KHAITAN & CO | HOSPITALITY HANDBOOK · HOTEL MANAGEMENT CONTRACTS 101 ... In this second edition of...

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KHAITAN & CO | HOSPITALITY HANDBOOK


INDEX

PREFACE ................................................................................................................................................................. 1

OVERVIEW ............................................................................................................................................................. 2

TEAM ....................................................................................................................................................................... 4

HOTEL BUSINESS MODELS, RISK ALLOCATION & COST IN INDIA ............................................... 7

INDIAN TAX ISSUES IN HOSPITALITY ...................................................................................................... 12

HOTEL MANAGEMENT CONTRACTS 101 - PART 1 .............................................................................. 18

HOTEL MANAGEMENT CONTRACTS 101 – PART 2 ........................................................................... 23

HOTEL OPERATOR EXPENSES TAXABLE IN INDIA – OPERATORS & OWNERS BEWARE! ........................................................................................................ 27

INTELLECTUAL PROPERTY IN THE HOSPITALITY SECTOR .......................................................... 30

HOTEL DATA PRIVACY & PROTECTION ................................................................................................ 36

ANTI-CORRUPTION ISSUES IN INDIAN HOSPITALITY .................................................................... 40

BOMBAY HIGH COURT REVERSES THE AUCTION SALE OF THE PARK HYATT (GOA): PROCEDURE TRUMPS SUBSTANCE .................................................. 44

DISCLAIMER

For private circulation only

The contents of this Handbook are for informational purposes only and for the reader’s personal non-commercial use. The views expressed are not the personal views of Khaitan & Co and do not constitute legal advice. The contents are intended, but not guaranteed, to be correct, complete, or up to date. Khaitan & Co disclaims all liability to any person for any loss or damage

caused by errors or omissions, whether arising from negligence, accident or any other cause.

© 2016 Khaitan & Co. All rights reserved.

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PREFACE In this second edition of the Khaitan Hospitality Handbook we have collated a selection of hospitality related articles authored by members of our hospitality team over the last 2 years.

This Handbook also includes our hospitality profile for reference and further communication.

Our Hospitality team is comprised of lawyers specialising in different practice areas including real estate, taxation, intellectual property, corporate, banking and finance and funds.

We hope you enjoy reading the Handbook and that you find the information provided relevant and useful. We have now been actively involved in working in the hospitality industry in India for some years now providing advice and assisting hotel owners, investors, developers and operators.

Of course the last few years have not been without difficulty as there has been substantial new development. Although demand has also grown it has not been at the same time or at the same pace as supply of new rooms and this has caused issues in the market and problems for many hotel owners who were planning and expecting continued growth in revenues and profits.

Even so the last three years have been an exciting time for the industry in India as hospitality has continued to grow. With tourism being an important part of the government’s agenda for growth and important initiatives like the “visa on arrival” scheme the future outlook looks very positive.

We look forward to working together with our clients and associates in the future development of the industry in India.

Sudip Mullick

Partner, Khaitan & Co


OVERVIEW Khaitan & Co (alternatively referred to as the “Firm”) is one of India’s oldest and recognised full service law firms. It was founded in 1911 by Late Debi Prasad Khaitan, a member of the Constituent Assembly of India (Independent India's first Parliament) and one of the seven members of the Drafting Committee which framed the Constitution of India. The Firm attracted many stalwarts from the field of law who laid the foundations of integrity, simplicity, dedication and professionalism. Deeply rooted in this tradition, the Firm continued to grow and prosper expanding its presence in India from its first office in Kolkata (1911) to New Delhi (1970) to Bengaluru (1994) and to Mumbai (2001). The Firm takes pride in its steady growth and celebrated its centenary year in 2011 (11 November 2011). Over the years the Firm has attracted and retained some of the best legal talent in India to provide high quality legal counsel expected from it across all spheres of commerce and industry. Besides offering a broad spectrum of legal expertise to all its clients, the Firm also ensures personal attention and prompt and quality service in a cost effective manner. The Firm is adequately equipped to respond with the speed and creative solutions that are demanded in today’s highly competitive and rapidly changing environment. Its clients include business and financial enterprises, large business houses, banks, financial institutions, government bodies, educational and charitable trusts, cultural institutions, high net-worth individuals, estates and trusts. Khaitan & Co is an exclusive member of Meritas in India. Meritas is a worldwide alliance of more than 175 independent commercial law firms located in over 80 countries, membership to which is purely by invitation. The Firm today, has a strength of over 500 fee earners including 106 partners and directors, in its 4 offices. In addition to fee-earners, Khaitan & Co has over 250 shared services.

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HOSPITALITY India has undergone unprecedented development in the hospitality sector in the last 5 years. Most industry observers believe that the growth and development of the hospitality industry will continue well into the foreseeable future. The Firm is committed to assisting its clients in pursuing the significant opportunities and meeting the inevitable challenges that lay ahead. The Firm has established a national hospitality team to service domestic and foreign clients with fully integrated real estate, financing, tax, corporate, intellectual property and dispute resolution expertise to undertake the broad spectrum of work that the industry requires including:

• Hotel acquisitions and sales including due diligence;

• New hotel construction and development documentation;

• Hotel financing and debt restructuring;

• Advice to foreign owners and management companies on transaction structuring;

• Hotel management contracts and franchises;

• Hotel joint ventures and alliances;

• Branded residence structures and marketing; and

• Multi – use project development including hotels and residences;

• Intellectual property issues including trade mark protection and enforcement;

• Hospitality corporate mergers and acquisitions; and

• Hospitality dispute resolution including mediation, conciliation, expert determination, arbitration (domestic and international) and litigation.

Because of the international nature of the industry, the Firm’s objective is to provide its hospitality industry clients with the high standards of expertise and service which their work demands and thereby to assist those clients in achieving the growth and development in the Indian market to which they aspire.


TEAM

Sudip Mullick | Partner, Real Estate D: +91 22 6657 5235 | E: [email protected] Sudip is a specialist in the real estate, construction and hospitality sector. He has been advising clients on diverse real estate transactions, litigations and dispute resolutions matters. Sudip is known for his deep (legal and commercial) understanding of hotel development, construction and management contracts.

Savita Singh | Partner, Real Estate D: +91 22 6657 5250 | E: [email protected] Savita specialises in all kinds of property matters. She regularly advises her clients on foreign direct investments in real estate in India, property leasing, licensing and development; including dispute resolution matters.

Anand Mehta | Partner, Corporate D: +91 22 6657 5155 | E: [email protected] Anand Mehta specialises in corporate acquisitions and mergers, India entry strategies, corporate & commercial laws, anti-trust, contract and securities laws. His forte, apart from mergers and acquisitions includes anti employment, data privacy & protection, anti-bribery laws, etc. He is also a qualified Company Secretary.

Siddharth Shah | Partner, Investment Funds and Corporate & Securities D: +91 22 6657 5160 | E: [email protected] Siddharth Shah specialises on matters involving fund structuring, organisation, documentation, regulatory matters, LP negotiations, carry structuring, tax advisory, fund governance, securities law matters, exchange control regulations, REITs, etc.

Bijal Ajinkya | Partner , Direct Tax D: +91 22 6657 5165 | E: [email protected] Bijal is a tax specialist with a deep understanding of international tax and in particular issues related to the structuring of entities and transactions for inbound investment.

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Nihal Kothari | Executive Director, Indirect Tax D: +91 22 6657 5180 | E: [email protected] Nihal specialises in direct and indirect taxes applicable in India and advises on tax planning, business structures, tax efficient business models, tax compliances, mergers and demergers.

Shishir Mehta | Partner, Banking & Finance D: +91 22 6657 5145 | E: [email protected] Shishir is an expert in banking and finance law with significant international experience gained working in UK and US. He specialises in domestic and cross-border financing transactions.

Adheesh Nargolkar | Partner, Intellectual Property Rights D: +91 22 6657 5240 | E: [email protected] Adheesh specialises in Intellectual Property Rights (IPR) and handles contentious as well as non-contentious matters including prosecution, enforcement and advisory work.

Kartick Maheshwari | Partner, Corporate D: +91 22 6636 5070 | E: [email protected] Kartick specialises in the private equity and corporate matters. He regularly represents private equity firms, alternative investment funds, sovereign wealth funds and corporate strategic investors on a variety of domestic and cross-border transactions.

Namrata Mehta | Principal Associate, Corporate D: +91 22 6657 5274 | E: [email protected] Namrata is a Principal Associate in the Corporate-3 Group at our Mumbai office. Namrata has over six years’ experience in corporate, commercial and infrastructure transactions. Namrata also has worked on several transactions in the hospitality sector, from both owner and operator perspectives.


Rajiv Khaitan | Partner, Corporate & Commercial D: +91 80 4339 7000 | E: [email protected] Rajiv has over twenty five years of experience in general legal practice with focus on business and commercial laws. He currently heads the Corporate and Commercial law practice at the Bengaluru office.

Bharat Anand | Partner , Corporate & Commercial D: +91 11 4359 9902 | E: [email protected] Bharat is a corporate lawyer with significant international experience having worked in the UK, who specialises in mergers, acquisitions, joint ventures and strategic alliances. He operates out of the Delhi office.

Ashwin Bishnoi | Partner, Corporate & Securities and Finance D: +91 11 4359 9915 | E: [email protected] Ashwin specialises in corporate and commercial transactions, mergers and acquisitions and joint ventures. Having advised issuers, arrangers and merchant bankers on offerings of secured as well as unsecured debt securities, including high yield debt, he has extensive experience in debt capital markets.

Gaurav Juneja | Partner, Litigation and Dispute D: +91 11 6642 7035 | E: [email protected] Gaurav has a strong background and experience in Commercial Litigation and Arbitration for over eight years now. He specializes in Media and Telecom Laws, Information Technology Laws and Infrastructure, Energy and Natural Resources Laws.

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INTRODUCTION

The purpose of this paper is to provide an overview of the 3 main hotel business models namely lease, hotel management agreement and franchise and to discuss the allocation of business risk between the parties to each of these arrangements and the cost of these arrangements.

Hotel management agreements are quite common in India today but hotel leases are not. Hotel franchises are becoming more common as franchisors gain more confidence in the ability of local operators to operate under their respective franchise systems.

As can be seen from the following pie charts, in mature markets, different regions have different rates of adoption of these business models, for example, based on a sample of the major hotel operating chains in 2015, hotel leases are far more common in Europe than they are in North America whilst hotel management agreements and franchises are important in both regions to varying degrees:

Summary of Hotel Business Models

Model Definition & Business Ownership/Risk

Lease Hotel property owner (“Lessor”) gives possession or control of the hotel property and equipment to a Lessee for a term of years for a fixed and/or variable rent. The hotel business is owned by the Lessee during the term of the Lease and all business risk is with the Lessee unless the Lessee subcontracts management using a hotel management agreement or obtains a franchise.

Hotel Management Agreement

Hotel Owner (“Owner”) engages a hotel manager (“Operator”) to brand and manage the hotel business for the Owner for a fee based on the performance of the hotel and typically a percentage share of revenue and gross profit before financing costs and taxes. The hotel business is owned and operated by the Owner and the Operator provides management, marketing and other services in relation to the business. As such all business risks remains with the Owner during the term of the agreement although the business carries the Operator’s brand.

HOTEL BUSINESS MODELS, RISK ALLOCATION & COST IN INDIA FEBRUARY 2016


Model Definition & Business Ownership/Risk

Franchise A hotel business system owner (“Franchisor”) grants the right to a Franchisee to brand and use the hotel business system to establish the Franchisee’s own hotel business at a specific location in return for payment of franchise and other fees. The hotel business is owned, operated and managed by the Franchisee and all business risk is with the Franchisee during the term of the agreement. A Franchisee can contract with a third party operator to manage the franchise business for the Franchisee under a management agreement.

Comparative Advantages & Disadvantages of Models

HVS has produced a paper generally analysing the comparative advantages and disadvantages of each business model which can be found at: http://www.hvs.com/article/7303/decisions-decisions-which-hotel-operating-model-is-right/. The following table is extracted from the HVS paper by way of summary.

COMPARISON OF HOTEL OPERATING MODELS

Issue Franchise Management Contract Lease

Income Brand: royalty + other fees

Owner: Operating Profit after fees

Brand: base + other fees

Owner: Operating Profit after fees

Tenant: profits after rent

Landlord: rent receivable

Services provided by Hotel Company

Brand, S&M support, reservation system and purchasing

Management, hiring and training staff, brand, S&M, reservations, purchasing

Management, hiring and training staff, brand, S&M, reservations, purchasing

Contract term (years)

10-20+ years (average +/– 15)

15-30 (even 40 sometimes!)

Generally 20 or more

Employees & Operating Company

Owner’s responsibility Owner’s responsibility Lessee’s responsibility

Financial Commitment

Owner: all or most (Brand might consider key money)

Owner: all or most

Brand: may provide key money or guarantees

Fixed rent, variable rent or combination

Prop Tax, Insurance & large renovations

Owner’s responsibility Owner’s responsibility Normally landlord’s, but can be negotiated

FF&E replacement Owner’s responsibility Owner’s responsibility Lessee’s responsibility

What Model is Appropriate in India?

Which business model is appropriate in India depends on a range of factors including local conditions, experience and risk appetite of the owner, the size and standard of the property and the suitability and availability of potential brands.

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Lease

A lease provides predictable cash-flow to the owner, but removes the owner from taking part in the operations or the upside of the business (in the case of a fixed lease). As a matter of general policy major hotel companies generally do not favour the Lease model but prefer Hotel Management Agreements. Hotel companies are averse to the business risk and long term liabilities that Leases impose and fixed lease payments must be disclosed as liabilities on their balance sheets. Also fixed rental payments provide an underwriting by the lessee of the owner’s share of the income from the hotel because all business risk under a lease is with the lessee. Business risk can sometimes be shared under a lease by structuring the rental as a variable rental (based on a revenue/profit share being paid as rental) or partly fixed and partly variable. Many Indian owners might prefer the Lease model, especially a fixed rental lease which underwrites a return, but hotel companies will generally not offer them other than in exceptional circumstances. Of course hotel companies may turn to the Lease model as a way of establishing competitive advantage with owners in the Indian market to grow their Indian hotel footprint. This has happened in other countries where hotel companies seized the opportunity to grow quickly in a new market.


Hotel Management Agreements allow owners to participate in the hotel industry with little or no experience required and enjoy upside when business is good and downside operating and market risks. Hotel Management Agreements have been attractive to Indian property developers interested in expanding into hospitality but unfortunately many expanded into hotels and did not understand hotel risk and the hotel cycle. They have experienced significant problems in the last few years as a result of increased hotel supply, the competition for occupancy and depressed cash flows, much less than expected.

Hotel Management Agreements are favoured by hotel companies because they enable them to grow their brand network with little or no incremental capital cost and with minimum exposure to business risk. Most of the hotel companies are looking for critical mass, scale and regular income streams and these agreements provide an efficient and cost effective way of achieving that outcome.

Franchise

Hotel franchising is the favoured business model in North America and has been the most significant source of business development for major hotel companies in mature markets. Franchises provide the owner with the right to operate the hotel under a brand name and to have access to the franchisor's distribution and marketing systems in exchange for paying franchise fees, however they must also have significant management expertise or make use of a third-party operator. Franchising works best in mature markets where franchisees have the aptitude, experience, expertise and skill to operate under a franchise system otherwise the franchise parties face less than average performance and constant conflict.

Hotel franchisors have met with varying degrees of success in India in the past but it is becoming more accepted today. Some hotel companies who franchise elsewhere will not franchise in India at present because they do not wish to expose their brands to damage from poor operations. Franchise agreements impose brand standards and restrictions which a franchised hotel must conform with for the benefit and protection of the brand and the franchise system. Franchisors have been concerned about the ability of Indian franchisees to comply with and operate under their franchise systems as well as the integrity and security of their franchise systems and potential damage to their brands. These remain concerns for hotel franchisors in India and potentially inhibit the growth of hotel franchising in the Indian market. On the other hand the entry into India of third party hotel management companies like Interstate Hotels, which manage hotels for business owners under franchise agreements, provides a solution to those concerns but at a cost, namely management fees. Over time the development of operating capabilities within the Indian industry will be the ultimate solution and as capabilities and experience grows so will hotel franchising in India or it has in other markets.


What cost?

LEASE

The cost of a lease to a hotel owner or lessee is negotiable and depends on the circumstances. The basic principle of risk being proportionate to reward applies. The lessee will have all of the business risk and therefore the lessee will want to capture most of the business upside when in the best part of the hotel cycle because it has all of the downside in the troughs. Owners cannot expect lessees to do more than provide a basic risk mitigated return on capital investment in the property. Increases in the rent payable should be related to the performance of the hotel rather than some unrelated index.


Fees payable under Hotel Management Agreements vary between systems but generally the fees and charges would range from:

Fee Percentage Base

Basic 1 to 3 Total Revenue

Incentive 6 to 10 Gross Operating Profit

Other 1.0 to 2.0 Total Revenue

Basic and Incentive fees are linked (e.g. low base and high incentive). Revenue based fees are obviously relatively riskless for Operators whilst Incentive weighted fees are preferable for Owners. Often the percentage of incentive fees payable is linked to the level of the gross margin achieved.

Franchise

Franchise fees payable to franchisors are expensive relative to Hotel Management Agreements. Fee structures vary from one system to another and there are different naming conventions used to describe different fee components.

Each year HVS produces and excellent annual survey on franchise fees in the United States, the latest published copy of which can be accessed at http://www.hvs.com/article/7097/2014-united-states-hotel-franchise-fee-guide/. The report also contains a detailed breakdown of the fee structures typically used and franchise costs in each of the major market segments from economy through to upscale hotels.

Of course the fee structure which applies in India compared with the United States may not be the same for various reasons but the report is instructive and helpful to anyone wishing to develop an understanding of hotel franchise fee structures and the key components of those fee structures.

The following tables extracted from HVS’s 2014 United States Hotel Franchise Fee Guide analysis demonstrates the type of information available on franchise fees and is instructive for those interested in hotel franchising.

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Conclusion

Which hotel business model is appropriate in any given situation depends on a range of factors some of which have been discussed in this paper.

Each model offers opportunity and risks for the parties involved and these need to be realistically and carefully evaluated in order to select the most appropriate model in all of the circumstances.

Hotel Management Agreements will continue to be strong in India but increasingly, as the market develops and matures, hotel franchising will be more prevalent and preferred as a way of doing business for both hotel companies and franchisees.


The application of domestic Indian taxation laws to payments made under a hotel management agreement (“HMA”) is a matter of great interest to both hotel owners (“Owner”) and hotel operators (“Operator”).

Foreign Operators are concerned about their Indian tax liability.

Indian Owners become concerned when indemnities and other provisions in the HMA transfer to the Owner the taxation risk on payments to the Operator by requiring the Owner to bear the taxation liability which often occurs.

In this paper we outline the basic principles which apply under Indian tax law across a range of HMA business models used in India with the objective of enabling Owners and Operators to better understand the Indian taxation regime that applies and the risks to which they may be exposed.

OVERVIEW OF INDIAN TAXATION REGIME

India adopts a residence and source based system of taxation whereby residents are taxed on their worldwide income and non-residents are taxed on their income sourced or deemed to be sourced in India.

If a non-resident has a permanent establishment (“PE”) in India, whatever form that takes, then its Indian source income (i.e. income received or accrued outside India but attributable to the activities of the PE) will be subject to Indian taxation. Such taxable income is determined under the provisions of the Income Tax Act, 1961 (“IT Act”) and the non-resident is required to file a tax return like any other Indian tax payer. The tax rate applicable to the PE of a foreign company in India is 40% (plus applicable surcharge and cess) as opposed to the domestic company rate of 30%.

Even in the absence of an Indian PE certain payments to a non-resident attract tax in India and there is a requirement to file a tax return reporting such income. The rate of tax depends on the nature of the payment. For example royalty and service fees payable to a non-resident are taxable on a gross basis at the rate of 10% (plus applicable surcharge and cess).

Payments to a non-resident which are attributable to an Indian PE or in the absence of a PE other payments like royalty or service fees attract withholding tax at the applicable rates. If the payer fails to fully comply with its withholding tax obligation then there are adverse consequences for the payer including disallowance of business expenditure, recovery of tax required to be withheld, interest on the tax required to be withheld and penalties.

Where the non-resident is from a country with which India has entered into a double taxation avoidance agreement (“tax treaty”), the domestic Indian tax regime will apply only to the extent that it is more beneficial than the tax treaty. Thus, the provisions of any applicable tax treaty are very important and relevant in determining the liability to taxation of a non-resident. Many tax treaties contain more beneficial provisions for non-residents than those under the domestic Indian tax regime and therefore, treaty analysis becomes critical.

HMA BUSINESS MODELS

There are a number of different models used in India to structure hotel management agreements and payments under those agreements. It is beyond the scope of this paper to cover them all here but it is useful to examine some of the more common models.

Typically, the Owner, an Indian company, enters into an agreement with a foreign Operator which provides its management expertise and licenses the use of its brand and operating systems etc. (“IP”). Commonly the IP is not owned by the company entering into the HMA and in such cases the owner of the IP (“IP Owner”) may license the use of the IP to the Owner directly.

INDIAN TAX ISSUES IN HOSPITALITY NOVEMBER 2015

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The three most common HMA business models are as follows:

Model A

An offshore company is the Operator and it is either the IP Owner as well or is licensed by the IP Owner to use the IP and it licenses the IP to the Owner and operates and manages the hotel in India.

Model B

An offshore company is the IP Owner and its affiliate, another offshore company, is the Operator; the former licenses the IP to the Owner and the latter operates and manages the hotel in India.

IP Owner & Operator

Owner Management & day-to-day Operations

Outside

India

Brand

Licenses brand; manages & operates hotel; provides services

License fee; Management fees;

reimbursements

License fee; Systems

Contribution Fund

Licenses brand; provides access to systems

Management fee; shared services fee; reimbursements

Manages & operates hotel on behalf of owner; provides technical services

IP Owner

Owner

Operator

Management & day-to-day Operations

Outside

India Brand


Model C

An offshore company is the IP Owner and its Indian affiliate, an onshore company, is the Operator; the former licenses the IP to the Owner and the latter operates and manages the hotel in India.

TYPICAL PAYMENTS UNDER HMA BUSINESS MODELS

The most common payment streams which will be found under each of these models are as follows:

Construction & Development

• Technical Assistance Service Fees (for transfer of knowledge, technology and expertise etc.)

• Expense reimbursements for technical service visits and related activities

Hotel Management

• Management Fees (base & incentive)

• Fees for Service provided by Operator or affiliates (IT, reservations, training etc.)

• Expense reimbursements (direct and indirect for example marketing fund contributions)

• Royalty or license fees

TECHNICAL ASSISTANCE FEES

Where the Operator is a non-resident (Model A & B), the technical assistance fees will be subject to withholding tax in India at 10% (plus applicable surcharge and cess) unless reduced under the applicable tax treaty. Where the services do not ‘make available’ technical knowledge and skill to the service recipient, certain tax treaties may completely exempt the payment from taxation altogether and thus, the jurisdiction of the Operator is determinative.

License fee; Systems

Contribution Fund

Licenses brand; provides access to systems

Management fee; shared services fee; reimbursements

Manages & operates hotel on behalf of owner; provides technical services

IP Owner

Owner Operator

Management & day-to-day Operations

Outside

India Brand

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Despite such fees being exempt (when they do not ‘make available’ technical knowledge or skill), by reason of any material presence of the Operator in India, whether through employees, representatives or otherwise, the Operator could be considered to have a PE in India. In that case, all income including technical assistance fees would be attributed to the PE and would be taxable in India at 40% (plus applicable surcharge and cess) on a net basis. This is a fact based determination and hence it is important to be mindful of this when planning business operations.

Where the Operator is an Indian company (Model C), technical assistance fees will be subject to withholding tax at 10% and taxed in the hands of the Operator at 30% (plus applicable surcharge and cess) as business income on a net basis. Credit for tax withheld is available to the Operator.

MANAGEMENT FEES & RELATED PAYMENT STREAMS

In essence, the position with respect to these payments is as follows:

Management Fees

Management fees are taxable as fees for “technical services” on the same basis as technical assistance payment streams.

Fees for Service by Operator

Fees for service are taxable as fees for “technical services” on the same basis as technical assistance payment streams.

Royalty or License Fees

Royalty or License fees are subject to withholding tax at 10% (plus applicable surcharge and cess) unless reduced under the applicable tax treaty.

Management Fees and Fees for Service are not subject to withholding tax where the tax treaty between the state of residence of the service provider and India contains a provision that technical service fees are taxable in India only when they ‘make available’ know-how, skill, etc. However, in such a situation, it also needs to be ensured that the fees should not be connected with the business presence of the recipient in India in the form of a PE. Thus, factual determination is imperative.

EXPENSE REIMBURSEMENTS

The application of withholding tax to expense reimbursements is a contentious issue.

The key question is whether there is a service element involved which is remunerated by the payer (even if only on a cost basis) or whether it is a genuine reimbursement of expenses incurred by one party on behalf of another. In the former case, even in the absence of a mark-up, withholding tax will apply while in the latter case there ought not to be any withholding tax.

Reimbursement of costs which are incurred by the Operator in the course of providing services may be treated in the same manner as primary fees and therefore be taxed as fees, although it may be possible to take a position that, where pure reimbursements are made under separate third party invoices, withholding tax should not apply.

OFFSHORE OPERATOR V ONSHORE OPERATOR

In determining whether the Operator should be offshore or onshore, the overall tax cost of the arrangement needs to be assessed and in this regard the following matters should be considered:

For an offshore Operator, payments for services will be taxable on a gross basis (typically at the rate of 10% plus applicable surcharge and cess or a lower rate under the applicable tax treaty). This would be the final liability of the Operator in India. The Operator would not be permitted any deduction for expenditure incurred for earning this fee which can help reduce the final Indian tax. However, the


Operator should get credit for the taxes withheld in India against its final tax liability in its home jurisdiction, subject to the local rules applicable to giving credit for foreign taxes.

For an onshore Operator the entire income of the Operator will be taxable on a net basis at the rate of 30% plus applicable surcharge and cess after set off of related business expenditure. Even in case of an onshore Operator, the payer has to withhold tax on gross amount at the rate of 10%, but such withheld tax would be available as a credit against the final tax liability of the onshore Operator which is determined at 30% on net income. Thus, if the final tax liability at 30% on net income due to lower profit margin is less than 10% on its gross receipts, the Operator would be entitled to tax refund.

Distribution of accumulated profits to the shareholders of the onshore Operator would attract a Dividend Distribution Tax (DDT) at an effective rate of 20.36% and the dividends will then be exempt from tax in India in the hands of the shareholders. In case of an offshore Operator, DDT would not be applicable as it does not apply to foreign companies paying dividends to their shareholders in their home jurisdiction. The higher rate of tax applicable to the PE of the offshore Operator in India generally results in a lower overall tax rate than the overall tax rate on the onshore Operator who is subject to 30% tax on profit plus 20% DDT.

The decision whether or not to come onshore also depends upon the extent of operations and presence of Operator’s employees in India. If that presence is expected to be reasonably significant, for example if employees or representatives of the offshore Operator regularly visit or stay in India, a taxable presence or PE exposure for the Offshore Operator in India will arise which will result in taxability of attributable income at the rate of 40% (plus applicable surcharge and cess) on a net basis. The most onerous issue in this regard is not the tax rate on net income but the determination of income which is attributable to the PE. Thus, where a taxable presence or PE exposure is anticipated, having the Operator onshore may be preferred.

Tax treaty analysis is also critical since under certain tax treaties the withholding tax rate on fees for services payable to an offshore Operator could be reduced to zero where the services do not ‘make available’ technical know-how or skill. In such cases, an onshore Operator structure may be less tax efficient. However, the benefit of zero tax on services will be eroded where the service provider has a PE in India. Where PE risk is high, having an onshore Operator may be preferred.

MARKETING CONTRIBUTION PAYMENTS

Marketing contribution payments to non-residents, where tax was not withheld from such payments, has been litigated in India. The parties generally take a position that such marketing contributions for offshore marketing are not taxable in India either as royalty or as business income if the recipient foreign entity does not have a PE in India. The argument is that such payments are not for the right to use any intellectual property, know how or an intangible asset. It is imperative to ensure that the facts and the underlying documentation support this argument.

TRANSFER PRICING

The IT Act contains comprehensive Transfer Pricing (TP) regulations which require that all the transactions between ‘associated enterprises’, one or both of which are non-residents, are regarded as international transactions and income arising from such international transactions must be computed having regard to the arm’s length price. Once the TP regulations are attracted, there are a series of prescribed compliance requirements that need to be satisfied.

The TP regulations also describe certain relationships or circumstances under which two enterprises are deemed to be ‘associated enterprises’. One such circumstance is where business of one entity is wholly or substantially dependent upon the use of brand or IP owned by another. If the Owner and Operator can be regarded as ‘associated enterprises’ then compliance with the TP regulations would be required for ALL the transactions between them.

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ONSHORE MARKETING EXPENDITURE

In recent times, expenditure incurred by an Indian entity in relation to advertising, marketing and promotion (AMP) has been the subject of significant TP adjustments with respect to arrangements involving an Indian party exploiting the trademark/brand name owned by a foreign party. In the absence of any specific law, the position is evolving on the basis of the judicial pronouncements.

Where the tax authorities consider that more than reasonable AMP expenditure is incurred by an Indian entity, compared with entities engaged in similar business, the excessive expenditure is deemed as having been incurred in creating or maintaining a marketing intangible for the offshore entity. In that case, the Indian entity is regarded as having provided service to the foreign brand owner to enhance the value of its brand in India. In the absence of an arm’s length compensation for such service, the excess AMP expenditure along with an arm’s length mark-up is added to the income of the Indian Owner. The applicability of the TP regulations and impact on AMP expenditure incurred by the Owner should be carefully considered when entering into relevant agreements.

CROSS BORDER PERSONNEL MOVEMENT

This is another highly litigious area and may pose tax concerns for foreign employers.

Where the expatriate continues to remain the employee of the foreign company and is seconded to the Indian company (Owner or onshore Operator) to perform his employment in India, two sets of tax issues arise:

- taxability of the employee himself; and

- taxability of his foreign employer.

While the employee will undoubtedly be taxable in India unless covered by short stay exemption provisions contained under the Indian tax law or the applicable tax treaty, since the source of his income is the performance of services in India, the taxability of his employer is subject to significant uncertainty. Continued employment with the foreign employer can result in the employee constituting a PE of the foreign employer in India. Then the issue arises as to whether the employee is carrying out the business activities of the foreign employer in India or the activities of the Indian company to which he is seconded.

In cases where a secondment arrangement is envisaged under the cross border agreements, this needs to be done carefully to ensure certainty of taxation outcomes for all concerned parties.

WAY FORWARD

From a taxation perspective, HMA arrangements need to be carefully structured and documented to deliver certain tax outcomes for the parties consistent with their respective expectations. Where one of the parties to the arrangements is a non-resident, the complexity and contentious nature of tax issues are compounded. Both Owner and Operator need to carefully evaluate the tax implications of their HMA arrangements at the time of entering into the relevant agreements in order to minimise the risks of unexpected Indian taxation consequences.


INTRODUCTION

THE BASIC CONCEPTS

This is the first in a series of newsletters dealing with Hotel Management Contracts and issues arising under those agreements. This first newsletter seeks to deal with some basic concepts by way of introduction for those less familiar with these agreements. We will be examining over time a wide range of complex and simple issues which may arise under these agreements.

What is a hotel?

It is often forgotten or misunderstood that a hotel consists of two elements namely:

Real estate being the land and buildings (“Real Estate”); and

Business being the operating business of the hotel (“Business”).

The Real Estate can be separated from the Business, for example, by the Real Estate owner leasing the property to a tenant and in that case the tenant would establish, operate and own the hotel Business.

However in the context of this paper the assumption is that the Owner owns both the Real Estate and the Business at all times and it is important to keep this concept in mind.

What is a HMA?

A hotel management contract (“HMA”) is an agreement between the owner of a hotel (“Owner”) and a hotel operator (“Operator”) under which the Operator agrees to manage the operation of the hotel for the Owner. However the HMA involves more than just management services.

Apart from management services, Operators provide a range of different services under the HMA including technical assistance services in relation to the development of the hotel, pre –opening services before the hotel opens, reservations services, marketing and promotion services, training and development services and technology services for which the Operator receives fees and expense reimbursements.

An important commercial element of the deal is that the Operator’s brand is applied to the hotel Business and the Operator includes the hotel in its marketing and promotion network and institutional programs (for example the loyalty program). Branding is achieved legally by the Owner being licensed to use the Operator’s brand in naming the hotel and in hotel marketing and promotion on the condition that such use complies with the Operators guidelines.

It will be appreciated from the above that a HMA has multiple dimensions and can be quite complex.

There is rarely a single “contract” but more commonly a suite of contracts which deal with different aspects of the overall agreement. The structure of the documentation varies from one operator to another and is largely determined by taxation considerations specific to the Operator’s legal structure and how local laws apply to that structure.

What is the legal role of the Operator & how does the Operator perform his role?

Historically and still in many cases today the Operator’s role is primarily that of a legal agent of the Owner in operating the hotel Business. That is, whatever the Operator does he is acting in a

HOTEL MANAGEMENT CONTRACTS 101 - PART 1 MARCH 2016

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representative capacity for and on behalf of the Owner. So when staff are employed, when room rates are set, when contracts are entered into these are the acts of the Owner which are effected through the Operator as the Owner’s representative.

In the United States there has been a trend for the Operator relationship with the Owner to be structured as that of an independent contractor rather than as an agent of the Owner. One reason for this is that under American law it was established that an agency can be legally terminated at will unless it is coupled with a proprietary interest and so an HMA, even for a long term, could be terminated on short notice. Another reason why this independent contractor structure developed out of the United States was because Operators as agents of the Owner have fiduciary duties to the Owner including duties of loyalty, good faith, confidentiality and avoidance of conflicts of interest. So Operators who are agents with fiduciary duties cannot make secret profits or commissions (like rebates on purchases) without disclosure to and approval from the Owner. These risks are mitigated or avoided through the independent contractor relationship.

An HMA can be structured in either way.

How is a HMA negotiated?

Normally an Owner will seek proposals from qualified Operators to manage the proposed hotel under a time bound competitive bidding process.

Typically this is or should be by way of a response to a formal request for proposal issued by the Owner and which is used by the Owner and his advisers to assess the short listed Operators and their suitability for this particular project. The Operator’s response will include financial projections by the Operator for the performance of the hotel. Ideally the Owner should be able to compare these against its own independent feasibility advice and projections for the hotel.

Generally the short listed Operators will give presentations to the Owner selection group and answer questions on their proposal. This may lead to a period of exclusive negotiation with one Operator although sometimes to maintain competitive tension two Operators remain “live” in the last stage the process.

This process is intended to lead to the signing of a Letter of Intent or Memorandum of Understanding between the parties for the HMA and which provides a framework for the negotiation and execution of the HMA.

Prior to the execution of the Letter of Intent or Memorandum of Understanding the Owner will have seen the Operator’s pro forma HMA and will have had the opportunity to consider any major issues it may have with that document.

The Letter of Intent or Memorandum of Understanding will contain the key commercial deal terms agreed between the Owner and the Operator and will also provide for the subsequent negotiation of the final HMA. The parties will not be finally legally bound until the formal HMA is executed which can take from 60 to 180 days or more after the Letter of Intent or Memorandum of Understanding depending on the circumstances.

The Operator’s pro forma HMA, which provides the basis for negotiation of the final HMA, is a document which reflects the sum total of the specialist international knowledge and experience of the Operator and its advisers over many years. Owners who fail to appreciate this and act without expert advice do so at the peril.

What are the key issues in Operator selection for a HMA?

The Operators fee and costs of a particular system are clearly relevant and should be assessed but not the most important by any measure. A decision based primarily on cost is more likely than not a poor one.

Fundamentally the decision should be based on which Operator and brand are most likely to bring the most incremental value to your hotel now and in the foreseeable future. This is obviously not


intuitive but involves a clinical assessment of a variety of different factors in the evaluation process, some less obvious than others. This is not an easy process and is made even more difficult if the Owner does not have independent advice.

How does a HMA allocate Business risk?

The Owner owns the hotel Business and therefore all Business risk is with the Owner.

The Owner is responsible for the entire financing of the hotel (Real Estate and Business) and is entitled to all profits and bears all losses from the Business and all increases or reductions in value in the Real Estate are the Owner’s.

The Owner indemnifies the Operator for all liability, loss and damage which the Operator incurs in managing the hotel.

Operators bring their brands and management expertise to hotels under a HMA but not their balance sheets. Whilst Operators receive fees based on the profitability of the hotel to align interests, fundamentally what they receive is a “fee” not a share of profit and it is certainly not a reward sufficient enough or commensurate with the assumption of any material business risk. Expectations from Owners that Operators will give income guarantees are unrealistic other than in exceptional cases.

How is management compensation structured under a HMA?

Operators typically receive two types of payments under a HMA namely fees and expense reimbursements. It is often difficult to distinguish in substance between the two different classes of payments. So the total compensation to the Operator will be the aggregate of all fees and expense reimbursements.

There are various different types of fees that may be payable under a HMA the most significant of which are management fees.

The usual management fee structure seeks to align Owner and Operator interests by relating fees to the performance of the hotel and comprises:

a “base fee” being a percentage of total hotel revenue; and

an “incentive fee” being a percentage of hotel gross operating profit.

The accounting concepts are provided by the American Uniform System of Accounts.

Incentive fees are riskier for Operators than base fees for obvious reasons and thus fee structures which are more heavily weighted to incentive fees are more Owner friendly. There are potentially many variations of this structure which may be appropriate in any given situation.

Exactly what services are covered by these management fees and what overhead cost the Operator is incurring can take some working out especially when the expense reimbursement costs are taken into account. Quite separately from fees Operator expense reimbursements which are widely provided for under HMA’s and these should simply be regarded as a fee by another name.

Apart from management fees there can be a wide variety of fees payable under different names for example royalties for brand licensing, marketing and promotion levies or contributions, reservations , loyalty program fees and other shared services fees.

How does a HMA work for a new hotel?

For a new hotel a HMA is entered into as early as possible in the project initiation process so that the advice of the Operator can be taken in relation to the design and construction of the hotel. The services provided by the Operator at this stage are commonly described as “technical assistance services”.

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The Owner employs and pays for all of the key consultants and contractors required to design and construct the hotel. The Operator will generally have interest in and influence over the identify of key consultants like the architect and interior designer as the Operator will wish to be assured that it is dealing with professionals who are competent to deliver a hotel which meets the Operators requirements.

The Operator will have its own brand standards which the hotel must comply with in order to carry the Operator’s brand. These standards will extend to matters such as room numbers, room size, room facilities, public facilities and life safety standards. Also the Operator will want to influence the design of the hotel to ensure that it reflects the values of its brand and satisfies the expectations of its guests.

The Operator reviews the work of the Owner’s consultants and has input in the design process however the primary responsibility for ensuring that the design and construction of the hotel meets the Operators requirements is always with the Owner and the Owner’s consultants.

Normally the fee for this work is a negotiated fixed fee paid progressively during the design and construction of the hotel.

What are Pre Opening Services?

Before a hotel opens there is much to be done to prepare it for opening and this takes some time. The General Manager of the hotel and key executives will be employed several months before the hotel opens to plan and implement the plan for opening.

The plan will extend to matters such as recruitment of the entire staff of the hotel, the training of all staff, pre- opening and opening marketing, public relations and communications, service and goods procurement and supply contracts.

A budget for pre-opening services is prepared by the Operator and submitted to the Owner, in advance of commencement of those services, for approval by the Owner as the Owner has to fund these expenses before the hotel opens.

Who employs the general manager and the hotel staff under a HMA?

The Owner owns the hotel Business so it is the Owner who employs all of the staff.

Generally the Operator nominates the hotel general manager and in some cases other key staff. Typically these executives have worked in hotels in the Operators system and are well versed in the system. Sometimes the General Manager will remain employed by the Operator but often this is not the case for tax reasons.

Not only is the hotel general manager critical to the successful operation of the hotel but he is also an extremely important person in terms of establishing and maintaining an effective relationship between the Operator and the Owner. His knowledge and experience of the Operator’s system brings to the hotel on a day to day basis the personality and effects of the Operator’s brand values. Whoever he is employed by the general manager is the Operators in house representative on the spot at the hotel.

The Owner will normally have a right to approve the general manager or at least to object to the general manager’s appointment or continuing appointment. This only reflects the practical reality that if the general manager and the Owner’s representative do not get on the relationship is never going to work.

How does the Owner know what is going on and exercise influence under a HMA?

Whilst the Owner appoints the Operator to manage the hotel and should not interfere with hotel operations there are few Owners today who do not asset manage their hotels.

The opportunity to do this is provided through:


Annual Plan;

Monthly Management Reports against the Annual Plan;

Hotel Operating Committee Meetings;

Meetings with Operators senior regional or country executives; and

The ability of the Owner to exercise influence over the general manager appointment.

What is the HMA Annual Plan and why is it important?

The Annual Plan is the annual business plan and budget for the operation of the hotel. The plan includes projections of income and expenditure and capital expenditure as well as detailed assumptions and plans supporting those projections such as market performance assessments sales, manning plans, training plans and marketing plans.

Prior to the commencement of each hotel fiscal year the Operator produces a draft Annual Plan and submits the plan to the Owner for approval. The Owner reviews the plan and engages in discussion with the Operator regarding the plan and the assumptions on which it is based. This is the opportunity for the Owner to exercise influence over the operation of the hotel by challenging the assumptions and forecasts for the hotel.

Once approved the Annual Plan provides the basis for the Operator to manage and direct the operation of the hotel for the forthcoming fiscal year.

If there is a dispute regarding the Annual Plan for example the Owner refuses to approve some aspect of the plan then the dispute is subject to an independent dispute resolution process, like expert determination or arbitration.

What happens during the fiscal year in terms of Owner information and influence?

Typically an operating committee, comprised of the general manager and financial controller of the hotel and representatives of the Owner, is established under the HMA. This committee meets regularly during each fiscal year, in many cases monthly.

Every month the hotel generates management accounts for the operation of the hotel including comparisons against the annual budgets in the Annual Plan. The management accounts are reviewed by the operating committee and material variances are discussed as well as plans to address those matters or to otherwise improve performance. The operating committee meetings provide a regular forum for the Owner to stay across the performance of the hotel.

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INTRODUCTION

This is the second in a series of newsletters dealing with Hotel Management Agreements (“HMA”) and issues arising under such agreements.

The first newsletter in March 2016 dealt with a number of basic concepts. This newsletter deals with a number of specific issues which frequently arise in relation to HMAs.

CAN AN OPERATOR LEGITIMATELY LIMIT ITS LIABILITY UNDER AN HMA IN INDIA?

Under Indian law, agents are generally expected to exercise reasonable care in the performance of their duties and it is presently unclear whether an agent can contractually exclude or limit its liability for negligence. However, there is some case law which suggests that, in certain circumstances, an agent may be able to contractually limit its liability for negligence. How and to what extent this applies in the context of an HMA is unresolved. This situation may present a material opportunity for owners and a material risk for operators in disputes regarding management performance.

WHY SHOULD OWNERS BE INTERESTED IN BRAND STANDARDS AND WHY ARE THEY IMPORTANT?

Brand standards are those aspects of the physical hotel and services provided to guests which reflect the unique character of the brand and its promise to guests and customers. It is important that each hotel operated under the brand complies with such standards not only in design and construction but also in operation, so that hotels meet the expectations of its guests.. Brand owners (operators) are typically fanatical about adherence to their brand standards because failure to comply with them reflects adversely on the integrity of the brand, its appeal to guests, and ultimately the value and reputation of the brand; the operation all hotels under the brand. In consequence the HMA will typically include provisions which oblige the owner to meet the costs of maintaining the hotel so as to comply with brand standards and of operating the hotel in a manner which complies with brand standards. The brand standards of an operator will impact the design, construction, fitting out and equipping of a hotel and therefore the cost of development. Owners who have failed to fully apprise themselves of brand standard requirements in their due diligence on the operator and are often unpleasantly surprised when they understand the cost of compliance with brand standards. Brand standards also impact operational costs for example, the delivery of specific guest services or achievement of certain service levels in the delivery of services to guests result in higher manpower and operating costs. There is commonly a conflict between Owners wishing to minimize construction and operating costs against the operator’s need to maintain brand integrity and brand standards.

Before entering into an HMA the Owner needs to clearly understand what the Operator’s brand standards are and how those brand standards are implemented by the Operator in order to understand the impact on capital and operating costs pursuant to compliance with brand standards.

WHAT IS THE OPTIMUM TERM FOR AN HMA?

There is no simple answer to this question.

Operators have historically sought long terms (25 years plus) with multiple renewal options however average HMA terms actually achieved by Operators have, been reducing in recent times.

Hotel investments are long term investments, so it makes sense that HMAs are “long term” agreements. Hotel cycles are driven by changes in hotel supply, and hence, hotel demand and supply

HOTEL MANAGEMENT CONTRACTS 101 – PART 2 OCTOBER 2016


changes do not occur quickly. In most places it takes 3 to 4 years and in others 5 to 6 years to develop a hotel from conception.

Given these market characteristics, it does not make sense for an Operator to have an HMA for 5 years which might represent half a cycle.

On the other hand, Owners are increasingly not prepared to enter into long-term HMAs which have no regard or flexibility for the performance of the hotel or the Operator. Also, the ability of the Owner to terminate the HMA on sale of the property has become increasingly important.

If the Owners have the ability to terminate the HMA before expiration of the agreed term, especially performance-based termination, then the agreed HMA term is obviously less significant.

WHY ARE HMA OPERATORS INTERESTED IN HOW THE HOTEL IS FINANCED?

Operators focus on the Owner’s hotel financing to ensure that the financing is reasonable and the Owner is not over-leveraged.

Operators understand that hotel cash flows are volatile. The supply and demand driven nature of the business is one of a number of factors that contribute to that volatility. Operators know that hotels which are highly leveraged present a material default risk.

If a finance default occurs, the hotel will normally become subject to the financier’s control. This will threaten the security of tenure of the Operator under the HMA and thereby the Operators ability to continue to manage the hotel.

Operators will commonly seek to limit the amount of debt which an Owner can obtain on the hotel based on a maximum loan-to-value ratio, to reflect the level of debt service that can comfortably be expected to be achieved in the anticipated performance of the hotel.

Generally Operators seek Non Disturbance Agreements (“NDA”) with financiers to protect the position of the Operator under the HMA in the event of a default by the Owner. The HMA will typically provide for the Owner to procure that the hotel financier will enter into an NDA in a form annexed to the HMA.

Through the NDA the Operator seeks to ensure that the financier will honour the HMA if the Owner defaults under the hotel financing and the hotel becomes subject to the control of the financier or sold by the financier to a third party to recover its debt.

Lenders are often keen to enter into NDAs with Operators to ensure continuity in operations and a smooth transition from the Owner to financier and ultimately to the buyer of the hotel from the financier.

Owners have the least to benefit from NDAs because such NDAs can create difficulties with lenders who are either inexperienced with NDAs or in jurisdictions like India, where NDAs are not commonly accepted by lenders. Some lenders do not favour NDAs because they limit the ability of the lender to achieve the best possible price for the hotel, because under an NDA the hotel must be sold by the financier subject to the HMA, whereas a better price may be achieved without an HMA being in place.

WHEN CAN AN OWNER TERMINATE AN HMA?

Every HMA contains a provision which entitles the Owner to terminate it in the event that the Operator fails to perform its material obligations under the HMA.

Examples of non performance which would entitle the Owner to terminate include:

failure to pay money due to the Owner;

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failure to deliver the annual plan or financial reports due to the Owner; or

insolvency of the Operator.

In most cases, notice is required to allow the Operator the opportunity to remedy the default before termination can occur.

WHAT RIGHTS SHOULD AN OWNER HAVE TO TERMINATE AN HMA FOR POOR FINANCIAL PERFORMANCE?

An Owner appoints an Operator to manage its hotel based on the expertise and experience of the Operator in hotel management.

However, if, in spite of the Operator’s expertise, a hotel performs badly, should the Owner be able to terminate?

Many HMAs now contain “performance termination” clauses which allow for termination by the Owner if the financial performance of the hotel is consistently poor. For example, if for two consecutive years the hotel fails to achieve the target gross operating profit by a material percentage.

Generally such provisions are only useful to the Owner in a catastrophic scenario because the performance benchmark is the annual budget set by the Operator.

A detailed analysis of the structure of these provisions is contained in our Newsletter of March 2016.

WHAT RIGHTS SHOULD AN OWNER HAVE TO TERMINATE IN THE EVENT OF SALE OF THE HOTEL?

Hotels can be worth more with vacant possession than if sold subject to an HMA. Therefore, in order to maximise the value of their property, Owners commonly seek provisions which enable them to terminate the HMA upon sale of the hotel property to a third party.

Naturally, Operators resist such provisions because they effectively reduce a long term HMA to a short term HMA, triggered by a sale of the property, which the Owner controls.

However, this right does not come cheaply. Owners typically agree to pay a multiple of the average historical fees and charges paid to the Operator under the HMA as compensation for the loss of future profits that the Operator is deprived of as a result of such early termination.

WHAT NON-COMPETE PROTECTION SHOULD AN OWNER SEEK FROM AN OPERATOR?

Owners generally seek “Areas of Protection” (“AOP”) for their hotels, that is, areas within which the Operator will not operate another hotel in competition with the subject hotel.

Years ago the AOP would be a city. These days, with Operators having multiple hotels in large cities and multiple hotel brands, AOPs have shrunk in size to reflect much smaller zones or areas of exclusivity for the Owner’s protection.

The idea underlying these AOP arrangements is that the Operator should not have another hotel or hotels which compete with the subject hotel. Obviously the smaller the AOP the higher that risk.

Operators typically limit the AOP afforded to Owners to a radius of a few kilometres around the hotel and also to hotels of the same brand as the subject hotel, even if other brands of the Operator compete.

Owners should seek the broadest geographical and brand protection they can achieve for existing and future brands of the Operator.


The upcoming merger of Marriott and Starwood demonstrates how unexpected conflicts can easily arise.

As a result of the Marriott/Starwood merger, the combined entity will have approximately 120 hotels across India in more than 40 cities including:

15 hotels in Delhi/NCR and Bangalore each

11 hotels in Mumbai; and

6 hotels or more in at least 5 other cities.

This merger could result in AOP breaches which would require the consent of the relevant Owners. However, whether there is an AOP breach or not, when the Operator has more than 10 hotels in the same city there are obvious concerns regarding conflicts for each hotel Owner, unless the other hotels are clearly not positioned competitively.

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In a recent judgment1 the Mumbai Bench of the Income Tax Appellate Tribunal (“Tribunal”) has held that the payments received by Marriot International Inc. from the Indian hotels characterised as payments on account of international sales and marketing are not expense reimbursements but are income taxable as ‘royalty’ in India. This decision may have significant implications for the tax positions of both hotel owners (“Owner”) and hotel operators (“Operator”) under similar hotel management agreements for Indian hotels.

FACTS

Marriot International Inc. (“Marriott”) was a tax resident of the United States of America (“US”) and was a member of the ‘Marriott Group’ of companies (“Marriott Group”), which was engaged in the business of operating hotels worldwide under different brands including ‘Marriott’ and ‘Renaissance’ (“Brands”).

The Marriott Group companies which owned the Brands licensed them to another group company, namely Marriott Worldwide Corporation (“MWC”), which in turn sub-licensed the Brands to the hotels around the world operated by Marriott Group companies.

Three Indian hotels entered into separate license agreements with MWC (as sub-licensor) for use of Brands and paid a royalty for that purpose on which due taxes were paid in India.

Separately, Marriott entered into International Sales and Marketing Agreement (“ISMA”) with each of these Indian hotels to provide international sales and marketing services outside India. The ISMA provided for the following payments:

Marketing contribution (as a fixed percentage of hotel gross revenue) for international services for advertising, marketing, promotion, public relations and sales, including purchase of print and electronic media space, provided on a centralised or group basis for the benefit of the Marriott Group hotels;

Fees for advertising services (as a fixed percentage of gross hotel revenue);

Reimbursement of expenses incurred in providing services on a centralised basis to all the Marriott Group hotels, allocable between the hotels on a reasonable basis, including:

– Special Chain Services (Frequent Traveller Program etc.);

– Reservation System;

– Special Advertising Costs.

ISSUES

Marriott declared nil income in its tax return claiming the receipts to be in the nature of expense reimbursements and thus, not taxable in India. According to Marriott these receipts could at the most be considered as business receipts which are not taxable in India in the absence of a permanent establishment in India.

The Indian tax authorities held that the ISMA payments were taxable in India as a royalty and “fee for included services” under the India – US tax treaty.

Marriott appealed to the Tribunal.

1 ITA No. 1996 & 1997/ Mum/ 2011

HOTEL OPERATOR EXPENSES TAXABLE IN INDIA – OPERATORS & OWNERS BEWARE! FEBRUARY 2015


TRIBUNAL RULING

The Tribunal decided the issue against Marriott deciding that the payments were, for Indian tax purposes, a royalty based on the following rationale:

The survival of the ISMA was dependent upon the survival of the Hotel Management Agreement (“HMA”) which was entered into with another Marriott Group company;

The Marriott Group had undertaken tax planning and organised its affairs so as to separate and allocate each facet of the “job to be done” in managing each hotel to different companies in the Marriott Group. Each of those companies had entered into separate agreements with the Owners of the Indian hotels. However, all the agreements were interdependent so that all the operations could be ultimately controlled by Marriott Group only;

For each hotel the Marriott Group divided a single transaction, being the management of the hotel, into several components so as to ensure that each respective revenue stream was received by a separate Marriott Group entity;

Marriott’s claim that the ISMA payments were merely expense reimbursements on a cost-to-cost basis without any mark-up defied business logic as a commercial company would never work without profit;

The fact that Marriott maintained that it had no profit motive proves that Marriott was only an extended arm of the Brand owner and can be considered as a facade of that company;

The division of payments between the royalty payable to MWC (as sub-licensor of Brands to hotels) and payments to Marriott under the ISMA was tax planning through colourable device resulting in a loss to the revenue by reducing the amount of the royalty to MWC;

The corporate veil should be lifted because of the structured approach adopted by the Marriott Group;

The responsibility to maintain and/or enhance the ‘brand value’ always remains with the brand owner. In the instant case, Marriott had undertaken the job of marketing the Brands. Thus, the amount received by Marriott should be considered from the perspective of the original brand owner. As the advertising program would go to promote the Brands, the ISMA payments were in the nature of a royalty under Article 12 of the India - US tax treaty.

In dismissing the appeal, the Tribunal held that the ISMA payments were taxable as royalty and it remanded the matter back to the tax authorities to determine the entity in whose hands this income should be assessed i.e. whether in the hands of Marriott as a representative assessee or in the hands of any other Marriott Group entity.

It is important to note that the Tribunal also distinguished the following important cases which were relied upon by Marriott:

M/s Marriot International Licensing Company BV2 (“BV”): The Tribunal observed that in this case the nature of receipt of charges as per BV’s ISMA was considered independently without linking the same with the royalty payment. Unlike in the instant case, the tax authorities had not raised the argument of bifurcation of royalty payment into more than one component and thus, this view point of the tax officer was not available before the Tribunal;

Sheraton International Inc.3: The Tribunal observed that in this case there was no separate royalty agreement and the Tribunal in this particular case gave a clear finding that there was nothing on record to show that the real transaction was other than what was stated in the agreements.

2 ITA No. 416/Mum/2008 3 313 ITR 267

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CONCLUSION

In this matter the Tribunal applied the “substance over form principle”’ guided by the material facts in this case including:

There being extensive cross-referencing and interlinking of otherwise independent agreements entered into with separate entities within the same group and having the same term;

The relevant Marriott Group entities having the same address; and

The royalty for use of the Brands being a small percentage (0.5%) of hotel gross revenue while reimbursements and payments under the ISMA amounted to about 3% of the hotel gross revenue.

The circumstances and HMA documentation structure will determine the outcome of any challenge of this nature by the tax authorities and Operators need to be mindful of these matters.

This decision while directly impacting the tax position of Operators in similar circumstances also has important implications for Owners because Owners will have a corresponding withholding tax obligation with respect to payments they make to an Operator which are taxable in the hands of the Operator in India. Failure to comply with this withholding tax obligation can result in recovery of any withholding tax short fall along with interest and penalty and denial of corresponding business expenditure. Thus, it is imperative to consider the impact of this ruling on existing HMA structures as well as future hotel agreements.


INTRODUCTION

Intellectual Property Rights (“IP”) play a critical role in the hospitality sector.

IP goes to the very heart of the concept of business “goodwill” and business value, whether of the hotel owner, hotel operator or hotel franchisee, and is perhaps most commonly associated with the trade mark or brand used by a hotel. However, this is just one, albeit very important aspect of IP. There are many others.

It is important for hotel industry participants to understand IP because IP is important to the value of a hotel businesses and brands and can give rise to serious liabilities.

The purpose of this paper is to explore and explain the nature of IP in hospitality and why hotel owners, operators and franchisee need to understand IP.

What is IP?

IP concerns the exclusive rights which are conferred by law on the creator or owner of a brand, concept, idea, design or other distinctive information to prevent a third party from using that material.

For example, the owner of a brand or trade mark has the exclusive right to use the brand or trade mark on his goods or services and to prevent others from using the brand or trade mark on their goods or services.

Some IP can be registered with the relevant government authorities and in some cases the law requires registration in order to enforce the IP, for example in the case of patents and designs. In other cases registration is not required to enforce the IP; so it is important to know when registration is required and what the consequences of not registering are.

Trade Marks

A trade mark or “brand” applied to a hotel, serves as the primary identifier of the hotel and the particular goods or services that it offers. Taj, Oberoi, ITC Welcome, Four Seasons, Hilton and JW Marriott are all examples of hotel trademarks.

A trade mark can consist of a word or words or logos or devices used either alone or in conjunction with the words. Some trademarks consist only of words and others include a logo or a logo is used separately to identify the goods or services offered.

Many trademarks may arise in the conduct of a hotel business whether they are the names of food and beverage outlets or events or programs undertaken by the hotel. These reflect particular goods or services provided by the hotel. Wasabi at The Taj in Mumbai and Three Sixty at The Oberoi in New Delhi are examples.

The terms “trade mark” and “brand” although used interchangeably are not the same. A trade mark is a mark capable of distinguishing the goods or services of one person from those of others. A brand is a marketing term which embodies a number of different concepts of which a trade mark is one which contributes to the development of the brand.

A trade mark confers on the owner two distinct types of rights. The first are rights created by statute (the Trade Marks Act, 1999), and the second are rights based on common law, that is those arising under the general law of the land.

The statutory rights in respect of a trade mark arise from registration of the trade mark. Typically, a trade mark is infringed if a person who is not the proprietor of the mark uses an identical mark or a

INTELLECTUAL PROPERTY IN THE HOSPITALITY SECTOR FEBRUARY 2016

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similar mark in respect of goods / services similar to those for which the mark is registered. Ordinarily, in a suit alleging infringement of a trade mark, the proprietor is not required to show proof of extensive use of the mark or evidence of reputation being associated with the mark; the very fact of registration gives rise to the right to sue for infringement. Once the Court is satisfied that the registered mark and the infringing mark are similar - such as to cause deception or confusion – it is empowered to issue orders preventing the infringer from continuing with the act of infringement.

A trade mark owner can also assert its rights under common law, even if the trade mark is not registered under the Trade Marks Act, 1999. Common law rights arise from the long and continuous use of the mark. Through such use at common law the owner of the trade mark establishes goodwill and reputation. Such rights exist to protect dishonest use of a mark where the long time user of the mark has acquired a reputation through actual use and promotion of the mark. Otherwise unscrupulous people could simply adopt the mark that the owner had spent years developing. Under common law, the trade mark owner can also prevent another person from passing off its goods / services as those of the trade mark owner and in order to do so must show long and continuous use of his mark for the relevant goods/services since and as a result that the mark has acquired substantial goodwill and reputation.

Trade Mark Diligence

Any mark can be used as a trade mark provided that it is not used by another person already.

Not all trademarks will be protected equally by the Courts. The level of protection afforded depends on the nature of the trade mark which can vary considerably in distinctiveness:

A ‘generic’ or a ‘descriptive’ trade mark, for example ‘Holiday Inn’, will not enjoy exclusive protection unless it has acquired distinctiveness by long continuous use;

A ‘suggestive’ trade mark, for example ‘Waffle House’ will be afforded better protection because it is more distinctive; and

An ‘arbitrary’ or ‘coined’ trade mark, for example ‘Accor’ enjoys greatest protection so that in the event of infringement the likelihood of the Courts preventing the infringer from using a similar mark is highest because it would be considered to be likely to cause confusion.

So the nature of the trade mark and understanding the limitations of the chosen mark in terms of the scope of protection is very important. However, it is also important to:

undertake a search in the records of the Trade Marks Registry for existing registered marks; and

undertake a market investigation to ensure that there are no existing unregistered marks which are similar where common law rights may have already arisen.

An example of the risks of not undertaking a search can be seen from a case involving two restaurants from Tamil Nadu namely the Thalappakatti Naidu Ananda Vilas Biriyani Hotel (“Naidu’s”) and the Chennai Rawther Thalappakattu Biriyani Hotel (“Rawther”). Naidu’s is a restaurant chain based in Dindigul district of Tamil Nadu, which has been selling biryani since 1957. It started as a single restaurant by Nagasamy Naidu, who used to wear a turban (which is called a thalappakatti / thalappakattu in Tamil) when purveying his biryani. His thalappakatti (turban) soon became synonymous with his biryani and after his death in 1978; his restaurant was renamed to Thalappakatti Naidu Ananda Vilas Biriyani Hotel. It soon expanded and in 2005, opened a restaurant in the state capital, Chennai too.

Rawther, a restaurant chain based out of Chennai, began in late 2005. The explanation for the latter’s adoption of its mark, Chennai Rawther Thalappakattu Biriyani Hotel, was that the name was out of respect to his ancestor, Mr Sulaiman who was the Chief of the Horse Regiment during the time of Raja of Sivaganga, who too used to always wear a turban. The latter, applied for registration of its mark claiming use since April 2005, while the former applied shortly thereafter, claiming use since 1957.


After a prolonged battle, both in the High Court of Madras and before the Intellectual Property Appellate Board, Naidu’s mark was allowed to be registered based on the long use and evidence of wide repute associated with the name, while Rawther was refused registration of its mark. The Courts refused to let Rawther open any further restaurants with the word “thalappakattu” in its name.

Prior use was also an issue in the “Hiltone” case. Hotel Hilltone Ltd (“Hilltone”) is an Indian company which has been running the hotel-restaurant Hilltone in Mount Abu, Rajasthan, since 1973. It registered its logo, which includes its name, as a trade mark in 1982. Hilton International Corporation (“HIC”), which runs the international Hilton chain of hotels-restaurants, started by Conrad Hilton in 1925, began business in India around 1995. Shortly before that, HIC challenged Hilltone’s trade mark and also issued a notice to Hilltone to stop using its mark, threatening legal action. Hilltone refused and filed a suit against Hilton’s threat. Hiltone argued that having been in India since 1973 and having acquired wide reputation, it should not be told by Hilton now that it should stop using the Hiltone name and mark. After a prolonged case the District Judge hearing the matter granted a decree in favour of Hilltone. He observed that while Hilltone had been able to prove that it had been using its mark since 1973, the best evidence that HIC could adduce was that it had conducted business since 1995 in India. The Judge noted that although HIC claimed that it was known in India before 1995 HIC had not produced any satisfactory evidence to substantiate that claim.

There is a similar case involving international fast-food chain Burger King, which is being sued by the Indian company Burger King Restaurants Private Limited. The Indian company operates a restaurant based in Silvassa that specializes in vada pavs and dabelis, and asserts that it has been using the “Burger King” mark since 1979. The Indian company is seeking to restrain the international chain from entering India. This case is still in progress with a final decision pending.

The key lesson from these cases is that before adopting a mark, it is important to ascertain whether the mark is already in use by any other person and to register the mark in the Indian register of trade marks.

Confidential Information

Confidential Information is a very important issue in hospitality for owners and operators.

Owners will be concerned about their business information including their rates, occupancy and profitability to which operators have access.

Operators will be concerned about their business information, hotel systems, hotel plans regarding outlay facilities, planning, architectural and technological drawings, and processes used in the conduct of the hotel to which the owner and his staff have access like information regarding interior fit-out, manuals etc.

This information is made available by each party on the basis that it is confidential and will only be used for the purpose for which it was provided.

Problems commonly arise because information is disclosed or used when it should not be. There are also issues around who is entitled to certain information, for example, is information concerning the guests of the hotel information of the hotel owner or information of the operator.

Under Indian law, confidential information is not protected by any specific statute. However, Indian law does recognise a duty of confidence in certain circumstances, for example, between employer-employee and a director and his company and other special relationships. The ability to enforce a duty of confidence also depends on the terms of contract or agreement between the parties.

In Base International Holdings v Pallava Hotels Corporation Limited, the Plaintiff initiated a suit against the Defendants for breach of confidence and obtained orders restraining the Defendants from using the proprietary information of the Plaintiff. The Plaintiff was the owner of the mark “Holiday Inn” by virtue of the assignment of the said mark from Holiday Inns Incorporated. The Defendants agreed with the Plaintiff that the Defendants would construct and operate an upscale hotel to be known as “Holiday Inn Crown Plaza-Madras” in Madras and the Defendants would be licensed to use the Holiday Inn system. For that purpose proprietary, confidential and commercially valuable

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information was disclosed by the Plaintiff to the Defendants. It was agreed that “time is of the essence” of the agreement. The Defendants were required to complete construction of the hotel by a specified date. The Plaintiff had the right to terminate the agreement if the Defendants did construct and complete the hotel by the agreed dead line. The Defendants failed to complete the hotel by the dead line and the license to use the Holiday Inn system was not granted. However, the Plaintiff did not terminate the agreement. The Defendants then terminated the agreement with the Plaintiff asserting that they were prevented from constructing the hotel by the agreed dead line and on the very same day entered into an agreement with Hilton International for the branding and management of the hotel. The Court restrained the Defendants from using the Holiday Inn systems and associated information as confidential information and from transferring, alienating or creating any third party interest in the hotel or the operation of the hotel.

Copyright

Copyright is an exclusive right in literary, dramatic, musical and artistic works, cinematograph films and sound recordings.

The owner of the copyright has the exclusive right for a limited period to make or authorise making further copies of the work and has the right to prevent others from making copies of the work without his permission.

Ordinarily, the hospitality sector is not one that generates extensive copyright issues. However, one must not lose sight of the fact that copyright law largely protects logos and the trade dress. Trade dress is the artistic visual appearance of a product, and includes the design of a building or even the uniform of the hotel staff, the layout and interior décor of a restaurant or suite.

Another reason why copyright should concern the hospitality sector is licensing of the musical works. It is a usual practice for restaurants and other places to play music or have live bands performing on their premises for their patrons. Whenever a sound recording is played or a song is performed, it amounts to a utilization of a copyrighted work, for which appropriate licenses ought to be obtained, failing which the restaurant would be liable for copyright infringement and may have to pay damages in addition to stopping such performance or music being played.

Until 2012, there were two copyrights societies, namely the Indian Performing Rights Society (“IPRS”) and the Phonographic Performance Limited (“PPL”) that dealt with and provided licenses for lyrics/ musical works and sound recordings respectively. After the Copyright Act, 1957 was amended in 2012, IPRS and PPL were required to re-register under the Act to function as duly recognized and registered copyrights societies, which they failed to secure. Thus, currently, one would have to procure a license directly from the owner of the copyrights – usually the producer, the lyricist and the music director / composer.

Patents

A patent is a monopoly for a limited period (generally twenty years) granted to an inventor in return for his disclosing the particulars and working of his invention. Typically, for an invention to be patentable, it must:

be novel;

have an inventive step;

have industrial applicability; and

must not be expressly barred from patentability (a patent holder has the right to prevent anyone else from making / using his patented invention without his permission).

Patents are commonly used to protect a new and useful article or an improvement of an existing article or a new process of making an article.

Patents are not very common in the hospitality sector.


Designs

A design means the aesthetic features of shape, configuration, pattern etc of a finished article, whether in two dimensional or three dimensional form. Although design rights may not be as popular as the trade mark rights, they may have some use in the hospitality industry. The two dimensional protection given under the Designs Act, 2000 may be used to protect different pattern.

IP Licensing

Every hotel management agreement and every hotel franchise involves some form or IP licensing by the owner of the IP to another party.

In the case of a hotel management agreement it is the hotel operator which owns the IP and is licensing the IP to the hotel owner to use in the operation of the hotel. Whilst the operator is operating the hotel, it is doing so on behalf of the owners, and so it is the owner who is actually using the IP in the operation of the hotel and who needs to be licensed for that purpose.

Franchising is growing in the hospitality sector in India. In essence, a franchise is really a licence by the owner of IP to a person, the franchisee, who is authorised to use the IP on specific terms and conditions. Under Indian law, a hotel franchisee is regarded as a licensee, that is, a person permitted to use IP on certain terms and conditions.

In the case of a franchise, the licensee operates the business itself without any involvement in management from the franchisor whereas under the hotel management agreement the hotel owner is the licensee but he is operating the business with the assistance of the operator / franchisor.

So long as a licensee functions under a license agreement, whether that takes the form of a hotel management agreement or a franchise, he is not entitled to claim any rights in the IP beyond the terms of the licensing agreement. However, any deviations by the licensee from the license terms and conditions, if not acted upon by the IP owner or licensors, may weaken the latter’s IP protection.

In relation to trade mark licensing whether under a hotel management agreement or a hotel franchise, some IP factors that the parties should consider and bear in mind before entering into the agreement are as follows:

The trade mark owner should prepare usage guidelines for the proper usage of the trade mark, including the font, size, colour and style;

The period, scope and extent of license granted to licensee, including modes of termination of license and consequences of termination;

The extent of liability of licensee if branding (especially exclusive branding) requirements are not met;

Whether licensee may prosecute or defend cases of infringement / passing off, and if so to what extent and whether licensee is entitled to indemnity in such cases and if so to what extent;

Whether the trade mark owner is liable for proceedings against the licensee by guests / third parties and whether the trade mark owner is entitled to indemnity in such cases;

What are the rights that a licensee in case of brand dilution / loss of brand value? Whether loss of brand value amounts to breach of condition or warranty. What representations, warranties and indemnities should the licensee seek in this regard? Whether the licensee can seek threshold based exit measures in the agreement in case of brand dilution;

What are the rights of the parties in case licensee is unable to maintain branding requirements profitably? What representations, warranties and indemnities should licensor seek in this regard? Whether licensor can seek threshold based exit measures in franchise agreement in case of brand dilution?; and

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To what extent can the licensee seek revisions / amendments in the terms of the licensing agreement (particularly in the means and modes of implementing branding, for example brand standards) during the term of the license agreement?

Conclusion

IP issues commonly arise in the hospitality industry because IP is an important business asset for owners and operators. Owners who own and operate hotels need to be concerned about IP to protect their business goodwill and value. Operators of hotels are concerned to protect their brands, operating systems and confidential information because these are key elements of their business goodwill and value. Hotel Owners who employ Operators or take franchises are licensees of IP and need to be concerned that they understand the nature and extent of their obligations and liabilities in relation to the IP they licence and use. These are all important matters which deserve careful cons


BACKGROUND

Technological developments, and particularly, widespread and ever increasing data collection, the advent of cloud, “big data” and enhanced data analysis capabilities, make privacy issues major concerns for individual and business interests, not only in India but around the world.

In the normal course of doing customary business transactions with their guests, hotels collect substantial amount of personal guest data. These include confidential information required for registration, copies of passport/visa (in case of foreign travelers), contact details, credit card and other payment information (necessary to transact and pay for hotel stay and other hotel services), details of internet browsing information via hotel internet facilities and surveillance footage of guests within the hotel.

The advent and ease of superior data capturing and data analytics, coupled with the potential to enhance brand value, reputation and profitability, has given hotels an added incentive to collect and use such data for internal marketing purposes, whether that might be through loyalty programs or customer relationship management systems. Hotels like many other businesses today also collect guest data to better understand their guests, their buying behavior in the hotel, their preferences for hotel services and even their personal idiosyncrasies. This information is typically part of the hotel’s CRM or customer relationship management system which is used to market and sell hotel services more specifically to each guest.

It is in this environment that hotels need to evaluate the potential risk and consequences of data breaches.

DATA BREACH - REALITY CHECK

Instances of data security breaches in hospitality sector are now very common and seem to be occurring with an alarming frequency. A few recent instances which have rocked the hospitality sector are as follows:

In April 2016, a top official of a multinational corporation paid a large sum as extortion amount after miscreants hacked into his vacationing daughter’s hotel security. The hackers discovered her current location from her Facebook page and then hacked into the hotel’s security feed. The recording allegedly contained footage of the daughter in a compromising position. Though the hotel’s name did not become public, such news most definitely would spread in the client circles and affect the hotel’s reputation.

It was reported in February 2016 that the computer network of an international five-star hotel chain in India had been hacked to steal ‘loyalty points’. These loyalty points were used to book flight tickets and hotel rooms and, thereafter, they were advertised in newspapers and sold at half the price. This would have continued unnoticed but for an inadvertent act of a hotel guest who brought this to the notice of the hotel’s management.

In December 2015, a premier hotel chain reported that they had been infected by a malware in their payment processing systems so that the hacker could access and collect certain sensitive credit card data. The hotel chain was attacked in several countries, across the globe, including India. While the management claims to have responded quickly, it took four months to identify the breach.

In 2015, four globally well-known hotel chains reported payment information breaches.

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The number and size of breach instances are on the rise across the globe, including India. After such data breaches whilst some major hotel chains have claimed to have taken steps to rectify the lapses, the damage to their reputation is done and legal liability stands incurred nonetheless.

DATA PROTECTION - THE RISKS HAVE AMPLIFIED

There are multiple ways that data security can be breached because of the way in which hotels transact and provide services to guests, including the ones specified below.

The first point of a potential guest’s interaction with the hotel is for registration — be it through the hotel website, travel websites or telephonic/mail communication or hotel concierges. When such data is stored online a common server is usually used. If not protected securely enough, entire databases stand open to misuse.

The second and the most obvious point of attack are payment methods which contain valuable financial information (credit/debit cards, associated loyalty point schemes, etc.)

Apart from the above, hotels collect information for providing certain facilities like security, conference facilities, Wi-Fi, telephone, security footage, etc. All of these are stored and are susceptible to unauthorized access and use by something as basic as spyware or malware.

Data protection measures taken by hotels are generally not commensurate with the nature and extent of the sensitive data which they collect.

Organizations studying data breaches have time and again flagged the hospitality industry’s general tendency to be vulnerable to cyber-attacks because of their failure to put in place commensurate and effective safety practices. Insurance companies, too, have acknowledged receiving increased inquiries from hotels related to cyber risks.

While collection of guest data has immense potential for hotels and may enhance the guest’s hotel experience, it is also an immense responsibility for the hotels.

Failure to effectively protect the confidential information of the guests can be a major risk to the reputation of the hotel and the brand name. That risk is compounded by the ability of guests to discuss and air grievances publicly through social media platforms generally and more particularly, through travel/hospitality specific websites.

There are also civil and criminal prosecution risks involved where hotels fail to effectively protect and secure guest data.

DATA PRIVACY & PROTECTION REGIME IN INDIA

The right to privacy has been recognized by judicial precedents as a part of 'Right to Life and Personal Liberty' (Article 21 of the Indian Constitution). Further, the Information Technology Act, 2000 ("IT Act") and the Information Technology (Reasonable Security Practices and Procedures and Sensitive Personal Data or Information) Rules, 2011 ("Rules") framed under the IT Act, along with the Indian Penal Code, 1860, (“IPC”) are the predominant statutes in the sphere of data privacy and data protection in India.

The Rules comprehensively address security practices and procedures relating to Sensitive Personal Data or Information ("SPDI") which is defined to inter alia include passwords, financial information (bank account, credit card, debit card or other payment instrument details), health related information, biometrics, etc.

From the SPDI definition, it is evident that hotels possess a wide range of SPDI which is required by statute to be protected.


LEGAL MANDATE FOR DEALING WITH SPDI

The Rules comprehensively provide for protection of SPDI across a wide range of activities, from collection of SPDI to its grievance review, some of which are discussed later.

SPDI Collection & Protection

The Rules require transparency in data collection procedures to ensure that the guest (provider of SPDI) is informed in advance of the privacy policy of the hotel and consents to it before the hotel captures guest SPDI.

The hotel is also required to take reasonable steps to inform guests regarding the hotel’s purpose for collecting SPDI, the intended recipients of the information and the contact details of the agency collecting and retaining the information. Further, the Rules require that the guests be permitted to review or amend any SPDI and withdraw consent at any time. If consent is withdrawn, the hotel has the right to discontinue provisions of services to the concerned guest.

The Rules specify that the security practices employed by a hotel to protect SPDI are to be commensurate with the nature of information being protected. Accordingly, the Rules specify International Standards (IS / ISO / IEC 27001) or other practices which are approved and notified by the Central Government as the standard for handling SPDI.

SPDI Disclosure & Transfer of Information

Disclosure of SPDI to third parties is only possible if the guest has consented to or there is a contract with the guest to that effect.

Further, SPDI can only be transferred to an entity that is complaint with similar privacy requirements as set out under the Rules. Neither the IT Act nor the Rules provide a "safe harbour" in this regard.

Privacy Policy & Grievance Review

The Rules mandate that the privacy policy should contain prescribed details such as the type of information collected, purpose for such collection, disclosure policy, security practices and procedures followed, etc. Additionally, the policy must be made available to providers of SPDI and should be clearly published on the website.

The collector of SPDI is also mandated to appoint a Grievance Officer and to display the Grievance Officer’s name and contact details on their website.

CERTAIN LEGAL CONSEQUENCES OF BREACH

Breach of obligations imposed by Section 43-A of the IT Act (including the Rules) results in civil liability to compensate the affected person by payment of damages for the loss suffered.

Further, Section 72-A of the IT Act imposes an obligation on a person who obtains any material containing personal information while providing services under the terms of a lawful contract, from disclosing the personal information without the consent of the person concerned or in breach of contract. In this Section, the parameter is 'personal information' and not SPDI, thus making the ambit of information covered very broad.

Contravention of Section 72-A of the IT Act is a punishable offence and attracts criminal liability where the disclosure of personal information is with the intent to cause, or with knowledge that there is a likelihood of causing, wrongful loss or wrongful gain to the person concerned. The penal liability includes a fine of up to INR 500,000 (Indian Rupees Five hundred thousand) and/or imprisonment of up to 3 years.

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A FEW PRACTICAL TIPS

First and foremost, putting in place a comprehensive privacy policy detailing the scope of information procured by the hotel, its future use, storage, etc. is central to a concrete data management system. Further, every guest should be required to sign the policy (either manually or online) as an indication of the guest’s consent. It would go a long way, if the policy specifies in detail, the rights and obligations of the hotel, the manner of storage of information, disclosure to third parties, if any. The drafting of the policy should ideally be undertaken by a person aware of the law in order to strike a balanced policy which not only addresses legal compliance but also the interests of guests and the hotel.

Third party disclosures of information need to be governed by comprehensively and carefully drafted documentation in order to conform to the data protection laws.

Privacy policies, though effective, are incomplete without appropriate security procedures being in place to help the management access, handle, use, retain and disclose such data appropriately.

The hotel website, internal management software, payment avenues, servers/routers, security cameras, etc. need to be protected proactively against threats - internal or external. For example, against internal threats, limiting access to the hotel server based on seniority of staff is an effective way to monitor and hold staff accountable for unauthorized access, use, etc.

Technology is constantly evolving and so are modes of hacking and other modes of illegal intrusion. Thus, all information technology systems used by the hotel, including appropriate firewalls and other data protection software, need to be routinely updated. Additionally, splitting the computer network, building electronic firewalls, encryption of data (especially for SPDI) are some other methods that can be explored.

The ambit of activities involved in data protection, makes training of employees in cyber security practices critical. Employees should also be trained to expeditiously report instances of actual and potential data thefts, internally and/or to appropriate authorities.

Apart from routine internal checks by the hotel for updating their security practices against threats, hiring professionals to manage compliance procedures and policies in place, would go a long way in safeguarding guest data.

Cyber security insurance should be considered as a viable protection for hotels against large-scale damages which may arise from data security breaches.

CONCLUSION

Guest goodwill, loyalty and trust are crucial to hotel and brand business reputation, and value.

While a good reputation is developed over years of dedicated and consistent efforts by the hotel management and staff, one inadvertent lapse can invite grave financial and legal problems.

Serious financial and business consequences will ensue for a hotel business which does not take data protection seriously and put in place appropriate safeguards. The risk and cost of non-compliance is not something to be taken lightly.


INTRODUCTION

Corruption is today an international issue and anti-corruption laws both in India and abroad are increasingly relevant to how business is done. No one is immune. United States and the United Kingdom hotel companies and investors are bound by strict anti-corruption laws which reach well beyond the boundaries of their home countries and regulate how those companies can do business in India and abroad. Many other countries are considering similar legislation. Indian hotel owners and others dealing with foreign hotel operators and investors are coming to understand the reach of foreign anti-corruption laws that impact them and their business relationships in potentially many ways.

Government opacity and the incongruence of legally acceptable business practices in geographies such as the United States and the United Kingdom, and those prevalent in emerging markets like India as well customs and cultural nuances of doing business, is brought up in sharp relief.

The nuanced inter-play between India’s Prevention of Corruption Act, 1988 (“Indian Law”) and the extra-territorial impact of the U.S. Foreign Corrupt Practices Act, 1977 (“US Law”) and the UK Bribery Act, 2010 (“UK Law”) produces a veritable tightrope for multinational hospitality companies doing business in emerging markets and for the parties in India whom they deal with.

Many of the major international hotel operators and investors based in the United States are very much interested in doing business in India and these facts combined with aggressive enforcement of the US Law by the government of the United States, as a tool to counter transnational bribery and corruption by companies operating abroad, means that these issues are very much “alive” in the hospitality industry in India today.

We highlight in this article, what this anti-corruption alphabet soup means for your hospitality business.

Can your business stomach the anti-corruption alphabet soup?

International hospitality players will often find themselves simultaneously subject to the provisions of the US Law, UK Law and Indian Law. This can present a number of difficulties and challenges in compliance.

The Indian Law prohibits:

public servants from receiving any kind of gratification or thing of value in connection with the discharge of official function;

a public servant receiving a bribe; and

any person offering a bribe as well as any middleman or a third party acting on behalf of a business entity influencing a public servant may make such business entity liable to be prosecuted.

While the US Law has exemptions for grease payments or facilitation payments to expedite non-discretionary governmental functions, the Indian Law has no such safe harbours. Consequently, while the books and records requirements under the US Law require recording such payments judiciously, such compliance would constitute a violation of the Indian Law.

While the US Law permits promotional and business expenses where the amount involved is small, there are no such dispensations under the Indian Law and / or the UK Law, lowering the threshold for companies to trip up. Further, the UK Law includes a prohibition on bribery of private individuals as well: the only safe harbour provided being the defence that appropriate and adequate systems and processes have been put in place to detect bribery.

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It is important to note that breach of the US Law and UK Law gives rise to serious sanctions for not only those directly involved but people at the highest level in these companies (directors and senior executives) whose responsibility it is to ensure that companies have systems in place to ensure compliance. So apart from penalties and obvious reputational damage to the offending companies, there are potentially serious consequences for the highest echelons of these companies which is why their systems reach out beyond their borders into emerging markets.

Learning from History

Some examples in the hospitality industry are:

In 2007, York International, a global provider of heating, ventilation and air conditioning, paid $22 million in penalties for a variety of unlawful payments, including payments made to secure construction contracts for luxury hotels in the UAE;

Las Vegas Sands, a Fortune 500 company that owns and operates integrated casino resorts in Asia and the U.S., admitted to the Securities and Exchange Commission (“SEC”) that it had likely violated the US Law in the course of its interactions with Chinese officials in Macau; and

In 2012, Wynn Resorts, an NYSE-listed company that develops and operates casinos in the U.S. and Macau, was criminally investigated by the SEC in connection with a US$135 million donation made to the University of Macau.

Some examples with an India-nexus, outside of the hospitality industry are:

In 2010, Dow Chemical Company was fined by the SEC for bribes paid by its fifth-tier Indian subsidiary to government officials to expedite approvals to permit the sale of certain pesticides in India, that were banned in the United States;

In 2011, Kraft Foods was investigated by the SEC in connection with the use of consultants to allegedly bribe government officials to procure of governmental approvals at Cadbury’s Indian subsidiary which Kraft came to acquire as a part of the Cadbury acquisition;

In 2011, Diageo plc, a leading producer and distributor of premium, branded alcoholic beverages, was subjected to a large disgorgement order and civil penalties by the SEC for having routed improper payments through various subsidiaries including in India, to secure sales contracts and tax benefits;

In 2012, Oracle Corporation agreed to pay a $2 million fine for having failed to prevent its Indian subsidiary from making unauthorized payments through various sham vendors to secure government contracts;

As of 2014, the DOJ and the SEC were investigating Walmart in connection with bribery and improper payments by its Indian joint venture with Bharti Retail, in connection with the procurement of regulatory approvals; and

A number of other multinationals have faced regulatory action in connection with US Law violations in relation to their Indian operations including Westinghouse Air Brake Technologies Corporation, Electronic Data Services Corporation, and Textron, Inc.

How the Cookie Crumbles

Anti-corruption matters can prove very costly for your business. Regulators are adopting innovative approaches to effect convictions and, an anti-corruption investigation could be the start of your woes.

Hotel approvals permits and consents: The hospitality space tends to be heavily regulated and typically requires a multitude of regulatory approvals to do business. Companies often unwittingly exchange benefits for governmental benefaction and ease of doing business.


Franchisee models: Franchisee models provide a mistaken sense of insulation and do not shield the franchisor from liability since franchisors indirectly stand to gain financially from the arrangement.

Promotional payments: In the hospitality industry, the line between promoting a product (say, a luxury suite or a specialty restaurant) and giving something of value (say, a three-night stay at a spa), in exchange for business is blurred. There are no bright-line tests and a good yardstick in such situations is to consider the situation from the perspective of a competitor – if it looks like impropriety, it probably is.

Aiding and abetting: While the US Law does not make aiding and abetting punishable, under other US federal law, an act of aiding or abetting the commission of any crime including under the US Law is treated equally with an act of committing the act itself. When it is clear to the hospitality provider that hospitality is being used by someone else to gain a business advantage this could also trigger liability on the hospitality provider. Unfortunately, there do not appear to have been any cases that shine light on this issue.

Bounty hunting under Dodd Frank Act: The Dodd Frank Act’s whistleblower and bounty hunter provision creates powerful financial incentives for whistleblowers to report corporate wrongdoing to the authorities before bringing it to the notice of the company by entrenching anti-retaliation mechanisms to protect the whistleblower from backlash from the employer. This law also promises a monetary award of between 10-30% of any penalty exceeding USD 1 million imposed. Whistleblowing is often swiftly followed by regulatory investigations and the misery is piles on. Whistleblowers are commonly found to be disgruntled ex-employees or competitors.

Shareholder class actions and derivative litigation: Anti-corruption regulatory investigations or enforcement actions are often swiftly followed by a class action suit filed by aggrieved shareholders against the company or a derivative litigation against the board of directors, typically accusing the defendants of having issued false statements about the company’s operations. Importantly, where illegality is involved, insurers deny liability or have an option of doing so which means the company and its officers are on their own.

Creative US Law enforcement: Recent cases suggest that the United States Department of Justice (“DOJ”) is creatively deploying the U.S. Money Laundering Control Act to convict foreign officials who have received illegal gratification (since they cannot be prosecuted under the US Law) and thereby, ensuring that such foreign officials co-operate and assist the DOJ in prosecuting companies that have violated the US Law, in cases which previously seemed hard to prove.

Navigating Troubled Waters: Practical Considerations

The need for a well-thought through and focused approach on anti-corruption compliance, tailored and responsive to a company’s business and risks, cannot be overemphasized. There is no one-size-fits-all rule as an ounce of prevention is worth more than a pound of cure. Some of the tools available which require consideration are:

Tone at the top: Senior management needs to make it absolutely clear that bribery, in any form, will not be tolerated so as to ensure that the same approach percolates downwards.

Meaningful training: All employees, in particular, those tasked with interacting with governmental officials in their respective countries must be thoroughly familiarised with the obligations and penalties under the US Law. A transgression at a lower level indirect subsidiary may cause chagrin to the parent company.

Effective Internal reporting mechanisms: Effective, smooth and efficient reporting mechanisms should be established, whereby officers can resolve problems and employees are encouraged to bring potential issues of concern to light as soon as they arise.

Formulating a customised compliance policy: It is essential to put in place a compliance policy that reflects the specific nature of the business and the risks and challenges it faces. Using

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something generic is unlikely to be comprehensively effective for a specific business/industry because each presents its own special risks and challenges.

Due diligence on third parties and agents: Appropriate diligence and background checks on government-facing third party vendors and contractors are essential since unknown actions by third parties can have dire consequences. Generally speaking, companies should carefully review contractual terms to ensure that they reserve periodic audit rights, termination rights, and demand periodic certification from counterparties that they understand and have complied with applicable anti-corruption laws and regulations.

Dynamic internal audit process: The compliance program and internal policies should be checked at different points in time through a dynamic and responsive process where defects are identified and rectified on an on-going basis.

Conclusion

Doing business in emerging markets is lucrative but fraught with risk in terms of both attitudes and expectations about bribery and cultural nuances. Understanding how the patchwork of international anti-corruption laws operates in the international hospitality industry and how it impacts your hospitality business is vital.

Violations are costly and can be extremely damaging not only in terms of substantial fines and potentially jail time for senior executives, but also in terms of erosion of shareholder value, loss of customers and corporate/brand reputation. A pro-active approach that blends continuous training of employees, a robust internal reporting mechanism and relentless vigilance and diligence on third party contractors will go a long way to mitigate the risk of anti-corruption law breaches in challenging business environments.


EXECUTIVE SUMMARY & OUR TAKE-AWAY

In what appears to be a setback to the mechanism for the sale of assets without the intervention of courts by asset reconstruction companies, banks and financial institutions, the Bombay High Court (Court), by its order dated 23 March 2016 (in the matter of Blue Coast Hotels Limited v IFCI Limited and Ors) (the Order), reversed the sale, by public auction, of the Park Hyatt (Goa) Hotel (Hotel) by IFCI Limited (IFCI) to ITC Limited (ITC). The sale had been undertaken pursuant to the exercise of rights by IFCI as a secured creditor under the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI), on account of a loan default by Blue Coast Hotels Limited (BCHL).

On the face of it, the Order portends bad news for lenders and distressed debt investors in India. While for the time being lenders need to grapple with the consequences of this Order (and examine it's implications on any proposed / pending enforcement actions), we are of the view that BCHL's lenders may be able to mount a successful legal challenge against several aspects of this Order. As such, it may not, eventually, withstand the scrutiny of the appellate court and thereby, not hinder the settled enforcement process available to lenders under SARFAESI.

Brief Facts

BCHL availed loans of INR 1.5 billion from IFCI, secured by a mortgage on the Hotel property, along with hotel movables, and subsequently, failed to repay the outstanding dues. Accordingly, IFCI exercised its rights as a secured creditor by invoking the SARFAESI to recover its debts. On BCHL being unable to pay its debts, IFCI issued an auction notice for the Hotel, and sold it to ITC, the sole bidder.

IFCI’s enforcement of the mortgage was challenged by BCHL on the ground that the sale was not in compliance with SARFAESI provisions, including that:

the mortgaged property included agricultural land, against which no enforcement action is possible;

the debtors representations against the enforcement notice was not considered by the creditor;

physical possession of the property was not obtained by the creditor prior to the auction sale; and

the manner of the auction sale suggested “collusion” between IFCI and ITC, as a result of which the sale failed to fetch “fair value”.

Key Conclusions of the Bombay High Court

The Court annulled the sale / enforcement of security and ordered that the Hotel be returned to BCHL, on inter alia the following grounds:

No enforcement against agricultural land: Even though security interest can be created on agricultural land, no proceedings or measures may be initiated under SARFAESI to enforce security interest over any property classified (or part of it) as agricultural land.

Land classification dependent on Government records, and not actual usage: While SARFAESI does not define agricultural or non-agricultural land, land classification in government records would be the guiding factor (and not the manner of usage of the land in question). The fact that

BOMBAY HIGH COURT REVERSES THE AUCTION SALE OF THE PARK HYATT (GOA): PROCEDURE TRUMPS SUBSTANCE APRIL 2016

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the relevant land was being used for non-agricultural purposes would not allow a creditor to invoke SARFAESI for enforcement of its security interest.

Sale notice does not absolve the auction purchaser: The Court brushed aside ITC’s contention that the SARFAESI sale notice issued in its favour absolved ITC (as purchaser) from any claims arising from the litigation between the borrower and the lender. A third party purchaser who is completely aware of pending litigation relating to, and existing encumbrances on, the secured property cannot argue the position of being a bona fide purchaser. A purchaser is expected to conduct necessary due diligence and cannot be permitted to show ignorance and claim equity after taking a calculated risk.

Facts suggest “collusion”: The Court was of the view that “collusion” between ITC and IFCI could not be ruled out: as there was only one participant in the auction i.e. ITC, the bid price of ITC was only INR 1000 higher than the reserve price set for the property (INR 5.15 billion), and ITC agreed to acquire the Hotel despite being aware that IFCI was, at the relevant time, not in physical possession of the Hotel – each of which factors prevented the property from realizing its fair market value in the auction.

Debtor representations cannot be ignored: If the borrower makes any representations or objections against a SARFAESI notice, it is mandatory for the creditor to decide on such representation or objection and communicate its decision, with reasons, to the borrower within 15 days of receipt of such representation.

No sale without taking physical possession: SARFAESI encapsulates the concepts of ‘symbolic possession’ and ‘physical possession’. Symbolic possession is recognised to protect the interests of the creditor in the secured asset, once the borrower has failed to make the payment as demanded, and also to serve as a notice to the public at large that the relevant property amounts to secured assets of the creditor. This also implies that the borrower still retains the physical possession of the property and can continue to make efforts to procure repayment of the loans.

No sale without taking physical possession (contd.): An auction process cannot be initiated by the creditor while having only symbolic possession of the secured assets. The Order has interpreted the mandatory provisions of SARFAESI to mean that, unless the secured creditor first obtains physical possession before initiating the auction process, the full and real market value of the assets may not be realised as purchasers may be hesitant to participate in the auction, solely on the basis of the creditor’s symbolic possession. The purposive interpretation of SARFAESI requires the interests of the borrower to be safeguarded and thus, secure the maximum price of the mortgaged property by following due process. To give effect to such intent, the mortgaged property should be transferred to the third party purchaser only after acquiring physical possession and clear title.

When may the Creditor apply to the Magistrate to take Physical Possession: If the creditor is unable to take physical possession on account of resistance from the borrower, such a creditor may, under the SARFAESI, apply to the Magistrate to assist in acquiring physical possession of the secured property. The Magistrate, while acting on such an application, has to be provided with an affidavit setting forth the required information, and only after perusing and being satisfied with the contents of the affidavit, the Magistrate may pass suitable orders enabling the applicant / secured creditor to take physical possession of the secured assets. It is imperative to note that the Order specifies that compliance with the foregoing is not merely procedural but mandatory in nature.

More importantly, where the debt of the creditor has been satisfied before it has been able to take over physical possession of the secured asset e.g. where the receipt of the sale consideration from the purchaser of the secured asset satisfies the debt, neither the creditor nor the purchaser will be able to attain physical possession of the property by resorting to the aforesaid assistance of the Magistrate. As such, in the facts of this case, IFCI was not in a position to take the assistance of the Magistrate in handing over physical possession to ITC.


Debts Recovery Tribunal (DRT) will not enforce in absence of compliance with procedure: The scheme of SARFAESI is such that where mandatory provisions have not been complied with, the enforcement actions undertaken by the creditor are open to scrutiny. If such enforcement is found to be non-compliant, the DRT is empowered to not only set aside the actions of the secured creditor, but also restore possession of the secured assets to the borrower.

Once invoked, SARFAESI is the sole remedy: Under the SARFAESI, there is no bar on financial institutions or banks to invoke other laws and related provisions for enforcement of security interest. However, once the SARFAESI has been invoked and the mandatory provisions of the SARFAESI have not been complied with, the creditor cannot seek protection under other laws, including but not limited to, the power of sale under the Transfer of Property Act, 1882 (as conferred pursuant to a mortgage in favour of the creditor).

Some key implications of the Order and its divergence from the SARFAESI framework

Strict interpretation of SARFAESI in a manner which puts several checks and balances on the enforcement process

The SARFAESI was essentially enacted to enable secured creditors to recover amounts due to them, by the enforcement of security without the intervention of courts. However, a strict interpretation of the enforcement provisions of the SARFAESI by the Court has skewed the enforcement process in a manner which was not originally contemplated. For instance:

the SARFAESI does not mandate that a secured creditor can enforce against assets charged in its favour, only if such creditor has physical possession of the assets1; and

the SARFAESI is also silent on the criteria for determination of agricultural land, and in light of this, the classification of land purely on the basis of government records ignoring the actual use of such land by the creditor may create challenges in enforcement of security, especially where only a part of the security comprises agricultural land.

Extinguishment of the debt (via receipt of sale proceeds) deprives a creditor of related enforcement rights?

Unlike as stated in the Order, a holistic reading of the SARFAESI clarifies that the receipt of sale consideration by the creditor on the sale of the assets from a third party purchaser does not strip such a creditor of its rights under the SARFAESI, as receipt of sale consideration and handing over of possession is part of the same transaction. This inter alia includes the creditor’s right to seek the Magistrate’s assistance in taking and transferring possession of immovable properties as part of the sale process to the third party purchaser.

A literal interpretation of this Order will strongly discourage prospective purchasers from participating in SARFAESI linked asset sale processes in which the creditor has not taken physical possession of the secured asset(s), and consequently, hamper the efficacy of any planned enforcement actions of a creditor.

Public auction v privately negotiated transactions?

Based on the aspersions cast on the sole bidder’s conduct in the auction process, to avoid claims of collusion, potential purchasers of secured assets may, for the time being, be well advised to rely on the “private treaty” route provided under the SARFAESI for their acquisitions. At the very least, the

1 For the purposes of enforcement and valuation, SARFAESI does not make a distinction between physical

possession and symbolic possession, as has been drawn in this Order. In fact, it may be counter-productive for lenders to take physical possession of units if they do not have the capabilities to operate such units in the interim period, prior to the sale.

47

terms of the negotiated purchase from lenders will thereafter not be open to claims of “bid-rigging” by the defaulting borrower.

Comment

The conditions laid down by the Court pose multiple difficulties in enforcement of security, and our analysis is that several of the Court’s positions are not consistent with the purport of SARFAESI; and are therefore not likely to sustain a challenge from the lenders. Further, the appeal which now lies before the Supreme Court, will be determined in the backdrop of increasing bad debts in the economy and mounting public scrutiny on inaction against defaulting borrowers: all factors which, in our view, go against the operation of several aspects of this Order.


AWARDS AND RECOGNITION We proudly attribute all our awards and testimonials to the dedicated and exceptional teams of experts we have from various disciplines to cater to our diverse clientele. Some of our awards are illustrated below:

Legal Era Awards 2013-14 Best Indian Law Firm of the

Year Best Private Equity Law Firm of

the Year

VCCIRCLE AWARDS 2014

Law Firm of the Year - Private Equity

India Business Law Journal Indian Law Firm Awards

2013 Best overall Law Firms Capital Markets / M&A

Corporate INTL Global Awards 2014

Capital Markets Law Firm

of the Year - India

India Business Law Journal Indian Law Firm Awards 2013

Competition & Antitrust Private Equity & Venture

Capital / Privatization

ACQ Law Awards 2013 - India

Full Service Law Firm of the Year

M&A Law Firm of the Year

Legal Era Awards 2013 Best Capital Market

Law Firm of the Year & Best Law Firm of the Year

(Kolkata)

Corporate International Legal Awards 2013

Law Firm of the

Year in India

India Business Law Journal 2012 Indian Law Firm Awards

Best Overall Law Firms Mergers & Acquisitions

IFLR – Asialaw India Awards 2012

Firm of the Year –

Mumbai and Calcutta 2012

International Legal Alliance

Summit & Awards

Best Indian Law Firm Silver Award 2012

India Business Law Journal 2012Indian Law Firm Awards

Capital Markets

Competition & Antitrust

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