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This Blog has been written by S. Vishal Varma

INTRODUCTION

The words “mergers” and “acquisitions” refer to the combination of businesses or assets via different kinds of transactions. Mergers and acquisitions are mostly used interchangeably in practice but they have their own set of differences. A merger refers to the consolidation of two or more entities into a single entity where the ownership and control of the previous entities will be transferred to the new entity. The recent consolidation of Vodafone India and Idea Cellular Network into a new company ‘Vi’ is a recent example of merges[1]. On the other hand, acquisitions refer to the takeover of one or more companies by a company and confirm itself as the new owner. The purchase of one by another company is called an acquisition. Unlike mergers, an acquisition does not give rise to a new entity. In acquisition, the transferee is acquired by the transferor company.

CROSS-BORDER MERGERS AND ACQUISITIONS:

Cross-border Mergers and acquisitions are a concept where the companies of different countries will get merged or acquired into one. In essence, these cross-border mergers and acquisitions include agreements between both domestic and foreign companies in the target nation. The trend of Cross- border mergers and acquisitions has raised with the globalization of the world economy.[2]

The concept of cross-border merger has been raised in its numbers as the time passes and currently, Indian companies are more common to cross-border mergers and acquisitions than other countries. TATA Steel acquiring the US based company Corus is an example of cross-border merger.[3]

1. Inbound Merger: A cross-border merger where the resultant company is an Indian Company and where the foreign company is considered as a branch office of the Indian Company is called an Inbound Merger.
2. Outbound Merger: A cross-border merger where the foreign company becomes the resultant company as a result of the merger is called an outbound merger.

ADVANTAGES OF CROSS-BORDER MERGERS AND ACQUISITIONS:

1. Foster Entry Growth: When an Indian company is merging with any foreign company then this Indian company is also entering the foreign markets where the merged company resides or operates. Thus, cross-border mergers will smooth entry into other markets.
2. Increase in Market Share: A merger increases the scale of the company which in turn raises its value in the market. As the proportion of the share of the company in the market will be increased as a result of merger or acquisition, its share price may also increase and also helps the merged companies to reduce their costs and achieve a better position in the competition, thus it increases the market share of the company.
3. Resource Sharing: A company can use the resources of the merged company based on the proportion of their merger agreement. Also, an acquired company, when it acquires a company it is also deemed to acquire the resources of the target company. Thus, sharing of resources helps the companies to have greater force in their operations.
4. Increased economies of scale: Cross-border mergers or acquisition leads to mass production thus leading to the operation on a larger scale. The size of the company raises the market share of the company and also has an advantageous position in the market.

CHALLENGES:

1. Cultural Differences: Every country has its own set of cultures and different behaviour toward different products. It is necessary to cope with such differences and should operate in markets of merged or target companies keeping in view the interest of the customers and workforce. Failure to maintain proper balance on the cultural differences leads to the losses of the company.
2. Complexities due to bankers, lawyers, regulations etc.: In cross-border mergers and acquisitions there involves a lot of documentation and compliance. Any failure of such regulations leads to hefty penalties. In such mergers and acquisitions, the currency and banks of the countries vary and have their own set of laws and thus it becomes a hindrance to the acquirer company or the merging company.
3. Legal and Regulatory differences: cross-border M&A transactions involve navigating different legal and regulatory systems, which can be complex and time consuming. Companies must ensure compliance with local laws, regulations and tax policies which can vary significantly across borders.

MERGERS

A merger strategy is a business term that refers to the strategies and tactics that companies or firms use to align their interests in which the ownership or control of two or more entities was not previously under a single ownership. It is a special type of acquisition in which two or more entities join together to form a larger entity. Mergers can take place in different contexts with varying degrees of intensity. The term merger is not defined in the Companies Act, 2013 but in the general sense it is used to define the consolidation of companies into a single entity to carry on business. Mergers can be done in various ways.

1. Horizontal Mergers: When two or more competing companies or any companies that are in same line of the market, merge into one company to get the benefit over the competition is considered as horizontal merger.
2. Vertical Mergers: It is a consolidation of two or more companies that are not competing but are involved in the same line of transactions in their respective markets. The entities merging are involved in different levels of the same transaction or market. Such a merger reduces the operations transportation warehouse and other related costs and can also achieve an advantageous position in the market.
3. Roll-up Mergers: It’s a type of horizontal or vertical merger. Roll-up Merger’s legitimate definition is consolidating or joining different small organizations into an enormous element that is better situated for economies of scale or the upper hand. Rollup strategy involves the process of acquiring small organizations in the market and consolidating them into a single larger organisation.[4]

ACQUISITIONS

Acquisition by definition is the acquisition of one company by another company with different owners. The Acquisition means direct investment to purchase an existing company.

There are 2 types of acquisition:

1. Friendly acquisition: It is a type of acquisition where the acquisition of the company will be done by the consent of its members, shareholders, creditors etc. The transferor company will provide an offer to the target company to acquire it and merge the transferee company in it.
2. Hostile Acquisition: In this acquisition the transferor company will acquire the ownership or control of the company without the will of the target company.

INDIAN LAWS GOVERNING CROSS-BORDER MERGERS AND ACQUISITIONS

In order to encourage cross-border mergers and acquisitions, India has put certain rules and regulations into place. Cross-border mergers and acquisitions are primarily regulated under Corporate Laws, Tax Laws, Foreign Exchange laws and any other laws that apply to merger structures:

CORPORATE LAWS:

a) Companies Act, 2013:

Sections 230 to 232 of the Companies Act, 2013 include the requirements for domestic mergers, while Section 234 of the Act, along with Rule 25A of the Companies (Compromises, Arrangements and Amalgamations) Rules of 2016, covers cross-border mergers and acquisitions.

Section 234 of the Companies Act states that domestic mergers shall apply mutatis mutandis to cross-border mergers and acquisitions between Indian companies and Foreign Companies as notified by the Central Government. According to this provision, a foreign company can merge with an Indian Company registered under this Act with the prior approval of RBI and the companies are obligated to provide the terms and considerations of the merger or acquisition.[5]

Rule 25A of Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 states that an Indian Company may merge with a foreign company subject to compliance under Sections 230 to 232 along with the prior approval of RBI provided that such foreign companies must be incorporated under the jurisdictions specified in Annexure B.

b) SEBI (SAST) Regulations, 2011:

The SEBI (SAST) Regulations on cross-border mergers and acquisitions aim to provide a level playing field for Indian companies and protect the interests of Indian shareholders. The regulations also provide clarity and transparency in the process of cross-border mergers and acquisitions in India.

• The regulations apply to all acquisitions of shares, control or voting rights in a listed Indian company by a foreign company, including a merger or amalgamation with a foreign company.[6]
• The regulations prescribe different thresholds for open offers for different categories of companies. The acquirer is required to make an open offer for 26% of the share capital but can increase its shareholding up to 75% without making any further open offers. Additionally, when the acquirer buys more than 5%, compulsory disclosure of the total ownership is required.[7]
• The regulations require prior approval from SEBI for any acquisition of shares or control in a listed Indian company by a foreign company.
• The regulations also require the acquirer to make certain disclosures, such as the details of the acquisition, the acquirer’s shareholding, and the purpose of the acquisition, among others.

c) Competition Act, 2002:

The regulatory body responsible for outlawing anti-competitive agreements, abusing dominant positions, and fostering market competition is the Competition Commission of India (CCI). The CCI has the power to regulate combinations and prescribe necessary changes in their proposed combinations.

• Section 2(a) defines the term acquisition as an agreement to buy shares, voting rights or other assets of the target company.
• Section 5 empowers the CCI to make an investigation on whether the combination has any appreciable adverse effect on competition and section 20 of the Act deals with the mode of inquiry
• The restriction on combinations that have or are expected to have a appreciable adverse effect on competition is covered under Section 6(1).
• Section 6(2) mandates the companies to provide prior notice along with relevant information to the CCI regarding the combination within 30 days
• Section 31 empowers the CCI to provide necessary orders on combinations either to approve the combinations or reject the proposed combination or may suggest modifications to prevent the combination from the adverse effect on competition in the market.

FOREIGN EXCHANGE LAWS

a) Foreign Exchange Management Act (FEMA), 1999:

Using the powers granted under Section 234(1) of the Companies Act, 2013, the Central Government has issued the FEMA Cross-border Merger Regulation, 2018, to regulate the process of cross-border mergers. The regulations that are involved are as follows:

• FEM (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2017,
• FEM (Transfer or issue of any foreign security) Regulations, 2004,
• FEMA (Establishment in India of a branch office or a liaison office or a project office or any other place of business) Regulations, 2016 etc.

b) RBI Act:

RBI has also proposed cross-border merger transactions under Companies (Compromises, Arrangements and Amalgamation) Amendment Rules, 2017 to address the issues that arise from the merger or acquisition between Indian and Foreign Companies.[8]

TAX LAWS

Income Tax Act, 1961 deals with the concept of amalgamation and demerger. The Income Tax Act’s Section 2(1B) defines amalgamation as the joining of two or more companies to create a single company. Mergers and acquisitions have been provided exemption under the head of Income from Capital Gains under section 47 of the Act, arising under indirect transfer of shares due to the merger or demerger of foreign companies. However, this benefit is applies only to an inbound merger.

Subject to the requirements of Section 72A (4) of the IT Act, cross-border demerger occurs when one or more undertakings of a company are transferred to a different entity overseas as a going concern, either to establish a new business or to merge with the current entity.

REGULATION OF CROSS-BORDER MERGERS AND ACQUISITIONS IN UK

The Companies Act of 2006 is one of the primary laws controlling M&A transactions in the UK. This act sets out the legal framework for mergers and acquisitions in the UK and applies to both domestic and cross-border transactions.

a) UK Companies Act, 2006:

Under the Companies Act 2006, cross-border mergers can take place between companies registered in different EU member states, or between UK companies and companies registered in EEA countries. The act outlines the requirements for such mergers, including the need for a cross-border merger plan, approved by the shareholders of both companies and the appointment of an independent expert to prepare a report on the merger.

Chapter 2 Part 27 of the Act deals with the concept of mergers and its requirements. [9]Section 1113 of the Act deals with the Enforcement of the Company’s filing obligations.[10]

After Brexit, UK revoked the Companies (Cross-border mergers) Regulations, 2007 along with its amendments of 2008 and 2015 are revoked.

b) Competition Act, 1998:

Competition Law: Cross-border mergers and acquisitions in the UK are subject to the provisions of the Competition Act 1998, which prohibits anti-competitive practices such as abuse of market dominance, price fixing, and collusion. Section 3 of Part I Chapter I of the act expressly exempts mergers from prohibitions. [11]The UK Competition and Markets Authority (CMA) is responsible for enforcing these laws and may intervene in mergers and acquisitions to prevent anti-competitive behavior.[12]

Schedule 2 of the Competition Act states that when a merger takes place for the purpose of Part V of Fair Trading Act or Part 3 of Enterprises Act, then prohibitions under Chapter I do not apply to such mergers. The word ‘any two enterprises’ under this schedule is wider and thus it applies to cross-border mergers.

c) Takeover Code:

The Code’s main focus is on controlling takeover offers and merger transactions of the relevant corporations, regardless of the way they are carried out, including through statutory mergers or schemes of arrangement (as specified in the Definitions Section). In accordance with Article 2 of the Companies (Takeovers and Mergers Panel) (Jersey) Law 2009 (the “Jersey Law”), a Panel has been established to carry out specific regulatory duties relating to takeovers and mergers under Jersey law.[13]

d) National Security and Investment Act:

Chapter 3 states that any acquisition made without the approval of the Secretary of State is considered void. [14]The Secretary of State is empowered with the power to give notice in cases of suspicion that might trigger the national security. [15]Thus, the UK government has increased its scrutiny of mergers and acquisitions involving companies in certain sectors that are deemed to be of strategic importance to the national security. To safeguard national security interests, the government has the authority to prohibit or place restrictions on such transactions.

e) Tax Laws:

Cross-border mergers and acquisitions may also be subject to UK tax regulations, including rules governing the taxation of capital gains, the transfer of intellectual property, and the use of tax havens.

REGULATION OF CROSS-BORDER MERGERS AND ACQUISITIONS IN USA

Cross-border mergers and acquisitions (M&A) in the United States are subject to various laws and regulations that govern the process. Cross-border M&A is subject to a number of important rules and regulations in the United States, including:

a) Clayton Act:

The Sherman Act’s basic restrictions are expanded upon by the Clayton Act, 15 U.S.C. 12 et seq., which also targets early-stage anti-competitive issues. Section 7 of the Clayton Act forbids mergers and asset purchases where “the effect of such acquisition may be used to reduce competition or to attempt towards establishing a monopoly, in any line of commerce or anything affecting it in any part of the country.[16]

b) Hart–Scott–Rodino Antitrust Improvements Act (premerger notification):

It is a set of amendments in antitrust laws of the state. For specific mergers and acquisitions, it requires that the corporations notify the Federal Trade Commission and the Justice Department’s Antitrust Division prior to the transaction. The Bureau of Competition is committed to the duty of preventing mergers or acquisitions that affects the competition in the market.[17]

c) Foreign Investment and National Security Act (FINSA):

The Committee on Foreign Investment in the United States (CFIUS) is empowered under the federal statute known as FINSA to assess and approve or disapprove foreign investments in US companies that might endanger national security[18]. The CFIUS may assess cross-border M&A deals involving foreign investors. The US government has passed certain legislations which empower federal agencies in foreign investments that pose risk to national security.[19]

d) Securities Exchange Act of 1934:

This federal law regulates securities transactions and requires companies to make various disclosures related to M&A transactions, such as tender offers, proxy solicitations, and disclosures of material information. Regarding both domestic and international mergers and acquisitions, the Securities and Exchange Commission has established two regulations. “Cross-border Release” facilitates participation in cross-border tenders and exchange offers, mergers and equivalent transactions, and rights offerings for holders of U.S. securities of foreign businesses. The regulation M-A Release governs the tender offer.[20]

Final Rule: The SEC issued exemptive rules on cross-border tender and exchange offers, business combinations, and rights issues involving the stocks of foreign corporations from the Securities Act’s registration requirements. The exemptions’ main goal is to make it easier for American investors to participate in these kinds of transactions.[21]

e) Tax laws:

Cross-border M&A transactions may have significant tax implications, including issues related to the tax treatment of assets, income, and gains, as well as transfer pricing and other international tax considerations. Companies engaged in cross-border M&A transactions in the US need to comply with federal and state tax laws, including the Internal Revenue Code and relevant tax treaties.

f) Foreign Corrupt Practices Act (FCPA):

The FCPA is a federal law that prohibits US companies from engaging in bribery and other corrupt practices when conducting business abroad, including in the context of cross-border M&A transactions. US companies engaged in cross-border M&A transactions need to ensure compliance with the FCPA, which includes anti-bribery and accounting provisions.[22]

g) State laws:

In addition to federal laws, cross-border M&A transactions in the US may also be subject to state laws. Each state has its own laws and regulations governing corporations, limited liability companies, and other business entities, which may impact the process and requirements for M&A transactions.

COMPARATIVE ANALYSIS

India’s regulations for cross-border M&A are governed by RBI and the Companies Act. The RBI governs foreign exchange regulations while companies act deals with the process of mergers and acquisitions. Whereas the UK’s regulations on cross-border M&A are enforced by Financial Conduct Authority (FCA) and Takeover Panel. The FCA deals with the conduct of companies and the Takeover panel regulates M&A activities. The USA’s regulations are enforced by the Securities and Exchange Commission (SEC), Department of Justice and the Federal Trade Commission, where the SEC regulates financial disclosures and the DOJ and FTC regulate antitrust and competition issues.

The process of regulatory approval for cross-border mergers and acquisitions also differs across these countries. In India, the approval is granted by the National Company Law Tribunal (NCLT) and RBI. The approval in UK granted by the Financial Conduct Authority and the Competition and Markets Authority. On the other hand, the SEC and the Department of Justice’s Antitrust Division approve transactions in the USA.

The tax implications of cross-border mergers and acquisitions are different in each of these countries. In India, there are specific tax rules that apply to cross-border deals. Her Majesty’s Revenue and Customs (HMRC) takes charge of the tax repercussions in the UK. While in the USA, the Internal Revenue Service (IRS) is in charge of overseeing the tax ramifications.

The practice of doing due diligence is crucial to cross-border mergers and acquisitions. In India, the acquirer usually undertakes the due diligence procedure. In the USA, the due diligence process is more detailed, with the target company required to provide detailed financial and other information. In the UK, the due diligence process is also thorough, with the acquirer required to carry out extensive checks.

The disclosure requirements for cross-border mergers and acquisitions also vary in these three countries. In India, the Companies Act, 2013 mandates companies to disclose all material information related to the merger or acquisition to their shareholders. The Securities Exchange Act of 1934 and the Securities Act of 1933, both of which apply in the USA, impose obligations on businesses to disclose certain significant information to shareholders and to register securities offerings with the Securities and Exchange Commission. In the UK, the Takeover Code sets out rules regarding the disclosure of information to shareholders.

Cross border mergers and acquisitions are complex transactions that require careful consideration of the regulations in each jurisdiction. Companies must be aware of the legal and regulatory requirements in India, UK, and USA to ensure compliance with the relevant laws and regulations. One key consideration is the protection of national security interests, which can lead to restrictions on foreign ownership or control of certain industries or assets. Another important factor is competition law, which aims to prevent anti-competitive behavior and maintain a level playing field in the market. Overall, the regulations surrounding cross-border M&A are multifaceted, but they play an important role in promoting fairness, transparency, and accountability in the global business environment.

To know more about Mergers and Acquisitions, enrol for Master Course in Corporate Laws.

[1] https://www.myvi.in/content/dam/microsite/pdfs/schemeofamalgamation/VILBeginsOperations.pdf

[2] https://www.apec.org/docs/default-source/Publications/2002/7/A-Review-of-CrossBorder-Mergers-and-Acquisitions-in-APEC-2002/02_cti_ieg_ma.pdf

[3] https://www.tatasteel.com/media/newsroom/press-releases/india/2007/tata-steel-completes-62bn-acquisition-of-corus-group-plc/

[4] https://corporatefinanceinstitute.com/resources/knowledge/deals/roll-up-strategy/

[5] https://www.indiacode.nic.in/show-data?actid=AC_CEN_22_29_00008_201318_1517807327856&orderno=238#:~:text=(2)%20Subject%20to%20the%20provisions,things%2C%20for%20the%20payment%20of

[6] https://www.sebi.gov.in/legal/regulations/nov-2022/securities-and-exchange-board-of-india-substantial-acquisition-of-shares-and-takeovers-regulations-2011-last-amended-on-november-9-2022-_64907.html

[7] https://www.sebi.gov.in/acts/tkreg.html

[8] https://www.rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=40288

[9] https://www.legislation.gov.uk/ukpga/2006/46/contents

[10] https://www.legislation.gov.uk/ukpga/2006/46/section/1113

[11] https://www.legislation.gov.uk/ukpga/1998/41/section/3

[12] https://www.legislation.gov.uk/ukpga/1998/41/part/I/chapter/III

[13] https://www.thetakeoverpanel.org.uk/wp-content/uploads/2023/02/The-Take-Over_Bookmarked_20.2.23.1.pdf?v=20Feb2023

[14] https://www.legislation.gov.uk/ukpga/2021/25/section/13/enacted

[15] https://www.legislation.gov.uk/ukpga/2021/25/section/1/enacted

[16] https://www.justice.gov/atr/antitrust-enforcement-guidelines-international-operations

[17] https://www.ftc.gov/enforcement/merger-review

[18] https://www.congress.gov/110/plaws/publ49/PLAW-110publ49.pdf

[19] https://www.cfr.org/backgrounder/what-happens-when-foreign-investment-becomes-security-risk

[20] https://www.sec.gov/news/extra/regmafaq.htm

[21] https://www.sec.gov/rules/final/33-7759.htm

[22] https://www.justice.gov/criminal-fraud/foreign-corrupt-practices-act

This blog has been authored by Gandham Lavanya

INTRODUCTION:

The advancement of technology is changing many facets of people’s life. In the legal profession, disruptive technology is also fostering improved accountability and reducing the length of litigation. The digitalization of the legal system was also greatly accelerated by the Covid-19 epidemic. Court sessions were held through video conferencing, and India’s top courts converted to electronic filing. However, the pandemic did not cause all of these breakthroughs. When the “e-Court Project,” a project under the National e-Governance Plan, was announced in 2007, the process of digitizing Indian courts got under way.[1]

All District and Subordinate Court complexes are intended to be completely computerized and ICT-enabled as part of the e-courts Mission Mode Project, which is being carried out by the Department of Justice in close collaboration with the e-committee of the Supreme Court of India[2]. The Artificial Intelligence Committee was created by the Indian Supreme Court to examine how AI is used in the legal system. The three primary applications for AI technology that this committee has identified are process automation, assistance with legal research, and translation of legal documents. Despite the second phase of the e-courts having been under development since 2015, AI technology has not been applied there.[3]

The use of artificial intelligence (AI) in the legal system has been the subject of extensive discussion in recent years. Artificial intelligence (AI) may be used to carry out a range of legal tasks, including document analysis, legal research, and case outcome prediction. Artificial intelligence (AI) has the potential to increase accuracy and efficiency in the legal business, lowering costs and enhancing access to justice.

AI IN CIVIL CASES:

The use of AI in civil proceedings, however, is particularly challenging in India. India’s legal system is complicated and varied, with a vast variety of laws, courts, and legal procedures. It is important to carefully weigh the potential benefits and challenges of utilizing AI in this situation. Beyond attorneys and judges, the general public may increase its participation with and comprehension of the law by using research and analytics technologies that are widely available. The goal of this participation is to develop more informed, pro-government citizens.[4]

By assisting judges with their decision-making, relieving the strain on attorneys, and improving public access to justice, artificial intelligence (AI) technology has the potential to change the legal system. AI can help with case prediction, document appraisal, contract analysis, and legal research. AI may assist in resolving disputes by providing mediation and arbitration services.

AI can assist in reducing case backlogs and improve judicial efficiency[5]. The large number of instances could appear to be reduced with the help of AI, but like any machine, it has its limitations. Only a small portion of the Indian legal system may be automated using artificial intelligence (AI) because of the complexity of the Indian judicial framework, which is composed of several laws, including civil, consumer, and criminal laws. Criminal law may employ AI to detect crime tendencies. But it is impossible to generalize AI to all criminal laws since every criminal case has a different set of circumstances. Therefore, it is difficult for AI robots to collect every piece of data. Although there are several applications of AI for assisting lawyers and judges with comprehension, such as expert systems, natural language processing, and language translation. It’s crucial to thoroughly consider the possible advantages and difficulties of applying AI in this case[6].

To know more about the regulation of AI, enrol for Certificate in Artificial Intelligence and Law. 

HOW ARTIFICIAL INTELLIGENCE CAN BE IMPLEMENTD IN INDIA:

Artificial intelligence (AI) has the power to profoundly alter the legal system by automating time-consuming, repetitive operations, enhancing decision-making, and increasing efficiency. Several examples of how AI is already being used in the legal industry are provided below, legal investigation AI-powered tools can analyze enormous amounts of legal data, including case law, legislation, and regulations, to help attorneys identify essential information more quickly and correctly. In addition to saving time and costs, this can improve the quality of legal research[7].

The overwhelming amount of cases that are still outstanding across India, where the same information has been made available on the National Judicial Data Grid (NJDG) website[8], is the system’s fundamental issue. The question that now arises is: Can artificial intelligence be utilized to expedite the legal system by lowering the backlog of cases? The answer might be somewhat yes or partially no.

To examine the use of AI in the judicial sector, the Supreme Court of India formed the Artificial Intelligence Committee and has offered a wide variety of prospective applications. The second phase of the e-courts projects, which have been operational since 2015, is being implemented, and law minister Kiren Rijiju stated that it was necessary to use new, cutting-edge technologies like machine learning and artificial intelligence to improve the effectiveness of the justice delivery system[9].

STEPS TAKEN SO FAR BY SC:

SUPACE: Supreme Court portal for aiding court efficiency; includes measures being made in the Indian judicial system as part of adopting ML-based applications. It may prepare a legal brief. Judgments are translated using a programme for language learning called the Supreme Court Vidhik Anuvaad Software (SUVAS). An AI-based technique to automate the reading of court judgments was published in 2020 by researchers at IIT Kharagpur. Software called SCI-Interact is used to make SC benches paperless.

POSITIVE IMPLICATIONS OF USING AI:

• Improvements in Access to Justice:

AI can help cut down on the amount of cases that are waiting in Indian courts. Judges and solicitors can more easily analyze, evaluate, and interpret data thanks to the technologies’ ability to quickly locate critical information from vast quantities of legal documents. As a consequence, disputes may be settled more rapidly, cutting down on the amount of time needed to resolve cases, which can save the court money and lower the expense of litigation for the public.

• Making Decisions More Efficiently:

AI can look at a lot of data and analyze trends that human specialists occasionally overlook. Judges and solicitors can provide more accurate outcomes by making clear and informed decisions.

• Efficiency gains:

AI-powered systems can analyses massive volumes of data quickly and accurately, saving time and effort on legal tasks. As a result, everyone may have better access to the court system and the legal system may function more effectively.

• Savings:

Litigation expenses can be lowered by automating routine legal tasks like document examination and analysis. As a result, both litigants and the court system may see significant cost savings.

CHALLENGES:

• Bias:

Artificial intelligence (AI) systems may reinforce prejudicial attitudes already present in the legal system, producing biased outcomes. This is especially true in India, where the legal system already treats marginalized communities unfairly. Analysing the training data and techniques employed by AI systems in detail is crucial to lowering this risk.

• Lack of Transparency:

AI systems are frequently secretive, making it challenging to comprehend how judgements are made. The judicial system may become less trusted as a result of this lack of openness.

• Limited Data Availability:

In order for AI systems to function properly, they need a lot of data. It is difficult to adopt AI-powered systems successfully in India since there is a dearth of digital data in the judicial system.

• Ethical Issues:

The employment of artificial intelligence in civil disputes poses ethical issues related to privacy, autonomy, and accountability. To guarantee that AI is utilized in a responsible and ethical manner, careful examination of these issues is required.

• Job Losses:

Lawyers and paralegals may lose their jobs as a result of the use of AI in civil trials, as these professionals may be replaced by AI systems. The legal industry, as well as the general economy, may suffer as a result.

CAN ARTIFICIAL INTELLEGENCE REPLACE THE LAWYER?

By enhancing the speed, accuracy, and efficiency of numerous legal operations including contract review, legal research, and document analysis, artificial intelligence (AI) has the potential to completely change the legal sector[10]. AI won’t likely completely replace attorneys, though.

While AI is capable of carrying out a variety of legal duties, such as document assessment, it is yet unable to give legal advice or make strategic judgements based on intricate legal and ethical issues[11]. Additionally, legal issues sometimes include complex events and human emotions that AI might not be able to manage well.

A human touch is also necessary in the legal profession since tasks like client counseling, bargaining, and courtroom representation cannot be performed by AI. It’s doubtful that AI will ever entirely replace attorneys in the foreseeable future. Although artificial intelligence (AI) technology has advanced significantly in recent years and can be used to automate some operations, such as legal research, document review, and contract analysis, it lacks the human judgement, creativity, and interpersonal skills that are required for many legal duties.

There are around 47 million pending cases in the courts and more cases are added every year[12]. A wide range of duties that need legal expertise, analytical prowess, and judgement are also included in the legal profession. These activities frequently need attorneys to apply legal concepts to particular and complicated factual situations, which can be challenging for AI to execute properly and efficiently. Although AI can be a beneficial tool for attorneys to boost productivity and efficiency, it is doubtful that AI will totally replace lawyers. On the other hand, as AI technology develops, it may be more fully incorporated into the legal industry and alter the way attorneys practice

CONCLUSION:

By enhancing productivity, accuracy, and justice access, the application of AI in civil matters in India has the potential to completely alter the way the judicial system operates. However, there are certain moral and legal issues that must be resolved, such as prejudice and discrimination, a lack of openness, issues with privacy, job losses, and access to justice. To make sure that AI systems are created and used in a way that supports fairness, accountability, and social justice, the legal community, legislators, and technologists must collaborate.

To know more about the regulation of AI, enrol for Certificate in Artificial Intelligence and Law. 

[1] https://analyticsindiamag.com/the-power-pitfalls-of-ai-in-indian-justice-system/

[2] https://singhania.in/blog/assessing-the-intelligence-of-the-artificial-intelligence-in-law-prospects-in-india-

[3] https://pib.gov.in/PressReleaseIframePage.aspx?PRID=1907546

[4] https://vidhilegalpolicy.in/wp-content/uploads/2021/04/Responsible-AI-in-the-Indian-Justice-System-A-Strategy-Paper.pdf

[5] https://indiaai.gov.in/article/ai-in-judicial-systems

[6] https://indianexpress.com/article/explained/explained-law/ai-is-transcribing-sc-proceedings-how-is-it-happening-and-why-8458492/

[7] https://njdg.ecourts.gov.in/njdgnew/index.php

[8] https://njdg.ecourts.gov.in

[9] https://p2ib.gov.in/PressReleaseIframePage.aspx?PRID=1814536

[10] https://blog.ipleaders.in/impact-artificial-intelligence-legal-system/

[11] https://www.scconline.com/blog/post/tag/artificial-intelligence/

[12] https://blog.forumias.com/ais-best-use-case-may-actually-be-in-our-judicial-system/

 

This blog has been authored by Vivek J. Vashi

INTRODUCTION

Fashion has become an integral part of the modern Indian society.  People have developed a general affinity towards fashion trends to showcase their fashion sense by purchasing various products from brand names. Everyone wants to associate themselves with the latest fashion trends. Sometimes money becomes a constraint, so contrabands and copies of the original creations are purchased.

Fashion has become an essential part of people’s lives as it sets the tone for people to present themselves. Wearing or owning products of a particular brand corresponds with status, eminence, and desirability of an individual. Brands such as Louis Vuitton, Bulgari, Gucci, Prada, Hermes, Rolex, etc. are examples of brands known as ‘luxury brands’ that claim to bestow the wearer with a sense of power and prestige owing to their massive reputation. In the process of self-expression, many a times a design becomes famous and others start copying it resulting in a loss for maker of the original design. Counterfeiting is one of the most significant problems faced by the fashion industry. There are two types of counterfeiting prevalent in the fashion industry. Firstly, Deceptive, where the consumers are under the impression that the product is a genuine product, and secondly, Non-Deceptive, where the consumers are aware that they are buying a knock off product.[1]

One may find counterfeit products of famous brands selling counterfeit products through various trade channels including online portals or branded companies taking advantage of loopholes in law to copy and create products belonging to some other brand. E.g. On 8th December 2017, Nike (the famous brand) was awarded damages and a permanent injunction against a trader selling counterfeit goods using their Nike and Swoosh trademark. The damages were compensatory and punitive.[2] Also, the “Indian media was abuzz with the news of High Fashion brand, Christian Dior having allegedly plagiarised certain designs from a small, Indian art collective and store known as ‘People Tree’. According to reports – which carried allegations raised by the collective – Dior’s Cruise 2018 collection contained a dress that contained exact reproductions of the Block Printing designs created, and sold by ‘People Tree’ in India.”[3]

India is the second-largest market in the Asia Pacific, with retail e-commerce sales growth of 25.5 percent in 2022. Most consumers prefer to continue shopping online even after the COVID-19 pandemic due to an overall positive experience and convenience of online shopping.[4] The counterfeiters deceive the consumers by domain name squatting as the consumers shopping online are increasing. They make the shopping experience look original and professional so that the consumer does not question the counterfeiter’s authenticity. The counterfeiters also make fake reviews and manipulate the buying decisions of consumers while shopping online.[5] Apart from e-commerce portals, social media portals like Instagram, Facebook, WhatsApp and Telegram are utilised to sell counterfeit products. To limit the counterfeit products from appearing on online retail platforms, measures must be taken by the platform to destroy counterfeit products appearing on its online marketplace for the sake of law makers, brands, and consumers.[6]

Counterfeit industry poses a huge threat to the economy too (due to government’s loss of revenue), apart from posing huge challenges to the profits and brand values of the popular brands. The counterfeiting industry is colossal and has had a strong impact of about one lakh crore on the Indian economy.[7] Counterfeiting can have severe legal and economic consequences for the brand owners, as well as the consumers who unknowingly purchase counterfeit goods. This is called as wilful counterfeiting where buyers are aware of the counterfeit products and buy the same. For the brand owners in the fashion industry counterfeiting attributes to a large gap in the price between the original and the counterfeit products.  Thus, counterfeiting is the offence of manufacturing or distributing lower quality imitating goods under someone else’s name without their consent or permission.[8] A person is said to “counterfeit” who causes one thing to resemble another thing, intending by means of that resemblance to practise deception, or knowing it to be likely that deception will thereby be practised.[9]

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LEGAL EFFECTS OF COUNTERFEITING

Counterfeiting in the fashion industry can lead to several legal implications for both brand owners and consumers. Some of the legal implications of counterfeiting in fashion include:

1. Infringement of Intellectual Property Rights: Counterfeiting in the fashion industry involves the unauthorized use of trademarks, designs, and copyrights, which infringes the intellectual property rights of the legitimate owner of the brand. Under Indian intellectual property law, trademark infringement can result in civil and criminal liability, including damages and imprisonment.
2. Unfair Competition: Counterfeiting in the fashion industry can lead to unfair competition, as counterfeiters can sell their products at lower prices, taking away market share from legitimate brands. This can lead to a loss of revenue and reputation for legitimate brand owners.
3. Consumer Health and Safety: Counterfeit products in the fashion industry are often of poor quality and can pose a health and safety risk to consumers. Example: Counterfeit cosmetics can contain harmful chemicals that can cause skin and other health related problems. [10].

The Indian judiciary has dealt with several cases related to counterfeiting in the fashion industry. In the case of Christian Louboutin SAS vs. Nakul Bajaj And Ors.[11] the Delhi High Court has clarified the responsibility and liability of online intermediaries for infringement of trademark. The judgement has shed light on India’s intermediary liability regime as it relates to infringement of trademark. The Plaintiff is Christian Louboutin, the owner of the registered trademarks, including the single colour mark for its distinctive ‘red sole’. According to the plaintiff the products are sold in India only by authorized dealerships. The defendant is “darveys.com”, a website marketing itself as a ‘luxury brands marketplace’. The plaintiff in this case alleged trademark infringement against the defendant, by selling counterfeit products. The defendant argued that the goods which were sold were genuine and there was no infringement on its part because it was mere intermediary and is entitled to be protected by “Safe harbour” provision of Section 79 of the Information Technology Act, 2000.

In this case the Delhi High Court examined ‘intermediary’ under section 2(w) of the Information Technology Act, 2000 and discussed intermediary position in the European Union, the United States and in India. The court analysis was based on whether the role played by the defendant was neutral i.e., if the conduct was merely technical, automatic, and passive, pointing to a lack of knowledge or control of the data that it stored. The court examined various judgements and concluded that knowledge of infringement by intermediaries makes the liability shift. This was also stated in the Indian judgement of MySpace Inc. v. Super Cassettes Industries Ltd. [12]

The concept of constructive knowledge and the active knowledge was discussed. In the MySpace judgement, it was declared that even if the intermediary has a knowledge of the illegality happening in their website, then the intermediary does not need a court order to stop the counterfeited product or infringing product from using their intermediary service. The activities that happen even after a minimum knowledge of the infringement can be claimed to be of a sort of abiding by the infringement done by the third party and it would amount to the intermediary becoming liable. The defendant Darveys.com was exercising complete control over the products and identified the sellers, which enabled them actively, promoted them and sold the products in India. When an e-commerce website is conspiring, abetting, aiding, or inducing, or contributing to selling counterfeit products, it could be said to cross the line from being an intermediary to an active participant. In such a case, the website would be liable for infringement in view of its active participation. The position in MySpace judgement is in line with the position on intermediary liability in cases of copyright infringement adopted by leading international jurisdictions such as United States, particularly in the case of A&M Records, Inc v. Napster, relating to reasonable knowledge of infringement.[13]

At last, the court in Christian Louboutin case concluded that the defendant is more than an intermediary and exercised complete control over product being sold. Therefore, the conduct of intermediaries in failing to observe ‘due diligence’ with respect to Intellectual Property could amount to conspiring, aiding, abetting, or inducing unlawful conduct would disqualify it from the safe harbour exemption, as per Section 79(3)(a). Finally, the Court ordered that the intermediary must require its sellers to honour the warranties and guarantees provided by the plaintiff and must also remove all meta-tags containing the plaintiff’s mark.

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THE WAY FORWARD

In the recent years online platforms play an important role in facilitating the exchange of information at a scale. This allows spreading of all types of content, legal and illegal. The role of online platforms sometimes expands from hosting information to governing how content is shown and shared which raises pressing questions on role and responsibility of platforms in preventing criminals and other persons involved in infringing activities online from exploiting their services. Some platforms have self-regulation of the content however, arbitrary actions by online platforms could affect freedom of speech and expression. The challenge of regulatory framework for online platforms is to find the correct balance between enhancing the role of online platforms and government in detection, moderation and the need to ensure protection for users and their fundamental rights and freedoms.[14]

The Government of India has brought reforms to effectively curtail the trade of counterfeit products in the country. On 23 July 2021, the Department-related Parliamentary Standing Committee on Commerce presented the 161st report on “Review of the Intellectual Property Rights Regime in India” in the upper house (Rajya Sabha) of Parliament.[15] It acknowledged that counterfeiting and piracy are rising threats to IP rights and recommended specific legislation to curb counterfeiting and piracy in India. A separate Central Coordination Body on IP Enforcement was also recommended to facilitate coordinated efforts involving various ministries, departments and government agencies. The Government has formulated due diligence requirements for intermediaries to adhere to under the Information Technology Act, 2000 and the Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules, 2021 to safeguard itself for the information it holds or transmits. The intermediaries remain immune from liability unless they are aware of the illegality and are not acting adequately to stop it.  They are subject to ‘duties of care’ and ‘notice and take down’ obligations to remove illegal content.[16]

Approved on 12^th Match 2016, the Government of India has formulated the National IPR policy which is reviewed every 5 years for a vibrant IP regime. The National IPR Policy was formulated after intensive stakeholder consultation with nearly 300 organisations and individuals by an IPR Think Tank, as also 31 departments of the Government of India.[17]

Also, the courts in India are taking strict view on online intermediaries thereby narrowing the scope of safe harbour to prevent online infringement. One effective legal framework to resolve issues relating to domain names in India is the .IN Domain Name Dispute Resolution Policy (INDRP). It was drafted in accordance with international guidelines (of the WIPO) and the provisions of the Information technology Act, 2000. The INDRP governs disputes regarding domain names containing the .IN or .Bharat code at the end. Any person aggrieved by the registration of a ‘.in’ domain on the grounds that it is identical or confusingly similar to his or her name or trademark may file a complaint before the National Internet Exchange of India, an administrative body for resolving issues under INDRP. It provides a quick and effective grievance redressal mechanism.

As Import of infringing goods is prohibited under the Customs Act 1962 and the Intellectual Property Rights (Imported Goods) Enforcement Rules 2007, the brand owners can record their trademarks with Customs so that the import of any products that infringe the trademarks is stopped. Further, the laws empower the enforcement authorities to seize misbranded and spurious goods and to suspend manufacturing licenses of businesses involved in such counterfeiting activities. Freedom to do business should not be an excuse to perform acts of counterfeiting and trademark infringement. In this regard, Sections 102, 103 and 135 of the Trademarks Act, 1999, can be employed as remedies against infringement and counterfeiting as they deal with falsification and false application of a trademark. Notably, Section 103 mandates imprisonment of three (3) years and a fine up to two lakh rupees as penalties for counterfeiting. The Courts have also stepped in by compensating brand owners who are the victims of widespread counterfeiting in India.

With an increase in awareness of intellectual property rights among the consuming public and brand owners taking actions on counterfeiters, the end to this epidemic may be possible soon.

References

[1] Kala, S. and Ghosh, R., 2019. Faking It In Fashion – Intellectual Property – India. [online] Mondaq.com. Available at: <https://www.mondaq.com/india/trademark/845644/faking-it-in-fashion> [Accessed 30 March 2023].

[2] Nike Innovate C.V vs. Ashok Kumar on 8 December 2017 suit no. 23/17.

[3] People tree v. Dior: IP Infringement, Cultural Appropriation or Both? [online] Available at:       <https://www.spicyipcom/2018/02/people-tree-v-dior-ip-infringement-cultural-appropriation-or-both.html> [Accessed 30 March 2023].

[4] Number of Digital Buyers in India [online] Available at: <https://www.statista.com/statistics/251631/number-of-digital-buyers-in-india> [Accessed 31 March 2023].

[5] A case over sale of counterfeits on Amazon may have implications for fashion [online] <https://www.finnegan.com/en/firm/news/a-case-over-the-sale-of-counterfeits-on-amazon-may-have-implications-for-fashion.html> [Accessed 31 March 2023].

[6] Amazon destroyed more than 2 million counterfeit products last year [online] <https://edition.cnn.come/2021/05/11/business/amazon-counterfeits/index.html> [Accessed 31 March 2023]

[7] The Economic Times. 2020. Counterfeit products create Rs 1-lakh-cr hole in economy, incidents up 24% in 2019: Report. [online]

Available at: <https://economictimes.indiatimes.com/news/economy/finance/counterfeit-products-create-rs-1-lakh-cr-hole-in-economy-incidents-up-24-in-2019-report/articleshow/77259432.cms?from=mdr> [Accessed 31 March 2023].

[8] International Anticounterfeiting Coalition. n.d. What is Counterfeiting | International Anticounterfeiting Coalition. [online]

Available at: https://www.iacc.org/resources/about/what-is-counterfeiting  [Accessed 3 April 2023].

[9] The Indian Penal Code, 28 (1860)

[10] Combating Counterfeiting in Fashion: Legal Implications and Strategies for Brand Protection in India. [online].

Available at: <https://www.legalbites.in/topics/articles/combating-counterfeiting-in-fashion-legal-implications-and-strategies-for-brand-protection-in-india-894661>

[Accessed 3 April 2023].

[11] (2018) 253 DLT 728.

[12] (2017) 236 DLT 478.

[13] 239 F.3d 1004 (2001).

[14] Liability of online platforms- European Parliamentary Research Service, February 2021 [online] Available at:  <https://www.europarl.europa.eu/RegData/etudes/STUD/2021/656318/EPRS_STU(2021)656318_EN.pdf > [Accessed on 5 April 2023].

[15] Recommendations/observations at a glance- Rajya Sabha press release [online],

Available at: <https://rajyasabha.nic.in/rsnew/Committee_site/Committee_File/Press_ReleaseFile/13/141/410P_2021_8_14.pdf > [Accessed 6 April 2023].

Available at: <https://rajyasabha.nic.in/rsnew/Committee_site/Committee_File/Press_ReleaseFile/13/141/410P_2021_8_14.pdf > [Accessed 6 April 2023].

[16] European Parliamentary Research Service, May 2020 [online] Available at: <https://www.europarl.europa.eu.RegData/etudes/IDAN/2020/649404/EPRS_IDA(2020)649404_EN.pdf > [Accessed on: 6 April 2023]

[17] National IPR Policy [online]

Available at: < https://cipam.gov.in/index.php/about/national-ipr-policy/ > [Accessed 6 April 2023].