses a formula which considers the number of shares issued in a subsequent round of investment and the number of shares held by the existing investors. Therefore, the broad based weighted average method is fair to the founders as well as to the investors and is adopted more frequently in investment transactions. The weighted average formula used in the transaction documents describe how the weighted average price is determined by taking into the consideration the existing price or the conversion price of the shares, number of outstanding shares prior to the new issuance, the number of shares to be issued and the purchase consideration to be received by the company with respect to such issuance.

Implications of Anti-Dilution Provision 

Pricing Guidelines under Indian Laws:

Any further issuance of shares by a Company registered in India shall adhere to various provisions of the Companies Act, 2013 (the “Act”), Foreign Exchange Management Act, 1999 including rules and regulations notified thereunder, regulations prescribed by Securities Exchange Board of India (“SEBI”) (if applicable) and Income Tax Act, 1961 (the “IT Act”).

In India, implementation of anti-dilution protection is complex considering the existing laws. For instance, shares issued to foreign investors need to be in compliance with the pricing guidelines as provided in Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017 (“FDI Regulations”). As per the pricing guidelines, capital instruments which are issued or transferred to a foreign resident has to be priced as per any internationally accepted pricing methodology for valuation on an arm’s length basis duly certified by a chartered accountant or a SEBI registered merchant banker or a practicing cost accountant in case of an unlisted company.

Convertible Instruments: Additionally, in case of convertible instruments, the price/ conversion formula of the instrument should be determined upfront at the time of issue of the instrument and the price at the time of conversion should not in any case be lower than the fair value worked out, at the time of issuance of such instruments, in accordance with the FDI Regulations. Therefore, even adjusting the conversion ratio of a convertible instrument can pose complexities.

Considering aforementioned guidelines, enforcement of anti-dilution provisions and issue of shares pursuant to the same, especially to non-residents will be very difficult. Also, implementation of anti-dilution which results in issuance of new shares for no consideration, would not be allowed under the Act (which is applicable for both resident and non-resident investors).

Tax: Further, there is a complication which has to be examined under tax laws. As per section 56 (2) (x) (c) of the IT Act, when any person receives shares for a consideration which is less than the aggregate fair market value (FMV) by an amount exceeding fifty thousand rupees, the aggregate FMV of such property as exceeds such consideration is taxable as ‘income from other sources’ in the hands of the person receiving such shares.

Our thoughts:

Considering the nuances associated with the issuance of shares at a price below FMV or for no consideration, the actual implementation of anti-dilution provisions poses a lot of difficulties. Unless certain exceptions are brought in the existing laws, actual implementation could be a challenge in India, especially with respect to foreign investors.

Authors:  Mr. Paul Albert and Mr. Ashwin Bhat