27 February, 2020
Manchester City Football Club (“MCFC”) was banned from participating in club competitions of the Union des Associations Européenes de Football (“UEFA”) for the next two seasons, on February 14, 2020. A fine of EUR 30 million was also imposed on the grounds of having committed serious breaches of UEFA Club Licensing and Financial Fair Play Regulations (“UEFA Regulations”), and because of failure to cooperate with the investigation. The Adjudicatory Chamber of the UEFA Club Financial Control Body (“CFCB”) has found that MCFC overstated its sponsorship revenue in its accounts submitted to UEFA between 2012 and 2016.[1]
Background to the Case
Under the UEFA Regulations, football clubs are required to comply with ‘break-even requirements’, i.e. ensure that expenses of a club during a particular period do not exceed income by a prescribed amount[2]. In determining whether the break-even requirement has been fulfilled, income from related parties is suitably decreased to ensure that it is above fair value.[3] Similarly, expenditure by way of transactions with related parties is suitably increased.[4]
In November 2018, several articles were published by various news agencies, including Reuters, about MCFC (popularly known as “Football Leaks”).[5] The said articles claimed that (i) MCFC (which is owned by a member of the royal family from the middle east) had negotiated a three-and-a-half year sponsorship contract with a state-controlled investment fund (of the same country), worth about GBP 15 million per year; and (ii) there was correspondence between officials of MCFC and the investment fund saying that the direct obligation of the investment fund would only be GBP 3 million and the remaining GBP 12 million would come from alternative sources provided by a member of the royal family.[6]
After conducting an investigation into the alleged violations, the Investigatory Chamber of the CFCB decided to refer the case to the Adjudicatory Chamber in May 2019.[7] This decision of the Investigatory Chamber was challenged by MCFC before the Court of Arbitration for Sport (“CAS”). In November 2019, CAS ruled that the said appeal was not admissible because only the final decision of the Adjudicatory Chamber is appealable.[8] Thereafter, the Adjudicatory Chamber heard the matter and issued its decision. The UEFA has said that since the decision of the Adjudicatory Chamber is subject to appeal to the CAS, if MCFC wishes to exercise its right, the full reasoned decision of the Adjudicatory Chamber will not be published prior to the publication of the final award by CAS.[9] MCFC has said that they will be appealing the decision before CAS.[10]
Related-Party Transactions under UEFA Regulations
The UEFA does not prohibit related parties from being sponsors of football clubs. However, while calculating income of the club for the purposes of break-even requirement, it provides that in case of income transactions with related parties, the club must determine the fair value of the said transaction and, if the fair value is lower than the actual income from that transaction, the excess income will not be taken into account while calculating the income of the club for the purposes of the break-even requirement.[11] Without this provision, the owners/ shareholders would have been able to circumvent the prescribed limit of EUR 35-million deficit (with equity contributions) by channelling additional funds through related-party sponsors.
Apart from MCFC, the Football Leaks articles also claimed that a leading French club (owned by a company in which the Ministry of Finance of a middle-eastern country has a majority stake) had entered into a sponsorship contract with the tourism authority of the same country under which between EUR 700 million and EUR 1.125 billion was payable over 5 years depending on the clubs tournament performance, even though the tourism authority was not entitled to display its brand on the players’ shirts (the right for which sponsors usually pay the most money). Both MCFC and this French club had entered into settlements with the UEFA in 2014.[12]
Relevance for Indian Football
For the 2019-2020 season, the Indian Super League (“ISL”) is reported to have restricted clubs in their spending, in terms of player salaries by imposing a ‘salary cap’, which is the maximum overall expenditure that can be incurred by a club for the inclusion of players in the squad, including annual salary, bonuses, signing-on fee, etc. Loan fees is also included in the salary cap, but transfer fees is not. Separate arrangements cannot be negotiated by clubs, neither can they be guaranteed by clubs to serve as an incentive for a player to sign a contract at a lower fee. If a player receives money from any person, under a separate arrangement, as a way of inducing him to play for the club at a lower fee, then that money will also have to be below the salary cap. The sanction for exceeding the cap could be a fine and/or ban from signing players and/or deduction of points.[13] For convenience, these reported restrictions are hereafter referred to as the “ISL Regulations”.
While both the break-even requirement under the UEFA Regulations and the salary cap under the ISL Regulations seek to achieve financial fair play in football, there are some differences between the two. The break-even requirement under UEFA Regulations limits the club’s expenditure by linking it to the club’s income instead of imposing a uniform ceiling/ cap for all clubs. In other words, a club which earns more can spend more. However, the salary cap under the ISL Regulations attempts to create a level-playing field to foster better competition between clubs by imposing a uniform ceiling/ cap for all clubs, irrespective of their income. Another difference is that the salary cap is applicable only on expenditure in relation to players, whereas the break-even requirement covers all football-related expenditure[14].
Despite the aforementioned differences between the UEFA Regulations and the ISL Regulations, potential for related-party transactions being used to circumvent the same remains a common feature that regulatory authorities will be looking to address. There have been reports in the past of related-party transactions in other Indian sports coming under the scanner, in the context of salary caps.[15] A majority of the UEFA Regulations — such as the requirement of clubs to submit detailed financial information/ statements[16] and prove that they have no outstanding payments due to other football clubs, employees and social/ tax authorities[17] — are also found in the corresponding regulations of the Asian Football Confederation (“AFC”)[18], although the break-even requirement has not yet been adopted by the AFC. With reports of Indian football clubs participating in AFC competitions in 2021[19], and the owners of MCFC having recently acquired a majority stake in an Indian football club, which is part of the ISL[20], the convergence of practices and regulatory approaches in European football and Indian football may occur sooner than expected.
For further information, please contact:
Adarsh Saxena, Partner, Cyril Amarchand Mangaldas
adarsh.saxena@cyrilshroff.com
[1] https://www.uefa.com/insideuefa/news/newsid=2638659.html (Last Accessed: February 22, 2020).
[2] Articles 58 to 64 of the UEFA Regulations.
[3] Paragraph A(1)(k) of Annex X to the UEFA Regulations.
[4] Paragraph A(2)(f) of Annex X to the UEFA Regulations.
[5] Referred to in Paragraph 7 of CAS 2019/A/6298 Manchester City FC v. UEFA available at https://www.tas-cas.org/en/jurisprudence/recent-decisions.html (Last Accessed: February 22, 2020).
[6] https://www.reuters.com/investigates/special-report/soccer-files-fairplay-mancity/(Last Accessed: February 22, 2020).
[7] This decision was under Article 14(1)(d) of the UEFA Rules.
[8] CAS 2019/A/6298 Manchester City FC v. UEFA available at https://www.tas-cas.org/en/jurisprudence/recent-decisions.html (Last Accessed: February 22, 2020).
[9] https://www.uefa.com/insideuefa/news/newsid=2638659.html (Last Accessed: February 22, 2020).
[10] https://www.telegraphindia.com/sport/manchester-city-snarls-uefas-club-licensing-and-financial-fair-play-regulations-charges/cid/1746777 (Last Accessed: February 22, 2020).
[11] Paragraph B(k) of Annex X to the UEFA Regulations.
[12] https://www.reuters.com/investigates/special-report/soccer-files-fairplay/ (Last Accessed: February 22, 2020).
[13] https://www.goal.com/en-in/news/indian-super-league-isl-player-regulations-2019-20-season/10cjwhhz7jvxj1q4noxivikcmb (Last Accessed: February 22, 2020)
[14] Paragraph C of Annex X to the UEFA Regulations.
[15] https://www.espncricinfo.com/story/_/id/22572024/ipl-players-salaries-face-taxman-scrutiny (Last Accessed: February 22, 2020).
[16] Articles 47, 47bis and 48 of the UEFA Regulations.
[17] Articles 49, 50 and 51 of the UEFA Regulations.
[18] Article 12 of the AFC Club Licensing Regulations, 2016 and Article 6.5 of the AFC Cup Club Licensing Regulations, 2019.
[19] https://hindustantimes.com/football/isl-league-toppers-to-play-in-2021-asian-champions-league/story-qU3OhOLrOHMPZfU7wHFKkN.html (Last Accessed: February 22, 2020).
[20] https://timesofindia.indiatimes.com/city/mumbai/manchester-city-acquire-65-stake-in-isls-mumbai-city-fc/articleshow/72286440.cms (Last Accessed: February 22, 2020).
