India’s growth rate of 7.2% in fiscal 2022-2023 was the second-highest among the G20 countries and almost twice the average for emerging market economies that year.[1] The country is an emerging economy. It has been a significant growth engine for the world, contributing 16% to the global growth in 2023. It is also situated at a strategically advantageous position in world geography. We get sunlight for the majority of the days which is more than 300 sunny days a year. It was about time that we realized to utilize the environment around us for our benefit.
It would be incorrect to assume that the country only has advantages and no disadvantages when it comes to its location in geography. However, we did a commendable job in utilizing the advantages for our good and also adapting to the disadvantages. One of the examples would be utilizing solar panels to meet increasing energy demands and other instances can be the cultivation of water-intensive crops like sugarcane where rainfall is abundant like Maharashtra and water-efficient crops like millet in Rajasthan. This is a smart way to deal with the needs of a country that is growing and as a consequence of such growth, the needs of its people are also increasing.
Every country just like India is dependent on the environment however humans have managed to reverse the situation wherein the environment is now dependent on us. The needs may change but one thing is constant, we cannot survive without the environment but the environment will not only survive but thrive without us something we saw in COVID times. The ramifications of climate change and environmental degradation pervade all realms, transcending geographical boundaries, sectors, and demographics without prejudice; however, the magnitude of their impact varies across different spheres. A propitious development is a cognizance among the global citizenry regarding the anthropogenic causation of nature's despoilment, which has catalyzed a collective endeavor to mitigate and redress the deleterious consequences.
The realization that the environment's survival hinges on human actions has prompted a collective global effort to mitigate climate change's adverse effects. Various measures have been taken by countries together like the Conference of the Parties (COP) and G20 and several measures are being taken individually within the countries like Swach Bharat Abhiyan, Namami Gange, EIA, National Action Plan on Climate Change (NAPCC), India's commitment to achieving a target of net zero emissions by the year 2070 etc.
Recognizing a problem is the initial stride toward finding a solution, and this realization has dawned upon us. An exemplary endeavor in our journey toward embracing climate resilience is the Reserve Bank of India's (RBI) introduction of draft guidelines on the 'Disclosure framework on climate-related financial risks, 2024.' These guidelines mark a significant step in acknowledging and addressing the financial risks posed by climate change, underlining our collective commitment to a sustainable future.".
The framework mandates disclosure by regulated entities (REs) on four key areas of governance, strategy, risk management, and metrics and targets. The central banking regulator recently released draft guidelines on climate risk and sustainable finance and the framework for acceptance of green deposits. The current disclosure framework is a step towards bringing the climate risk assessment, measurement, and reporting requirements under the mainstream compliance framework for financial sector entities in India. This move will help incorporate climate-related issues into the overall organizational culture, policies, and operations.
As per the draft guidelines, it is mandatory for all Scheduled Commercial Banks (excluding Local Area Banks, Payments Banks, and Regional Rural Banks), Tier-IV Primary (Urban) Co-operative Banks, All-India Financial Institutions (such as EXIM Bank, NABARD, NaBFID, NHB, and SIDBI), and Top and Upper Layer Non-Banking Financial Companies (NBFCs) to disclose climate-related financial risks. Climate-related disclosures by REs being a significant source of information, allow different stakeholders (e.g., customers, depositors, investors, and regulators) to understand relevant risks faced and approaches adopted to address such issues. This in turn allows them to make an informed choice.
RBI has clarified that all the entities mentioned above should disclose their governance structures related to climate risk management. This includes details on board oversight, the role of senior management, and how these risks are integrated into overall governance. With this, RBI aims to ensure that senior management and the board assume responsibility for climate risk integration and make this information about climate risk management accessible to stakeholders.
However, there are several limitations and challenges that entities might face including maintaining robust governance structures for climate risk management which can be complex, especially for smaller financial entities with limited resources.
However, RBI has not specified any metrics and methodologies for measuring and reporting climate risks. The lack of sufficient data on climate risks may make it difficult for entities to conduct thorough assessments. Moreover, the individuals in management may not be experts in climate risk management.
Moreover, RBI has mandated the entities to describe the actual and potential impacts of climate-related risks and opportunities on REs, strategy, and financial planning. This involves a thorough assessment of what specific climate-related issues would arise over time and the material impact it could have on the RE along with current and anticipated effects of climate-related financial risks and opportunities on the business model of the RE.
However, integrating climate risk assessments into existing business models and strategies can be difficult, particularly for entities with complex or diversified operations. Successful implementation will depend upon the trained staff with specialized knowledge and skills to assess climate impacts, which many organizations may lack. Climate change is a long-term phenomenon, and its impacts may unfold gradually over years or decades.
Businesses may struggle to incorporate these long-term considerations into their short-term strategic planning. Lastly, switching to sustainable and climate-efficient practices is costly which will automatically increase the financial burden.
Apart from that, RBI has mandated disclosures regarding the processes used by entities to identify, assess, and manage climate-related financial risks. This includes how climate risks are integrated into overall risk management frameworks and the methods used to prioritize these risks. Here, no standard process has been mentioned by RBI that can universally be used by these entities so the chances of different strategies and varying results can impact the object sought to be achieved by RBI. lack of standardised process leaves a lot of scope for interpretation on the side of REs which can differ from one entity to the other.
Entities are further mandated to report the metrics used to assess and manage relevant climate-related risks and opportunities. This includes performance metrics, targets set by the entity, and progress towards achieving these targets. This target can be impacted by limited availability and quality of data. Measuring progress toward targets requires consistent monitoring and reporting mechanisms. For these reasons, additional investments are needed in technology and expertise for monitoring and reporting. In the absence of a standardized process, many organisations might be reluctant to prioritize climate risk management over traditional financial work especially when they know their competitors are not prioritizing the same.
The RBI’s guidelines will be implemented in a phased manner to ensure a smooth transition and adequate preparation time for entities. In Scheduled Commercial Banks, All-India Financial Institutions, and Top-tier NBFCs Governance, Strategy, and Risk Management disclosures will commence from FY 2025-26 and Metrics and Targets disclosures will start from FY 2027-28. Tier-IV UCBs will follow the same implementation schedule, starting a year later. This phased approach allows entities to gradually build their capabilities and integrate the necessary systems for comprehensive climate risk management.
The Reserve Bank of India's (RBI) Draft Disclosure Framework on Climate-related Financial Risks, 2024 represents a commendable effort to address the inadequacies in reporting climate-related information within the financial sector. With a notable portion of climate-related data being either inaccurately reported or altogether omitted due to the absence of binding regulations, the introduction of this framework by the RBI signifies a crucial step towards rectifying this issue. By mandating the reporting of such data, financial entities will be compelled to undertake more climate-efficient measures to mitigate associated risks.
Moreover, this initiative is poised to foster a culture of responsible leadership within management, instilling a habit of considering climate risks when making decisions that could potentially harm the environment. However, this is not the first instance of the RBI taking proactive measures to address climate-related issues. Back in 2007, the RBI published guidelines on Corporate Social Responsibility (CSR), sustainable development, and non-financial reporting, demonstrating its ongoing commitment to promoting sustainability within the financial sector after realizing [2] the general lack of adequate awareness on the part of Asian Companies on issues like global warming and climate change and the risk that it can pose to business models.[3]
[1] World Economic Forum, “India could become the world’s 3rd largest economy in the next 5 years. Here's how” (January 15, 2024), available at https://www.weforum.org/agenda/2024/01/how-india-can-seize-its-moment-to-become-the-world-s-third-largest-economy/#:~:text=On%20the%20economic%20front%2C%20India,emerging%20market%20economies%20that%20year.
[2] PWC “Disclosure framework on climate-related financial risks, 2024”, (Accessed on 23.05.2024), available at https://www.pwc.in/blogs/disclosure-framework-on-climate-related-financial-risks-2024.html#:~:text=On%2028%20February%202024%2C%20the,related%20financial%20risks%2C%202024'.&text=The%20framework%20mandates%20disclosure%20by,management%20and%20metric%20and%20targets.
[3] Business Standard, “RBI asks banks to step up CSR efforts” (Jan 19 2013), available at https://www.business-standard.com/article/finance/rbi-asks-banks-to-step-up-csr-efforts-107122000048_1.html
Mergers and acquisitions (M&A) stand as pivotal moments in the life of a business, promising growth, synergy, and new opportunities. However, the road to successfully blending two entities involves complex tasks like brand integration, process alignment, and cultural harmony.
Amidst these challenges, the legal aspects of M&A take centre stage, demanding meticulous planning and attention to detail.
The cornerstone of any successful merger or acquisition is thorough due diligence. This comprehensive investigation, ideally conducted with professional assistance, is crucial for identifying and mitigating potential legal risks that could result in future litigation. Legal due diligence involves a meticulous examination of contracts, licences, litigation history, and regulatory compliance.
Understanding and navigating regulatory landscapes is paramount in M&A transactions. Companies operating in highly regulated industries such as healthcare or insurance must delve into specific regulations. Key regulatory areas include:
Even after the deal is closed, legal complexities may persist. Merged entities might need to comply with new regulations, especially if operating in a different jurisdiction or industry.
Integrating policies, procedures, and cultures can introduce legal challenges, particularly in areas like employment and contracts. Continuous compliance is crucial, considering the dynamic nature of laws and regulations.
In today’s digital age, the integration of IT infrastructures is an indispensable element of business operations. IT professionals play a crucial role in preparing for changes brought about by mergers and amalgamations, which may involve migrating to the cloud or sharing resources.
Collaboration is enhanced, especially when dealing with remote teams. However, these changes also bring about challenges related to data privacy and security.
Data privacy laws, such as India’s Digital Personal Data Protection Act, 2023, General Data Protection Regulation (Europe) and California Consumer Privacy Act (USA), impose strict regulations on organisations.
Explicit consent, safeguards to protect data, prompt notifications in case of breaches, and respect for the right to be forgotten are crucial compliance measures. As data is a significant asset, understanding and adhering to region-specific data privacy laws is vital for the success of an M&A.
Organisations often overlook the importance of archiving data for transparency and record-keeping requirements.
Compliance with secretarial and financial regulations necessitates the retention of messages. Additionally, eDiscovery and effective data management are critical in legal investigations or audits, providing tools to handle and mitigate potential risks.
Successful M&A transactions require a holistic approach, with legal considerations being integral to the process. Thorough due diligence, regulatory awareness, post-merger integration strategies, and a focus on data privacy and cybersecurity contribute to the seamless blending of business entities.
Navigating the legal landscape with diligence and strategic foresight ensures that M&A transactions not only deliver on their promises of growth but also stand resilient against potential legal challenges.
https://inc42.com/resources/charting-legal-waters-best-practices-for-ma-due-diligence
Merely a month after the Ministry of Consumer Affairs, Food & Public Distribution posited that the wholesale price of Edible Oils in India has decreased, the Government has urged manufacturers to slash prices again.
In April, Indonesia, the world’s biggest exporter of palm oil, halted shipments, to restrain the hiking prices of edible oils. This ban was introduced when the global market was already struggling to import oil from the war in Ukraine. Considering that India is the largest importer of cooking oil from Southeast Asian countries, it experienced the highest impact of the Indonesian ban. However, on the inducement of Indonesian lawmakers, the ban was lifted after three weeks.
Due to the lifting of the ban on palm oil export, cooking or edible oil prices in the Indian market are set to decrease. Indian manufacturers use palm oil in a multitude of household products such as soaps, cosmetics, processed foods and biofuel. Therefore, the immobility caused by market circumstances had led to myriad issues for manufacturers and customers.
The invasion of Ukraine by Russia has caused crude oil prices to reach new highs, and there has been talks in the markets about imposing a one-time "windfall tax" on oil and gas businesses due to the unprecedented profits witnessed by market players in the energy sector. In order to deal with the windfall profits earned by companies the government had two options: either raise dividend yield or impose a windfall tax. with no surprize the government chose the second option, which helped them to limit the fiscal deficit.
On July 1, the government enacted windfall gain taxes on domestic crude oil production as well as the export of petrol, diesel, and aviation turbine fuel (ATF)[1]. Additionally, it requires exporters to first satisfy the needs of the domestic market before supplying the export demand. According to a report[2], if the windfall taxes were applied to crude output alone, they would bring in an estimated Rs 65,600 crore in income, while the taxes on export goods would bring in an additional Rs 52,700 crore. Therefore, the money collected through windfall taxes can be used by the government to offset its losses.
Post windfall tax, the reported margin on gasoline and diesel has decreased to almost loss-making levels, while the reported margin on crude and aviation fuel has fallen below 15-year averages. In the last few weeks, there has been a reasonably large decline in crude prices as well as margins for important refined products due to growing concerns about oil consumption as recession fears intensify.
The irony of this well-meaning tax rate revision made by the GST Council is the manufacturer’s inability to attain a refund of the ITC which will eventually lead to a price hike. In relation to edible oils, the ITC on account of inputs is higher than the amount of GST charged on account of outward supplies of the goods. Therefore, the inability to attain the refund of the higher GST amount paid would trigger liquidity blockages and additional monetary burden on manufacturers.
Besides India, other nations are also experiencing the levy of windfall taxes. Recently, Hungary announced its intent to levy windfall taxes on additional profits earned by various sectors, including energy firms, for a two-year period to fund subsidies.[3] UK and Spain are also resorting to implication of windfall taxes to minimise food and fuel bills of their citizens[4]. With the rising global demand for edible oil and alternatives like palm oil, Indonesians, predicting a domestic shortage on account of the enhanced profit-making potential the international market, froze palm oil exports thereby further shooting the international demand and cost.
Following a drop in international rates and with Indonesia removing its export levy on all palm oil products until August 31, edible oil manufacturers in India will be able to pass on the benefits of softer global prices to final customers. The government reduced the windfall tax on gasoline, diesel, jet fuel, and crude oil. The additional tax of Rs 23,250 per tonne on domestically produced crude oil has been reduced to Rs 17,000 per tonne.[5]
In India, at the first instance, the domestic oil and gas producers have seen a sharp rise in profits. The strain on people's wallets is growing along with the price of crude oil. However, oil and gas businesses all over the world are making money while government exchequers are bleeding and these advances are the result of the geopolitical environment rather than any changes in their operations. A final decision on this matter would, however, be taken by the competent authority at an appropriate time.
Disclaimer: The content of this piece published by White & Brief Advocates & Solicitors is intended for informational purposes exclusively and is not intended to be a piece of legal advice on any subject matter. By viewing and reading the information, the reader understands there is no attorney-client relationship between the reader and the publisher. The contents of this informational piece shall not be used as a substitute for professional legal advice from a licensed attorney, and readers are encouraged to consult legal counsel on any specific legal questions they may have concerning a specific situation.
[1] ‘India cuts windfall taxes on fuel exports as global prices fall’, The Economic Times. Available here.
[2] ‘Govt slashes windfall tax on fuel export, domestic crude oil’, Press Trust of India. Available here.
[3] ‘Govt considers windfall tax on oil and gas giants’, Hindustan Times. Available here.
[4] Ibid.
[5] Govt cuts windfall tax on fuel export, raises levy on domestic crude oil, Business Standard, Available here.
In the last quarter, the global economic market witnessed a manifestation of the effect digital assets and Web 3.0 have had on the overall market cash flow.
Venture capital investments in fintech and crypto projects native to the metaverse and Web 3.0 have already touched USD 10 billion globally.[1] The majority of the investments were made in crypto and non-fungible token (NFT) exchanges, decentralized financial applications, and token issuers.[2]
Currently, Indian stakeholders are grappling with the issue of inadequate regulation in the Web 3.0 space. Indian policymakers have not developed a law for regulating Web 3.0 despite it being in the pipeline for more than two years. Although tax implications and advertising standards have been deliberated upon and decided, the lacuna in the Indian legal regime needs the attention of stakeholders and lawmakers. During the Web 2.0 phase, India was unable to participate in policy making for internet governance due to limited consumption heft and foreign innovation.
Today, India is striving to position itself as an authority in the blockchain space by leveraging the local brainpower and consumer base. While NFTs indeed emerged as an extension of celebrity identities in India, today its presence is felt across industries. Entities such as GaurdianLink, MakeMyTrip and Lakme Fashion Week are also dabbling into NFT collectibles. However, the prevailing regulatory grey zones in the intellectual property laws, finance rules, securities laws and cybercrime laws call for the immediate action of Indian policymakers to implement enabling and safeguarding provisions. Given the lack of regulations and policy grey zones, investing in digital assets such as NFT is fraught with challenges, requiring careful consideration and due diligence.
NFT are cryptographic assets on a blockchain. Creators in the Web 3.0 space can attain a license for recreation and use from the copyright owner of the original artwork. However, the original NFT owner retains the copyright in the original digital asset. Essentially, the license enables an NFT license to manipulate and capitalize on the artwork digitally. On the other hand, the original NFT owner can invest and capitalize on the growth of the NFT through existing brand identities such as trademarks, logos, characters, books, movies, music, illustrations, etc.
In layman’s terms, even if you manage to buy an NFT license, you are still not automatically permitted to manipulate the artwork licensed or sell anything related to the said NFT. The original owner’s consent plays a key role in establishing the scope and nature of the rights enjoyed by an NFT license owner.
It is pertinent to design an NFT license agreement to fit your specific needs despite there being certain boilerplate smart contracts being used by key industry players. In exercising the IP rights by NFT owners, any transfer, sub-licensing or assignment and terms for such transfer, sub-license or assignment must be chalked out with specific attention to the terms of the original license. In certain cases, original owners may limit the scope of control over modification of the original digital asset and what may be combined with the said digital asset.
For instance, NFTs can be created in multiple layers within the same artwork, where each layer is made by different artists and then individually tokenized. Furthermore, it can also be programmed to change its layers based on certain triggers. These characteristic features of NFTs may lead to some undesired usage of the original owner’s IP that can only be prevented by explicit limitations in the smart contract which governs the digital asset’s usage.
Under the Copyright Act, 1957, for any assignment of copyright to be valid, such assignment will have to necessarily be in writing and signed by the assignor or his/her duly authorized agent, specifying the rights, duration and territorial extent of such assignment. NFT owners can, in addition to ownership rights, include terms on how subsequent purchasers may attain ownership of the subject matter NFT and select the marketplaces (open, curated or proprietary) on which their NFT can be resold.
The NFT license can prescribe specify the rights and restrictions on displaying, copying and usage of the NFTs. A general use license usually assigns a worldwide, non-exclusive, non-transferable, royalty-free license to use, copy and display the same, whereas a commercial use license can be crafted to allow the purchaser to commercially exploit the NFT. NFT owners and creators can also opt to include terms prescribing fees and royalties associated with the initial and subsequent sale of the NFT.
Decentralized finance (De-Fi) is under threat of fraudulent and money laundering activities due to the nature of blockchain technologies. De-Fi-related hacks have hiked 2.7 times in 2021 from 2020.[3] From human trafficking and terrorist financing to drug trading, cryptographic money laundering has harrowing effects. The highly lucrative market for NFTs coupled with anonymity could potentially become an avenue for money laundering and other illegal funds transfers, if not already. At present, there is no generally accepted standard for monitoring the flow of assets in the digital space despite the potentially catastrophic risks it may result in.
The Prevention of Money Laundering Act, 2002 prohibits all forms of private cryptocurrencies. However, it fails to prescribe the technologies that fall under the scope of the term “cryptocurrencies” and what aspects of the same will constitute a violation of the law. However, the Ministry of Corporate Affairs as of 24 March 2021 mandated all listed and unlisted companies to declare all cryptographic transactions in their balance sheets effective 01 April 2021 by inserting item (xi) in Paragraph 5 of Schedule III, Part II of the Companies Act, 2013. On the other hand, policymakers need to notify virtual asset providers as “Reporting Entities” under the Prevention of Money Laundering Act, 2002 and stipulations to upgrade reporting requirements needs to be prescribed.
In a recent case of Hitesh Bhatia v. Mr. Kumar Vivekanand[4], the Delhi High Court, in dealing with cryptocurrency transactions, held that cryptocurrency transactions shall comply with the general laws in India such as Prevention of Money Laundering Act, 2002, Indian Penal Code, Narcotic Drugs and Psychotropic Substances Act, 1985, Foreign Exchange Management Act, 1999, Tax laws and all RBI regulations relating to Know Your Customer, Combating of Financing of Terrorism compliance guidelines[5], and Anti-Money Laundering requirements. While the Court did not adjudicate on the issue of the legality of cryptocurrencies, the observations made in the instant case pave a path for effective navigation of regulatory discourse associated with such complex technologies and will by extension apply to NFT transactions as well.
It is reported that cryptocurrencies worth USD 5.2 billion could be stolen in 2022.[6] Hackers use stolen private keys and passwords attained through security breaches caused by software bugs to access crypto funds. While establishment of identity will create more secure platforms for virtual interactions, private players face uncertainty due to the ever-evolving data privacy regulations and their enforcement owing to the nascent stage at which the law currently. Another concern that arises is the loss of data since all data is stored virtually. A blockchain may be operated anonymously, thereby increasing the risk of compromised and hacked accounts resulting in long-lasting damage and loss of data for account-holders. In such a situation, the ability to anonymously operate the blockchain becomes a problematic feature.
Industry stakeholders will need to conduct background checks to verify the integrity of the seller’s ownership rights and the authenticity of the online marketplace. Players are advised to conduct transactions only with verified sellers on reputed platforms.
At the moment, from a regulatory perspective, policymakers are split-minded, but it is clear more policies to incentivize digital assets are needed. The first step toward a novel framework to regulate NFTs is the creation of a definition. The definition needs to be wide enough to accommodate the various sub-classes of virtual assets that currently exist and may be invented in the future.
It is at this juncture that Indian entities such as the RBI, SEBI and the Ministry of Finance can undertake joint regulation of the NFT space and position India as an industry standard-setting nation. A coordinated approach will also ensure that the convoluted issues relating to crypto-assets are adequately addressed. These entities, in consultation with the legislature and industry experts, can deliberate regulatory concerns and introduce forward-thinking policies and protocols.
Until the implementation of appropriate NFT regulations and policies in India, stakeholders will do well to be mindful of potential pitfalls in transacting in NFTs and should consider taking adequate protective steps, such as conducting thorough client / customer due diligence to ensure the legitimacy of the transacting party and title in NFT assets and ensuring detailed contractual terms tailored to their unique needs instead of solely relying on boilerplate smart contracts available on mainstream platforms.
[1] Venture Capitalists Catch Crypto Fever, Stampeding Towards Web 3.0, NDTC Profit.
[2] Ibid.
[3] “DeFi Has Accounted for Over 75% of Crypto Hacks in 2021”, CoinDesk.
[4] Hitesh Bhatia v. Mr. Kumar Vivekanand, Case No. 3207/2020.
[5] Master circular of RBI dated July 1, 2013.
[6] “DeFi-fo-fum: hackers find new ways to gobble up crypto”, Economic Times.