India Business Law Journal – June 2024

The tiger’s teeth

Banking regulator on the prowl for regulatory breaches

In recent months several prominent companies operating in the banking and finance sector have been on the receiving end of regulatory actions from the Reserve Bank of India (RBI). Companies like Paytm, Kotak Mahindra Bank, Visa, Mastercard, Federal Bank and IIFL have been asked to restrict their business operations in one form or another. The impacts have been at varying intensities; Paytm’s Payment Bank was asked to suspend operations entirely over significant supervisory concerns and Federal Bank was asked to stop issuing co-branded cards in partnership with brands in order to preserve consumer interest.

This issue’s Cover story examines reasons behind the RBI’s intensified focus on regulatory compliance within India’s banking sector. While some industry experts believe that such actions pose complex challenges, others believe that it is necessary to protect the financial sector from threats and violations. The regulator has not only brought down the hammer on non-compliant entities, but also made efforts towards improved focus on digital security and online banking services.

Where the RBI is hoping to improve compliance with increased requirements and sanctions on non-compliant entities, tax authorities are looking to close off loopholes on tax avoidance and evasion, which have made offshore jurisdictions attractive to investors. This brings us to our Spotlight article, titled Layers of uncertainty, which looks at a significant change in the India-Mauritius tax treaty that has been in place for nearly four decades.

Importantly, the treaty earlier provided capital gains tax exemption to investors. This stands to change with the most recent amendment, which alters the tax benefits to those entities that route their investments in India through Mauritius. This poses the question: what lies ahead for the India-Mauritius tax relationship for foreign investors and their investments in India?

As AI-driven products become ubiquitous, questions arise regarding responsibility and accountability in cases of malfunction. Our Expert briefing written by Sumeet Kachwaha, a partner at Kachwaha & Partners, provides an insight into this as yet uncertain area of law.

Terms such as generative AI, and large language models and their training, are part of broader conversations that include the implications of AI and data privacy in the modern age. However, any dispute related to this cannot be brought before the consumer courts of India as the forum is not designed to deal with matters of complex facts, or those that require expert evidence. So, where does the liability for AI products fall in India?

This issue’s Intelligence report brings provides a detailed report on the top India-focused foreign law firms judged on the basis of an array of factors including the direct opinions of the in-house counsel of various top multinational corporations. The report, now in its 18th year, draws on analysis of more than 600 law firms across the globe. It recognises the strong commitment of these law firms to the Indian market and the substantial resources, talent and energy they’ve devoted to the Indian market for more than two decades.

In What’s the deal? we dissect a recent memo from the Ministry of Finance that proved to be a shock for the dispute resolution world, primarily because the government over the years has reiterated many times its desires for India to be seen as an arbitration hub.

New guidelines by the ministry advocate avoiding relying on arbitration as a dispute resolution mechanism in its contracts. They seek to shift focus to mediation and other forms of alternate dispute resolution (ADR) than arbitration. Experts say that although promotion of other ADR methods is a positive move, to do so by undermining arbitration may not be the right move.

In Jumping through hoops, we address corporate social responsibility (CSR) obligations and how existing rules have made it cumbersome for foreign-owned Indian companies to discharge their responsibilities. Companies that qualify for payment of CSR dues have to contribute 2% of their average net profits made during the previous three years towards CSR expenses.

Notably, companies owned by foreign entities face significant hurdles in making CSR contributions to NGOs in India as they are regulated by the Foreign Contribution (Regulation) Act (FCRA). Under the act, NGOs must be qualified to accept foreign contributions, register with the government, and open a designated FCRA account with the State Bank of India, narrowing the scope of foreign-owned Indian companies to carry out CSR activities. The authors seek for CSR contributions to be exempt from coming under the ambit of the FCRA, and point to provisions that enable the government to do so.