Background: The Amazon-Future-Reliance Controversy
The evolving controversy between Jeff Bezos’ Amazon, Kishore Biyani’s Future Group, and Mukesh Ambani’s Reliance Industries Limited (RIL) – hereinafter abridged as “Amazon-Future-Reliance” – has the potential to change the face of retail in India. The underlying legal dispute has changed significantly at every adjudicatory stage, resulting in a number of interesting orders.
First, Amazon invoked the arbitration clause in its Shareholder Agreement with Future Coupons Private Limited (FCPL), seeking a stay on the sale of assets by Future Retail Limited (FRL) to RIL. As a 49% stakeholder in FCPL which is itself a minority stakeholder in FRL – Amazon sought to protect the integrity of its agreement with FCPL, without the FRL-RIL deal diluting its interests. It obtained a favourable award from the Emergency Arbitrator at the SIAC. Second, a Single Judge of the Delhi High Court (“Del HC”, hereinafter) ruled on the validity of the emergency arbitrator’s award in Indian law, and enforced the interim stay prescribed thereby. Third, the Division Bench of the Del HC vacated the stay ordered by the Single Judge. It ruled against the indirect control sought to be exercised by Amazon on FRL’s business transactions via its acquisition of FCPL, without any direct shareholding in FRL. It also found that such control would be violative of India’s FDI policy, under the Foreign Exchange Management Act (FEMA). Finally, the Apex Court has stayed all other proceedings in this matter. However, as of the 7th of July, Amazon’s special leave petitions has not been heard for admission yet (here, here).
Once the case is taken up, the Court must examine what degree of ‘control’ a foreign acquirer can exercise directly over the target company and/or indirectly over its subsidiary holdings. While the Supreme Court has previously dealt with definition and interpretation of ‘control’ – a square application of any one definition would be remiss in addressing the precedential weight multiple interpretations of ‘control’ have amassed over time.
A. ‘Control’ in SEBI’s Takeover Code
‘Control’ is defined in the Companies Act, 2013, and the Securities Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, (“Takeover Code”, hereinafter) [Regulation 2(e)] – as, inter alia:
“[T]he right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner”
Apropos the above definition, the regulatory focus of the Securities Exchange Board of India (SEBI) is on de facto control [¶2.5]. There is no uniform test to determine if control has been acquired, before triggering the SEBI’s regulatory discipline. While such an approach may ostensibly compromise doctrinal consistency, it is preferable to retain the breadth and flexibility of SEBI’s regulatory scope.
However, presently the Supreme Court must determine if Amazon has ‘control’ over FCPL and over FRL through FCPL – in light of such piecemeal interpretation thereof by SEBI. Depending on the definition used – Amazon could either lose this suit summarily on account of regulatory irregularities in its agreement with FCPL, or be granted protective rights extending beyond FCPL, to FRL. The case ultimately depends on the degree of deference the Supreme Court gives to SEBI’s interpretation of ‘control’, as an executive agency.
B. First Principles: Judicial Deference and the Separation of Powers
The doctrine of ‘separation of powers’ envisages clearly defined functional mandates between the different wings of the State serving as checks on each other’s exercise of power. The separation of powers as subsisting between the legislature and the judiciary may extend to a specialized agency to which the legislature may have delegated power. In light of this, judicial forbearance may be expected with regard to the agency’s functioning. However, insofar as the agency interprets the scope of its own power in exercise of such delegated power – it forays into the functional terrain of the judiciary. It is in such circumstances that the ‘separation of powers’ manifests as the doctrine of ‘judicial deference’: it dictates that a Court should defer to the agency’s expertise with respect to the matter concerned, insofar as it is within the vires of the Constitution and the agency’s parent statute.
In light of the above, the following blog foremost discharges the preliminary burden of demonstrating the need for the Supreme Court’s deference to SEBI’s interpretations of its own regulations. Subsequently, I – first extrapolate the applicable standards of such judicial deference from American jurisprudence; second, show how judicial creativity and ‘purposive interpretations’ can navigate contemporary developments in American law; and, third, use such ‘purposive interpretation’ to import and locate the contemporary American standard of judicial deference in Indian jurisprudence; to, finally, use this standard to resolve the focal Amazon-Future-Reliance controversy over ‘control’.
II. Subverting SEBI’s Interpretations: The Case for Judicial Deference
In exercise of its vast power of judicial review, the Supreme Court of India has periodically reviewed SEBI’s executive policies as regards the interpretation of its own regulations – seldom, if ever, observing ‘judicial deference’ thereto. This can be illustrated in the Court’s and SEBI’s conflicting treatment of mens rea in the various offences under the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (“PFUTP Regulations”, hereinafter).
Self-trades are fictitious trades executed on the stock market by the same person/entity posing as both the buyer and seller, to inflate the volume of stocks traded. Though per se manipulative and illegal in stock trade, the PFUTP Regulations were silent on self-trades – leading to contradictory orders of the SEBI. Such conflicting orders undermined the ipso facto unlawfulness of self-trades, or excused them for their minimal impact owing to their low volume. To resolve this internal inconsistency owing to the silence in the PFUTP Regulations, the Securities Appellate Tribunal (SAT) gave a conclusive interpretation on the matter, and notified an internal policy for the assessment of self-trades. Under this policy accidental and unintentional self-trades were excused from the discipline of the PFUTP Regulations. Resultantly, there is both a formal agency ruling and an informal internal policy interpreting ‘self-trade’ in the context of a fraudulent practice. The Auer deference standard would not permit [pp. 109] the Court to substitute its own interpretation for SEBI’s.
However, in SEBI v Kanaiyalal Baldevbhai Patel, while interpreting the PFUTP Regulations – the Supreme Court observed that the offences contemplated by the Regulations attracted civil penalties [¶62]. Therefore, such offences were not understood to require mens rea to be established. Effectively, the very premise of the SAT ruling and SEBI policy on self-trades was extinguished. The SEBI/SAT could previously assess alleged offences flexibly in light of different surrounding circumstances (contrast here and here). The Supreme Court’s summary usurpation of SEBI’s power to interpret the PFUTP Regulations takes this flexibility away.
The Court’s dilution of evidentiary standards penalizes individuals for ‘fraudulent’ practices notwithstanding their bona fide intent. Insofar as it disempowers the SEBI/SAT from excusing the bona fide conduct of respondents, the Supreme Court’s ruling betrays the need for some judicial deference. As a manifestation of the doctrine of ‘separation of powers’ – the standard for such judicial deference can be extrapolated from the jurisdictional context where the doctrine of separation of powers is most pronounced. Therefore, the following sub-sections exposit the nuances of the doctrine in an American judicial context.
III. The Polarizing Standards of American Judicial Deference
Though the United States Congress cannot displace the interpretive mandate of the Federal Courts, it can create special administrative agencies with the authority to interpret their own regulations. This is because administrators occupying such offices accumulate considerable industrial experience which allows them to arrive at interpretations most conducive [pp. 1034] to the industry’s functioning. In Skidmore v Swift Co. (1944), the Supreme Court of the United States (SCOTUS) acknowledged the persuasive value of such experience and resultant interpretations [pp. 139]. Unless found to be ‘plainly erroneous or inconsistent with the regulation’ [pp. 413-14] – these interpretations were held to guide, if not control, the court’s own interpretation of an impugned provision [pp. 140].
However, eventually the SCOTUS started affording greater controlling weight to such interpretations. In 1984, in Chevron USA Inc. v Natural Resources Defence Council Inc., the SCOTUS upheld an agency’s ‘permissible construction’ of Congressional silence in a regulation. The agency’s interpretation effectively became coextensive with Congressional intent, warranting minimal judicial interference therewith. In Stinson v United States, and Auer v Robbins, this line of judicial reasoning normalized judicial deference towards an agency’s interpretation of its own regulations. Agencies, however, draft these regulations themselves, making any interpretation a manifestation of legislative intent. Affording them greater deference on this account, potentially incentivizes vague rule-making, to be later interpreted on an ad-hoc basis. This warrants some judicial creativity in the process of interpretation, especially for the Indian Supreme Court which seeks to do ‘complete justice’.
IV. Judicial Creativity and Purposive Interpretation
Judicial creativity in the name of purposive interpretation may still be possible in three modes: deductively (what the purpose of the regulation requires the interpretation of a term to be), inductively (what an interpretation of a term means for the regulation at large), and equitably (whether the purposive interpretation is ‘just’ and ‘fair’ in a given fact situation).
The contrast between the first two modes of interpretation can be exemplified in the contrast between Skidmore and Auer – where on the same issue of overtime pay requirements under the Fair Labour Standards Act, 1938 – Skidmore constructed agency interpretation in line with the broader purpose of the regulation [pp. 138-39], and Auer construed the larger purpose of the regulation in conformity [pp. 463-64] with the agency’s interpretation of the regulation.
Contrastingly, the equitable mode of interpretation has found greater acceptance in the 21st Century. In United States v Mead Corp., the SCOTUS diluted the Chevron standard by introducing a ‘force of law’ dimension to the application thereof. Under this ‘zero-step’, agency interpretations without precedential value could not claim unqualified judicial deference. Therefore, internal office policies and interpretations lost precedential force and were given the same ‘persuasive value’ as in Skidmore, without any deferential treatment [pp. 226-27]. In Kisor v Wilkie, the SCOTUS reviewed Auer to make its deference conditional on genuine ambiguity in the regulation, the exhaustion of other tools of statutory construction, and the test of agency expertise – ensuring that the predictive value of law was not foregone [pp. 11-19].
Curiously, in Kisor, the Court also acknowledged that the Auer deference standard was not reasonable in a number of cases. In matters of deep economic and policy significance (scrapping Obamacare, in this instance), a just judicial pronouncement precludes judicial deference. With contemporary developments in the American standard for judicial deference, the SCOTUS has rekindled de novo judicial review in American administrative law.
V. Purposive Interpretation of ‘Control’ in India
In a jurisdiction with relatively relaxed norms of ‘separation of powers’, and a more comprehensive scope of judicial review – the contemporary pragmatist model of judicial deference in the United States can temper the Supreme Court of India. Such a case can be made even more strongly considering how the Supreme Court has observed a similar equitable standard of interpretation as regards ‘control’ – in contrast with the deductive and inductive approaches of the SEBI/SAT.
Illustratively, in Rhodia SA v SEBI (2001) and Sandeep Save v Chairman, SEBI (2003) the SAT was looking into whether a minority veto and temporary/paper rights (respectively) amounted to ‘control’ for the purposes of the Takeover Code. The purpose of establishing ‘control’ was identified in the Justice PN Bhagwati (Reconvened) Committee Report (1997, 2002). Notifying a change in control [Regulations 3, 4, 5 r/w Regulations 10, 11] allows investors an opportunity to exit their investment if they are dissatisfied with such change [pp. 10] (also, here at ¶59). By corollary, the larger interest for the determination of ‘control’ is protecting the non-controlling minority stakeholder’s interest. Therefore, provisions in favour of minority stakeholder interests. In both these cases, the SAT came to a similar conclusion in a classic exercise of such deductive reasoning. In these cases, the definition of ‘control’ was deduced from the broader purpose of the Regulations.
Contrastingly, in Subhkam Ventures v SEBI, the SAT restricted its finding on an acquirer’s control over a target company. It limited the definition of ‘control’ to exclude any ‘negative’ control that a shareholder may exercise in the guise of ‘protective rights’ [¶8]. Effectively, the SAT particularized the definition of ‘control’ as ‘effective control’ and interpreted the Takeover Code to reflect this recontextualization/redefinition. At the time, the Supreme Court rejected the precedential value of Subhkam and left the question of law open. However, the SEBI internalized this rhetoric to hold that protective rights did not confer control upon an acquirer. Consequently, the SAT altered the force of the Takeover Code quite significantly – by inductively imputing its interpretation of ‘control’ to the entire Takeover Code.
Notwithstanding, even the Supreme Court has warmed to such interpretation of ‘control’ by the SAT/SEBI – and has upheld the same in ArcelorMittal v Satish Kumar Gupta [¶48-50]. However, the Supreme Court has notably read a ‘reasonable man’ standard [¶51] for the determination of effective control on the basis of proximate facts and circumstances surrounding the alleged ‘control’ or lack thereof. The Court has essentially interpolated an equitable stipulation that is cognizant of the limitations of a restricted definition. Resultantly, though judicial acceptance of (if not deference to) an agency’s interpretation has emerged – the same is afforded a persuasive weight. Such an interpretation is reminiscent of the Skidmore standard of judicial deference.
With the Del HC explicitly using the definition of control as found in ArcelorMittal/Subhkam,– and observing that the surrounding circumstances and construction of the contractual terms may cause even protective veto rights to transgress into acquisition control– a Skidmore standard of interpretation of a regulation, with the relevant agency interpretation at the centre, could be of value to the Court.
Presently, Amazon’s case is replete with regulatory non-compliance on its part for failure to obtain the government approvals needed under the FDI Rules and the non-compliance with open-offer requirements under the Takeover Code [Regulation 4]. In fact, the finding of ‘control’ in favour of Amazon, as it pleads in the listed case, would make Amazon itself vulnerable to the regulatory discipline and penal provisions of these regulations. Alternatively, however, Amazon could find recourse in ‘negative control’ – as interpreted in ArcelorMittal/Subhkam – to argue that its interest in the FRL-Reliance asset deal stems from the minority stake FCPL holds in FRL. Amazon’s protective rights in FCL (through a 49% stake) could be understood to indirectly extend to FRL without finding any ‘control’ by Amazon over either of them. In such a case, the discipline of the Takeover Code could be avoided.
Nonetheless, the present controversy has presented the Court with a salient opportunity to settle the question of ‘control’ while upholding the persuasive value of the SEBI’s expertise in this regard. Considering SEBI’s case-to-case approach to ‘control’ – remanding the present dispute to the SEBI/SAT would be a significant step in this direction. Alternatively, SEBI’s interlocutory inputs could be obtained in the matter, serving as the interpretive core of the Court’s decision, and therefore observing the Skidmore standard of judicial deference.
† Sarthak Wadhwa is a III year BA LLB (Hons.) student at the National Law School of India University, Bangalore. He would like to thank the reviewers for their feedback which not only added value to the piece but also significantly streamlined its scope. Any errors remain his own.
 Russell L Weaver, “Judicial Interpretation of Administrative Regulations: An Overview” (1984) 53 University of Cincinnati Law Review 681