The government in the past 10 months has approved over 6,000 investor claims such as matured company deposits and unpaid dividends through the Investor Education Protection Fund (IEPF) Authority, according to sources. The IEPF Authority, set up in 2016, had cleared only 800 claims till March last year.

The Ministry of Corporate Affairs has also issued notices to companies to submit the verification report of investor claims and also to transfer the unclaimed dividend and shares to the Fund. These monies are supposed to be moved to the IEPF if not claimed within seven …

The Ministry of Corporate Affairs has notified rules for winding up small businesses without having to go to a tribunal, under a provision in the Companies Act that offers an alternative to the commonly used liquidation procedure under India’s bankruptcy code.

The rules notified by the ministry further define provisions of section 361 of the Companies Act which allowed such an option for liquidating small firms with assets up to ₹1 crore.

As per the rules, those companies which have total outstanding deposit of up to ₹25 lakh, or those with outstanding loan including secured loan up to ₹50 lakh, or entities with up to Rs50 crore sales or those with paid up capital up to Rs1 crore are covered under this provision.

The rules mandate that the closure of the company will be carried out by the official liquidator hired by the government, who will take charge of the assets and deal with the claims of the company. If the liquidator finds any fraud having been committed by shareholders, directors or other officials of the company, the government may order a probe. The rules say that the central government will issue directions to the liquidator in case of companies going for summary liquidation similar to what bankruptcy tribunals do in other cases.

The Companies (Winding Up) Rules, 2020, signed off on 24 January and effective 1 April, prescribe how official liquidators have to go about in managing the resources of the company that goes into liquidation under various provisions of the law and the manner of selling assets under the guidance of bankruptcy tribunal.

The government is considering a new formula for payments to creditors of distressed companies resolved through the insolvency and bankruptcy law, which would give a better deal to unsecured lenders and operational creditors.

There are two options under consideration, a government official told ET.

Under one of the plans, the resolution amount would be split into two parts – liquidation amount set by the valuers before the resolution is started, and anything in excess of this amount.

Liquidation amount would be distributed to company’s creditors in accordance with the “waterfall” mechanism set out in Section 53 of Insolvency and Bankruptcy Code, as per the plan.

Under this mechanism, all claims of secured financial creditors must be fully paid before payments are made to unsecured financial creditors, who must in turn be fully paid before operational creditors.

Any amount in excess of the liquidation value would be split on a pro-rata basis among all creditors – secured, unsecured and operational.

The government has also proposed this formula for distribution of proceeds from the resolution of debt-ridden Infrastructure Leasing and Financial Services Group (IL&FS).

“One formula is that everyone has contributed to enterprise value, so up to liquidation value, secured creditors will have the first claim. Till liquidation value, Section 53 (waterfall mechanism) will apply. On the balance, everyone has a claim,” said a government official.

The second formula being considered is to set aside a fixed proportion of 5% or 10% of sale proceeds for operational creditors.

The government is looking at the National Company Law Appellate Tribunal (NCLAT), which is set to decide on the formula proposed by the government for distribution of proceeds from the sale of IL&FS group entities, before finally taking a call.

IL&FS is not formally under IBC resolution but the process is being overseen by the NCLAT.

“We are awaiting judgement in the IL&FS case,” said the official.

Experts however point out that while the move may help protect the interest of operational creditors, which are often small businesses, it may push financial creditors to opt for other options for recovery.

The Securities and Exchange Board of India (Sebi) on Monday extended the deadline by two years for the implementation of its directive to split the post of chairman and managing director (MD) or CEO for the top 500 listed entities by market capitalisation. Firms now have time till April 2022 to comply with the directive.

The markets regulator had earlier directed the top 500 listed entities to ensure that the chairperson of the board should be a non-executive director and not be related to the managing director or the chief executive officer of the firm — a directive that was to be implemented by April 2020. The earlier directive to implement the split in the roles was done following recommendations by the Sebi-appointed Kotak committee on corporate governance.

Experts believe that the deferment announced on Monday was a bit surprising considering the regulator’s strong stand on the issue back in 2018. As Rishabh Shroff, partner at Cyril Amarchand Mangaldas, said the Kotak committee recommendations made a compelling case for the move. “Companies are still struggling to break the tight multi-generational link between the post of chairman and MD being the same promoter patriarch. If the same individual as chairman & MD was creating shareholder value, why should a company change it? But the law is clear on this now — it’s just been deferred. So, promoters have two years to see how to make this transition,” he said.

The Federation of Indian Chambers of Commerce and Industry (Ficci) welcomed the Sebi’s decision. Sangita Reddy, president, Ficci, said, “This was part of multiple representations made by Ficci and we appreciate that Sebi has extended the deadline as managerial continuity, unified vision and speed of execution are crucial to business success and are facilitated in family businesses.”

The data from Prime Database showed that at big private companies like Reliance Industries, Hindustan Unilever and ITC, the chairman also holds the position of the MD. Even many public sector undertaking companies like Coal India, Indian Oil Corporation and NTPC are yet to split the post of chairman and MD.

The Ministry of Corporate Affairs is giving final touches to the takeover code for unlisted companies and it is likely to be introduced soon, a senior government official told Business Standard.

The new rules, which are under consideration, will allow a person alone or together with other parties owning 75 per cent in an unlisted company to trigger a takeover of the entire shareholding by moving the National Company Law Tribunal (NCLT). Unlisted companies have no formal takeover code and shares are transferred on the basis of contracts and agreements. “We want to bring a …

The regulator is believed to be taking a relook at the regulations under the ‘Listing Obligations and Disclosure Requirements’ and is understood to be working on guidelines that clearly define material and non-material events.

BSE MD & CEO Ashishkumar Chauhan confirmed to FE that discussions were on at various levels between the regulator, the government and the exchanges on the proposed nature, timing and the mode of disclosures. “There is a debate about what to disclose because any person can write anything. If you don’t disclose it’s a problem, if you disclose it’s even more of a problem. Because of social media, you tend to have consequences which are unintended,” he said.

Discussions between Securities and Exchange Board of India (Sebi) and the exchanges began shortly after Infosys last year did not disclose to exchanges that it had received whistleblower complaints. In response to queries from the exchanges, Infosys had said: “Before conclusion of the investigation of the generalised allegations in the complaints, a disclosure under Regulation 30 of LODR Regulations was not required. The disclosure made on October 22, 2019, was to respond to multiple media inquiries and reports”.

FE has learnt the proposed changes have been discussed at Sebi’s Primary Market Advisory Committee (PMAC) and Secondary Market Advisory Committee (SMAC).

The Corporate Governance Report, submitted to Sebi by Uday Kotak in October 2017, says “high-quality information represents the basic input for governance because it reduces the twin problems of reliability and asymmetric information, which refer to the fact that professional managers, board members and auditors possess significantly greater information than the average investor in these companies”. “These may get exacerbated by the possibility that good news may be revealed aggressively while bad news may be allowed to percolate slowly or remain undisclosed. Therefore, high-quality information is the primary ingredient for enabling shareholders to exercise their voting rights in general meetings of the company and express their views on such key corporate decisions.”

The specific cases of Yes Bank and Infosys suggest disclosure norms need to be tightened. While in the case of Infosys, the details of the whistle blower were not disclosed till they appeared in the media, Yes Bank, according to legal experts, continuously disclosed details of capital raising programmes that led sharp movements in its stock price.

Stakeholder Empowerment Services founder JN Gupta said: “The definition cannot be cast in stone. What is material and non-material depends on case to case and cannot be strictly spelled out. Sebi has already given guidelines. Those definitions stand and are doing well. I would agree with Nilekani, all whistleblower complaints need not be disclosed, accepting and disclosing all whistleblower complaints may create a panic in the market which will lead to chaos. I would strongly oppose disclosing whistleblower complaints that are anonymous, those which have the name of the complainant should be disclosed if material.”

Away from the hustle bustle of city glare, on the outskirts of Gurugram, sits the office of the Central Registration Centre (CRC) where all applications for registering a company’s name and incorporation are processed and given a final stamp of approval.

The address of the office, set up by the ministry of corporate affairs three years ago, is not exactly a secret but officials do not want to publicise any specific details of the organisation housed on the premises of the Indian Institute of Corporate Affairs, Manesar. Reason? Formed with the purpose of taking away human interface and …

In a significant change in the liquidation framework, the Insolvency and Bankruptcy Board of India (IBBI) has prohibited secured creditors from selling assets of a company to any person restricted from submitting an insolvency resolution plan.

The move will close doors on promoters regaining control of their insolvent firms during liquidation proceedings. The IBBI said it has notified changes to the regulations with effect from January 6. The amendment also provides for a stakeholder to withdraw from the corporate liquidation account.

“The amendment clarifies that a person, who is not eligible under the code to submit a resolution plan for insolvency resolution of the corporate debtor, shall not be a party in any manner to a compromise or arrangement of the corporate debtor under section 230 of the Companies Act, 2013,” it said.

The IBC provides for time-bound and market-linked resolution process for stressed firms. In case the resolution process does not materialise, then the entity goes for liquidation. Section 230 allows for promoters or any class of creditors to reach an arrangement with other stakeholders to take control of the company once it is sent for liquidation.

Further, a secured creditor cannot sell or transfer an asset, which is subject to security interest, to any person who is not eligible under the code to submit a resolution plan for insolvency resolution of the corporate debtor.

Section 29A of the IBC debars individuals who have defaulted on debt obligations from bidding for stressed assets during the insolvency resolution process.

The amendment allows a secured creditor, who proceeds to realise its security interest, to contribute its share of the insolvency resolution process cost, liquidation process cost and workmen’s dues, within 90 days of the liquidation commencement date, the release said.

Also, the secured creditor has to pay excess of realised value of the asset, which is subject to security interest, over the amount of its claims admitted, within 180 days of the liquidation commencement date. When the secured creditor fails to pay the amount to the liquidator within 90 days or 180 days, as the case may be, the asset should become part of the Liquidation Estate, the release said.

Among others, the amendment provides that a liquidator should deposit the amount of unclaimed dividends and undistributed proceeds in a liquidation process along with any income earned thereon into the corporate liquidation account before an application for dissolution is submitted.

Registering a company? Soon there will be one fewer thing to worry about, with the Ministry of Corporate Affairs (MCA) planning to give a bank account number to each company as soon as it is incorporated. The move is part of the government’s push to better India’s ranking on the World Bank’s ease of doing business index, especially on the criterion of starting a business, a senior government official told Business Standard.

In giving ranking on ease of doing business, the World Bank has 10 parameters, of which starting a business is one. While India’s …

Private companies with total outstanding debt of Rs 100 crore or more to banks and financial institutions will now have to submit a secretarial audit report to the government, according to a rule notified by the corporate affairs ministry on Monday.

Under the previous rules, public companies with a paid-up share capital of Rs 50 crore or more or those with a turnover of Rs 250 crore or more were required to submit secretarial audit reports along with their board reports. In a move aimed at boosting the ease of doing business, the threshold for paid up capital at which private companies are required to employ a company secretary was raised from Rs 5 crore to Rs 10 crore.

A senior government official, who wished to remain anonymous, said these changes were aimed at reducing the compliance cost for companies without substantive operations and to protect public interest in the case of companies with substantial borrowings.

“A number of companies that do not have substantive business operations had represented that it is onerous for them to employ a company secretary only because they have a paid up share capital of Rs 5 crore and this was raising compliance cost,” the official said. Experts said the move is a step in the right direction and would push the ease of doing business.

Madhu Sudan Kankani, Partner – Deloitte India said the move to increase the threshold for the appointment of a company secretary would reduce the cost of compliance for smaller companies. “This eases the burden on private companies and is a welcome move from the ease of doing business, cost and compliance perspective,” said Kankani.

On the move to bring all companies with outstanding loans of Rs 100 crore or more under the ambit of secretarial audit, Kankani said: “This move will increase cost a little but will ensure better compliance by companies which have exposure to public funds.”

The Union Cabinet has approved an ordinance to further amend the Insolvency and Bankruptcy Code (IBC), to protect a winning bidder against liability of a corporate debtor for an offence committed prior to the commencement of the insolvency resolution process.

There would be no prosecution for any such offence from the date of resolution plan being approved by the adjudicating authority, an official statement said. This will shield the new owner and the corporate entity while instilling confidence in resolution efforts.

Union minister Prakash Javadekar on Tuesday said the Cabinet has cleared an ordinance to amend the Code.

“The amendment will remove certain ambiguities in the IBC, 2016 and ensure smooth implementation of the Code,” the statement said.

Experts say this will remove hurdles in the way of corporate resolution.

The move comes after investigation agencies filed cases against companies besides erstwhile promoters that were undergoing resolution process. The industry had represented to the government on the issue.

The amendments involve insertion of Section 32A in the Code, which will bar government agencies from attaching assets of an insolvent debtor undergoing bankruptcy resolution for prior offences. Assets of companies undergoing liquidation will also be protected from any action from government agencies. The amendments, however, allow for prosecution against promoters or management in case of criminal proceedings.

On December 12, the government had introduced a bill in the Lok Sabha to amend the Code. The bill seeks to remove bottlenecks and streamline the corporate insolvency resolution process, wherein successful bidders will be ring fenced from any risk of criminal proceedings for offences committed by previous promoters of companies concerned. The Code, which provides for resolution of stressed assets in a time-bound and market-linked manner, has already been amended thrice.

The government has proposed at least 100 individuals or 10 per cent of creditors such as homebuyers have to come together to initiate corporate insolvency proceedings under the amendments to the Insolvency and Bankruptcy Code (IBC).

Adding a clause to Section 7 of the IBC, the IBC Amendment Bill, tabled in the Lok Sabha on Thursday, has proposed to make this change retrospectively. It seeks to give 30 days for cases where a single homebuyer has taken a company to insolvency to comply with the revised criteria from the time of the commencement of the Act.

The proposed threshold will be applicable in all cases where a financial debt is owed to a class of creditors or is in the form of securities or deposits, and provides for appointing a trustee or agent to act as authorised representative for all the financial creditors.

The government has not, however, as demanded by industry bodies, yet announced an increase in the overall threshold for a company — currently Rs 1 lakh — to be admitted to the corporate insolvency resolution process.

The IBC has taken a big step in providing a clean slate to buyers of stressed companies by barring criminal proceedings such as attachment, seizure, or retention of property of such companies for offences committed before the initiation of insolvency proceedings.

The Amendment Bill has introduced clause 32A in this regard: “Notwithstanding anything to the contrary contained in this Code or any other law for the time being in force … The corporate debtor (company undergoing insolvency) shall not be prosecuted for such an offence from the date the resolution plan is approved.”

Anshul Jain, partner, PwC India, said: “While this will be a great reprieve to successful bidders, the IBC itself cannot fix this issue … Other laws have to be amended accordingly to make the intent of this amendment felt.”

Addressing the concerns of interim or rescue financiers, the Bill has also expanded their definition of “any financial debt raised by the resolution professional during the insolvency resolution process period” by adding “… and such other debt as may be notified”.

In its statement of objects and reasons, the Bill stated, “A need was felt to give highest priority in repayment to last mile funding to corporate debtors to prevent insolvency…in case the company does land in that situation — to prevent potential abuse of the Code by certain classes of financial creditors.”

The Bill, while adding an explanation in Section 14, which deals with moratorium, licences, registrations, or clearances given by the government, shall not be terminated due to insolvency, subject to the condition that there is no default in paying current dues arising out of the use of the licence during the moratorium period.

While some experts said most companies under the IBC would not benefit from the clause because they did not have sufficient funds to pay their current dues, other felt differently. “This will preclude the need to reapply for licences and permissions and save the successful resolution application a lot of management time and overhead,” said Uday Bhansali, president, financial advisory, Deloitte India.

The resolution professional has also been empowered in the Bill to continue to manage the stressed company even after the expiry of the corporate insolvency resolution period (CIRP), until an order approving the resolution plan or appointing a liquidator is passed.

This had become an issue in the case of Essar Steel, where the CIRP continued way beyond the 330-day deadline. The resolution professional will be allowed to start insolvency proceedings against another corporate debtor to recover dues.

The Bill has also clarified that the insolvency commencement date will be treated as the date of admitting the CIRP application and the resolution professional will have to be appointed by the same date.

Government agencies will soon be barred from attaching assets of an insolvent debtor undergoing bankruptcy resolution for prior offences, making such stressed assets more attractive to potential buyers, if Parliament clears proposed amendments to the insolvency law, experts have said.

“It is in response to development we see in the economy,” said finance minister Nirmala Sitharaman, introducing the IBC (Second Amendment) Bill, 2019 in the Lok Sabha on Thursday. “Please do help us to respond to the economy as all of us are equally concerned,” she said, acknowledging lack of the two-day mandatory notice for introducing the bill.

The Cabinet approved amendments on Wednesday. The opposition wanted the bill to be sent to a standing committee.

“No action shall be taken against the property of the corporate debtor in relation to an offence committed prior to commencement of the corporate insolvency resolution process.., where such property is covered under a resolution plan approved,” said the proposed amendment. Such action will include attachment, seizure, retention or confiscation, it says.

The move is expected to help companies such as Bhushan Power, REI Agro and Rotomac Global that are undergoing insolvency resolution. “In Bhushan Power’s case, even if the National Company Law Tribunal order has been passed, the transaction is not closed yet,” said Uday Bhansali, president, financial advisory, Deloitte.

FINANCIAL ENTITIES

The proposed amendments also provide that a financial entity regulated by a financial sector regulator will not be considered a related party or connected person to the corporate debtor merely because it had acquired shareholding through a conversion of debt into equity or instruments convertible into equity shares. This change would ensure they are not barred from resolution process because of such a relation.

“The clarification makes it easy for financial institutions that hold multiple equities in different companies to bid for the entity or any stressed asset,” said Abizer Diwanji, partner and national leader, financial services, EY. “For example, SBI will not be disqualified now for bidding for DHFL.”

REAL ESTATE

The amendments provide that a minimum of 100 or 10% of homebuyers of a real estate project will be required to initiate insolvency proceedings against a company, giving relief to companies, as the change will be applied retrospectively. This will help in cutting frivolous litigation, experts said. Applications made by a single financial creditor or a small number of homebuyers will lapse if not modified within 30 days.

The definition of interim finance, which includes financial debt raised during insolvency resolution period, was also enlarged to include any other debt that may be notified.

Auditors might soon have to provide a detailed report on usage of borrowed funds, comment on critical financial ratios, and flag any factors that affect the going concern nature of the companies under audit, as the government plans to expand the scope of audits and improve scrutiny of financials, a senior official said.

The Ministry of Corporate Affairs is planning to revise the Company Auditors Regulation Order (CARO) 2016, announcing several additions to the rulebook for auditors early next year. “The subject involves multiple jurisdictions. We should be able to introduce …

The government’s committee to review the law on companies has recommended further decriminalising of many provisions and reducing of penalties, for both declogging the criminal justice system and doing more to provide “ease of living for law abiding corporates”.

The panel’s final report was given on Monday to Union finance minister Nirmala Sitharaman and is open for comments from stakeholders till November 25 .The 11-member group was chaired by Injeti Srinivas, secretary of the corporate affairs ministry.

Other members included Uday Kotak, managing director, Kotak Mahindra Bank; Shardul S Shroff, executive chairman, Shardul Amarchand Mangaldas; Ajay Bahl, founder, AZB Partners; Sidharth Birla, chairman, Xpro India; Rajib Sekhar Sahoo, principal partner, SRB & Associates; and Amarjit Chopra, senior partner, GSA Associates.

The panel suggests the government be authorised to raise the thresholds which trigger applicability of Corporate Social Responsibility provisions.

It has recommended re-categorising 23 compoundable offences, to be dealt with in the in-house adjudication framework and subject to lower penalties. Also, limiting 11 offences to only fines and removing the imprisonment requirement.

Government is planning to introduce the Companies Amendment Bill with special focus on decriminalisation in the winter session of the Parliament.

“Procedural, technical and minor noncompliances, especially the ones not involving subjective determinations, may be dealt with through civil jurisdiction instead of criminal,” the committee report said. In recent amendments to the Companies Act, as many as 16 sections saw decriminalisation of breaches. Most of these cover lapses such as prohibition on issues of shares at a discount or failure to file a copy of a financial statement with the registrar.

For non-compoundable offences in the law, the panel has suggested status quo. And, to extend the benefit of the provisions on lower penalties for small and one-person companies to producer companies and start-ups, to encourage budding entrepreneurs and farmers.

To improve ‘ease of doing business’, it has suggested reducing of timelines, so as to hasten rights issues for fund raising by companies and non-levy of penalties for delay in filing the annual returns and financial statements in certain cases. Currently, under Section 62 of the Act, companies are required to give a notice of at least 15 days for offering shares.

The panel has also batted for adequate remuneration to non-executive directors in case of inadequacy of profit, by aligning these with the provisions for remuneration to executive directors, in such cases.

It suggests wider consultation to review the provisions in respect of debarment of audit firms and disqualification of directors. The group has also called for consultation with the Securities and Exchange Board of India (Sebi) for exempting certain private placement requirements in Qualified Institutional Placements.

The committee has also proposed extending the exemptions from filing of specified resolutions to certain classes of non-banking financial companies, in consultation with the Reserve Bank. It has also called for the power to exclude a certain class of companies from the definition of a ‘listed company’, mainly for listing of debt securities, in consultation with Sebi.

The panel has proposed more benches of the National Company Law Appellate Tribunal. Presently, there is only one such tribunal, in Delhi.

It has also suggested that appeals be allowed against orders of the regional directors (RDs) of the National Company Law Tribunal, after due examination. “Currently, there is no redressal mechanism against any decision of an RD, except going to the high court. This will bring a lot of ease,” Singhi added.

The government on Friday notified rules under the insolvency law to deal with resolution of financial service providers, excluding banks.

The corporate affairs ministry has notified the Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019 (Rules).

It will provide a generic framework for insolvency and liquidation proceedings of systemically important Financial Service Providers (FSPs) other than banks, an official statement said.

“The special framework provided under Section 227 of the Code for financial service providers is essentially aimed at serving as an interim mechanism to deal with any exigency pending introduction of a full-fledged enactment to deal with financial resolution of banks and other systemically important financial service providers,” it said.

The move also comes against the backdrop of instances of various FSPs facing problems.

The government has put out detailed rules for the resolution of systemically important financial service providers under the bankruptcy law, opening the doors for resolution of stressed non-banking finance companies under this framework.

Financial service providers are ordinarily not covered under the Insolvency and Bankruptcy Code. Under the rules notified, the code can be invoked to find a resolution for stressed finance companies such as Dewan Housing Finance Corporation Ltd. (DHFL). These rules will not apply to banks.

Separately, the government will notify specific categories of financial service providers that do not fall under the systemically important category to be resolved as ordinarily applicable to corporate debtors.

“The government will notify specific categories of FSPs that do not fall under the systemically important category and shall be resolved under the normal provisions of the Code as ordinarily applicable to corporate debtors,” it said in a release, adding that the special framework will not apply to banks.

This will be decided in consultation with the appropriate regulators, which, in most cases, would be the Reserve Bank of India.

The rules were issued under Section 227 of the IBC, which allows the Central government to notify FSPs or categories of FSPs for the purpose of insolvency and liquidation proceedings.

Corporate affairs secretary Injeti Srinivas said the special framework is essentially aimed at serving as an interim mechanism to deal with any exigency pending the introduction of a fullfledged enactment to deal with the resolution of banks and other systematically important financial service providers.

The government will introduce the Financial Resolution and Deposit Insurance Bill in parliament in the winter session.

Under the framework, the Corporate Insolvency Resolution Process will be initiated only on the application of the appropriate regulator. The National Company Law Tribunal will appoint an administrator proposed by the regulator for financial service providers admitted into insolvency proceedings and will take on the management of the company, accept or reject claims of creditors and handle liquidation proceedings.

Under the framework, approval of any resolution plan will also require the administrator to seek ‘no objection’ from the regulator regarding the persons who will take over the management of the FSP.

The regulator shall issue ‘no objection’ on the basis of the fit and proper criteria applicable to the financial service provider.

The government is considering a formula for distributing the proceeds of insolvency resolution among financial and operational creditors in a fixed proportion, said people with knowledge of the matter. The goal is to protect the interests of operational creditors and reduce delays due to litigation, ensuring that the objective of the Insolvency and Bankruptcy Code (IBC) is preserved.

“This is one of the solutions that is being looked at,” an official said. The government will take a final call only after extensive deliberations, he added.

Distribution of resolution proceeds has emerged as one of the key factors behind the extended litigation, delaying major insolvency cases. Dissatisfied operational creditors have been the source of such cases in some instances.

The Supreme Court is currently deciding on the distribution of proceeds in the case of Essar Steel, which entered the National Company Law Tribunal (NCLT) system in August 2017. The process was thought to have ended when Arcelor Mittal’s Rs 42,000-crore bid for the debt-ridden steel manufacturer was approved in March 2019. But the original promoters, the Ruias, opposed approval of the plan, questioning Arcelor Mittal’s eligibility.

Operational creditors rejected the plan on the grounds of discriminatory treatment. Financial creditor Standard Chartered Bank has also gone to court against the resolution plan on the same grounds. Financial creditors moved the Supreme Court after the National Company Law Appellate Tribunal (NCLAT) ordered proportional recovery for both financial and operational creditors. Under the IBC, cases have to be decided within a 330-day window.

Distribution of proceeds is currently decided by the committee of creditors (CoC) consisting of financial creditors. The committees typically set aside about 5% of resolution proceeds for operational creditors, which have 6-7% of total claims against insolvent companies on average, according to a government official.

The decision to change the rules to grant greater protection to operational creditors had come from the “highest levels of the government,” said one of the persons.

The Centre is looking at further changes to the IBC as it doesn’t want to leave any room for litigation on the distribution of proceeds, the person said. The IBC is regarded as one of the signal reforms of the first Narendra Modi government. The process got bogged down in litigation over some of the biggest cases, blunting the IBC’s aspiration of speeding up bankruptcy resolution and cleaning up banks’ books. The 2016 IBC has already been tweaked several times toward this end.

Operational creditors had slightly higher recoveries than financial creditors, according to data available with the government, said the person cited above. The Insolvency and Bankruptcy Board of India has pegged the average recovery for financial creditors in cases where there was successful resolution at 41.5% at the end of the September quarter.

In the latest set of amendments to the IBC, carried out in the budget session of parliament, the government had clarified that the CoC would have the right to decide on the distribution of proceeds but that all creditors must receive liquidation value or the amount they would receive if resolution proceeds were distributed according to the ‘waterfall mechanism,’ whichever is higher.

The waterfall mechanism under the IBC outlines the order of priority for repayment to creditors in the event of liquidation.

Under this, secured creditors have to be paid fully before any payments can be made to unsecured financial creditors who in turn have priority over operational creditors.

India proposes to let startups issue sweat equity and grant additional exemptions as it eases norms for them under the Companies Act with a view to boost entrepreneurship in the country.

The ministry of corporate affairs plans to allow startups to issue 50% of their paidup capital as sweat equity and extend the period of exemptions from other regulatory filings for up to 10 years instead of five now. They will be exempted for 10 years from a rule that bars private companies from raising deposits exceeding 100% of their paid-up share capital.

“Exemptions already given to startups for five years will be available for 10 years, in line with the revised definition by the Department for Promotion of Industry and Internal Trade,” a government official told ET.

The DPIIT expanded the definition of startups earlier this year to state that entities would be considered startups for up to 10 years from the date of their incorporation.

The official said a notification would be issued soon to put into effect the proposed changes, although relaxation of norms on financial filings for startups would require an amendment to the Companies Act.

Provisions to exempt startups from filing cashflow statements in their annual filings and allowing them to hold only one board meeting every six months instead of four every year may need parliamentary approval.

Kunal Arora, joint partner at law firm Lakshmikumaran & Sridharan, said the extensions would provide startups operational and financial flexibility and the relaxations would “reduce the time and costs involved in undertaking the onerous compliances and enable the young companies to focus on the growth of their businesses.”

The government has taken several measures to boost the startup ecosystem, including giving them relief from what was popularly dubbed angel tax, which is levied when companies get investments at higher than their fair market value. It is looking to enhance the startup fund of funds, which invests in venture capital and alternative investment funds that in turn invest in startups.

Hailing the panel’s recommendation, Pavan Kumar Vijay, founder of Corporate ProfessionalsGroup, said:”The existing framework of law unfairly deals with the situation, particularly where there is alarge firm of auditors and one partner acts in a fraudulent manner or colludes in a fraud, with the entire firm getting blamed and consequently getting debarred from acting as auditor.

The Bankruptcy Code will soon be the final word on matters relating to the rescue of sinking companies, even if detective agencies investigating fraud by their owners and executives are itching to take matters into their hands.

A set of amendments to the Insolvency and Bankruptcy Code (IBC) that the ministry of corporate affairs will move in the ongoing winter session of Parliament will make it prevail over other laws including the Prevention of Money Laundering Act (PMLA), a person with direct knowledge of the matter said. This is being done so that new investors putting up money to rescue bankrupt companies under the supervision of company law tribunals are protected from liability arising from the wrongdoings of previous managers and shareholders.

The rescue of bankrupt Bhushan Power and Steel Ltd (BPSL) by the second largest private steelmaker in the country, JSW Steel, is currently stalled on account of complications arising from a probe by the Enforcement Directorate and the attachment of BSPL’s assets.
The government intends to introduce a ‘non obstante’ clause in IBC that will be sufficient to give the Code primacy notwithstanding any conflicting provisions in other statutes as IBC is a newer law, said the person, who spoke on condition of anonymity. This will give protection to new investors. “In due course, if needed, one could think of amending the Companies Act or the PMLA,” said the person.

The amendments will also make it clear that criminal liability of the previous management and shareholders will continue. There, however, will be no protection to the company in the hands of new investors and management for any contingent liability, which the new investors will anyway take into account while preparing their financial bids.

“IBC is a specialized law and bankruptcy resolution is executed under the supervision of company law tribunals. How can an eligible investor, who is not a related party, paying a consideration to take over a bankrupt company as a going concern be encumbered with actions against the wrong-doings of the previous management or promoter?” said the person.

According to Sumant Batra, managing partner of law firm Kesar Dass B. & Associates, the move to ring-fence new promoters and management from prosecution and other proceedings arising from the misdeeds of erstwhile promoters and management will help incentivise more bidders to come forward and realise better value for the asset.

Batra said the challenge, however, lies in dealing with the assets that are suspected to form part of proceeds of crime. “If the assets remain exposed to attachment under PMLA it will continue to pose challenges. This is the tough one to deal through an amendment in IBC,” he said.

The National Company Law Appellate Tribunal (NCLAT) which had approved a ₹19,700 crore bid from JSW Steel to take over BPSL, subsequently stayed the transfer of payment by the bidder to the creditors of BPSL, pending an investigation into allegations of fraud and money laundering by the former owners of the steel mill. Bhushan Power, which had accumulated a debt of ₹47,000 crore, was part of the original dirty dozen cases identified by the Reserve Bank of India to be referred to bankruptcy courts.

The ministry of corporate affairs has set up an expert panel to examine the need for an institutional framework for regulation and development of valuation professionals. To strengthen the practice of valuation and set a common standard for valuation professionals in the country, it has solicited public views on the issues it is deliberating. It is expected to submit its findings very soon, and based on the recommendations the regulatory architecture will be adopted.

An uptrend in deal activity and onset of corporate distress brings with it increased likelihood of fallouts and disputes. Valuation is often the first point of negotiations. Valuations are undertaken for individual assets or liabilities or a group or the entire business as per requirements and applicable regulations.

Independent valuations are also relied upon by management and investors to support decision-making.

Professional experience of a valuer plays a major role in concluding value. We have seen different regulators prescribing different valuation requirements for transactions involving purchase/sale of assets. Some regulators have prescribed some valuation methodologies, whereas others have kept it open to the judgement of valuers. Such conflicting assessment can deter investors, and hence this anomaly must be addressed for ease of doing business in India.

What India needs is an institutional framework for a single standard of valuation and regulation through which valuation professionals can estimate the value of any class of assets with transparency and accountability. India is aligned to global best practices across industries, and this makes it all the more critical that there is a comparable standard of valuation and regulation in the country. One standard, one regulation for the valuation industry will go a long way in achieving the goals that the expert committee has set.

India requires universal education, development of valuation standards, practice guidance and institutionalisation of the profession. The regulation of valuation profession would bring in serious valuation professionals with valuation standards in place. Correct principles can be applied by valuers, leading to more standardised process, the basis of conclusions, reporting formats and disclosures. However, the element of ‘valuer’s judgement’ cannot be taken out of valuation process.

The Ministry of Corporate Affairs (MCA) has decided to empower resolution professionals (RPs) to file routine compliances, said a senior government official, in what may bring relief to companies undergoing insolvency struggling with routine filings.

Since powers of the board of directors get suspended as soon as a company is admitted to insolvency, it becomes challenging to make several routine filings. “The status of the company in MCA master data will reflect if it is undergoing corporate insolvency resolution, liquidation or dissolution. The RP will authorise all filings, …

Leading stock exchanges BSE and NSE have come out with a framework for listing of commercial papers, a move aimed at broadening investors’ participation in such securities.

Issuers can now apply for listing of commercial papers (CPs) issued on or after November 27, 2019, the exchanges said in two separate notices.

This come after the capital markets regulator Securities and Exchange Board of India (Sebi) in October asked exchanges to put in place necessary framework for systems and procedures for listing of commercial papers.

Under the guidelines, issuer who desires to list its CPs needs to send an application for listing along with the specified disclosures to stock exchanges.

Companies, NBFCs, other entities with a networth of at least Rs 100 crore and any other other security specifically allowed by Reserve Bank of India (RBI) are eligible to list commercial papers.

“Commercial Papers, by their very nature are short term money instruments and until now, have been regulated primarily by RBI. Listing of CPs will bring them under Sebi’s domain as well, leading to a more transparent and better disclosure regime.

According to NSE, issuer whose other securities are already listed on the exchange and seeking listing of CPs on the exchange for the first time, is required to include ‘commercial paper’ in securities applied for listing under “information about the company and securities forming part of uniform listing agreement along with a covering letter”.

Stock market regulator SEBI’s legal stand on various cases, including market manipulation, is now being relied upon by the Supreme Court in the final verdict in the case involving audit firm Price Waterhouse (PW) , say legal experts.

There was partial relief for SEBI as the Supreme Court on Tuesday gave an interim stay on the SAT ruling, which said that the regulator did not have the power to debar an audit firm dealing with a listed company.

BusinessLine had published a detailed report on September 27 highlighting why SEBI should challenge the SAT order in the PW matter mainly on the question of its jurisdiction on audit firms dealing with listed companies.

Effectively, Tuesday’s interim stay by the Supreme Court means that SEBI has powers and can deal with those who do not directly form ‘components’ of the capital market but are even indirectly linked to it, such as audit firms who deal with preparing the financials of a listed company.

Impact of final SC ruling on SEBI

It includes the regulator’s power in dealing with those indirectly associated with the capital markets and establishment of a ‘mens rea’ or direct proof and not circumstantial evidence against those who are not directly linked to the markets.

What needs to be settled now?

“Who are ‘persons associated with securities market’ and hence amenable to SEBI’s jurisdiction, is an important question of law which needs to be decided by the Supreme Court,” said Sumit Agrawal founder, Regstreet Law Advisors, and former SEBI Officer.

Agrawal says that while the Bombay High Court had said that auditors are to be considered associated, the Supreme Court has not decided on the issue so far. “Similarly, what does dealing in securities cover, for SEBI to apply its Fraudulent and Unfair Trade Practices Regulations? Would “audit” or “advice” be covered? This, too, has to be decided,” Agrawal said.

Another key point raised by SAT for rejecting SEBI’s case against PW was that the regulator had failed to prove ‘mens rea,’ meaning establishing intent or direct evidence. SEBI mainly moved to punish PW and other entities for their role in the Satyam Computer scam, based on a trail of ‘convincing evidence.’

But there is a view based on past Supreme Court judgements that a ‘quasi judicial’ regulator such as SEBI can proceed on the basis of ‘convincing proof’ against corporate wrong-doers, rather than trying for evidence similar to proving ‘culpable homicide’, which is key in criminal proceedings. In white collar crimes, it is often next to impossible to get direct evidence, and it is mostly the trail of evidence or pre-ponderance of probablities that is followed by regulators like SEBI that could be ‘convincing enough to a prudent mind,’ to issue strictures, experts said.

Observation of Chief Justice Ranjan Gogoi on ‘mens rea’ in SEBI matter

On September 20, 2017, Justice Gogoi in a judgement involving SEBI versus Kanaiyalala Baldevbhai Patel versus SEBI observed, “Mens rea is not an indispensable requirement and the correct test is one of a preponderance of probabilities. The inferential conclusion from the proved and admitted facts, so long as the same are reasonable and can be legitimately arrived at on a consideration of the totality of the materials, would be permissible and legally justified.”

In another benchmark ruling in a civil case, which was widely quoted in law journals, involving the case of a Chief Income Tax Commissioner versus one Durga Prasad More, Supreme Court judges A Grover and K Hegde with regard to the evidence said, “Science has not yet invented an instrument to test the reliability of the evidence placed before a court or tribunal. Therefore, the Courts and Tribunals have to judge the evidence before them by applying the test of human probabilities. Human minds may differ as to the reliability of a piece of evidence. But in that sphere, the decision of the final fact finding authority is made conclusive by law.”

Why was PW guilty according to SEBI

In the matter involving a network of accounting firms, including Price Waterhouse, were held held guilty by SEBI of gross negligence of duty to follow minimum standards of diligence and care expected from a statutory auditor. In fact, SEBI has gone a step further and even talked about the acquiescence and complicity of Price Waterhouse in the case and stated that several red flags, which were all too obvious for any reasonably professional auditor to miss, failed to engender the necessary professional scepticism in the Price Waterhouse team associated with the Satyam Computer audit.

The government on Tuesday notified rules for the initiation of insolvency proceedings against personal guarantors to corporate debtors, to be applicable from December 1. Under these rules, if insolvency proceedings against a corporate debtor under the Insolvency and Bankruptcy Code are already in process, the same bench of the bankruptcy court would also deal with the proceedings against the personal guarantor.

According to the Supreme Court’s recent ruling in the Essar Steel case, overturning an order of the National Company Law Appellate Tribunal, claims against a personal guarantor would not extinguish once a resolution plan for the corporate debtor was approved.

The new framework will allow creditors to continue the recovery process with personal guarantors after the completion of the corporate insolvency resolution process. The move is the first phase of operationalising personal insolvency via IBC. In October, corporate affairs secretary Injeti Srinivas had said the government was planning to fully operationalise the personal insolvency regime under the IBC in one year.

In a rare insolvency and bankruptcy case (IBC), a Bench of the National Company Law Tribunal (NCLT) has approved a plan giving the unsecured financial creditor his entire claim while handing the secured lenders only 32.84 per cent of their claimed amount.

A recent order passed by the Ahmedabad Bench of the NCLT in case of the insolvent entity — Korba West Power — approved the resolution plan of Adani Power, which is also an unsecured creditor to the stressed company. Business Standard has reviewed the order copy.

Secured financial creditors have received Rs 1,100 crore, against their total admitted claim of Rs 3,346 crore, as mentioned in the NCLT order. The unsecured lenders have been provided 100 per cent of their Rs 1,685 crore claim under the approved plan, said the NCLT order.

According to a person close to the development, ‘no period of payment’ for the unsecured creditor has been specified in the plan. “This amount cannot be paid to the unsecured creditor without the permission of banks,” he said.

Queries sent to Adani Power and Axis Bank remained unanswered till the time of going to press.

The distribution of amount offered by Adani Power has surprised many IBC experts with secured lenders drawing a much smaller share of the pie, compared to unsecured creditors. The change in the usual pecking order comes at a time when the government has amended the IBC to stress that secured lenders be given priority over unsecured and operational creditors.

Adani Power held the maximum voting share of 37.3 per cent in the CoC, while the lead banker — Axis Bank — has 6.9 per cent share. The resolution plan of Adani Power was approved, with 69 per cent voting share in the CoC and a letter of intent issued to the company on April 6, 2019.

The total claims against the Korba West Power are around Rs 5,000 crore from 19 financial creditors. Claims of Rs 111 crore were admitted from 197 operational creditors. The total bid amount for Adani Power is not known. However, the liquidation value was around Rs 1,454 crore. The NCLT Bench in its order said: “In view of the fact that the resolution plan has been approved by a majority of 68.47 per cent of the financial creditors, this adjudicating authority has no reason to question the commercial wisdom of the CoC.”

Korba Power had received three resolution plans, including from Worlds Window Impex India and Lakshdeep Investments and Finance, who were both out of the race.

Adani Power, according to its resolution plan, agreed to make upfront cash payment of Rs 100 crore to the secured financial creditors on a pro rata basis and also a fund infusion of up to Rs 594 crore to meet the capital expenditure requirements of Korba West. The company has also proposed to make an additional capital expenditure of up to Rs 480 crore towards compliance with environmental and other norms.

Adani has been eyeing this asset since 2017, before it was tagged a non-performing asset (NPA) by the lenders. Adani Power had paid Rs 800 crore towards purchase of 100 per cent shares of Korba West from its original promoters. It also gave loan of Rs 1,600 crore as inter-corporate deposit till March 31, 2018.

Based on an understanding by stakeholders, Adani Power acquired 49 per cent share in the company, while balance was held by the lenders, thereby making Korba West an associate company of Adani Power. Adani Power sold 49 per cent of shares to a third party for Rs 270 crore in December 2018.

The deal to take over 100 per cent stake purchase could not be concluded due to operational issues at the plant and pending resolution of the NPA status. “Our intention is to obtain this restructuring approval from 100 per cent lenders, and then make the company a part of Adani Group once this NPA tag is removed,” it had said in a concall.

Korba power project in Raigarh is close to the Parsa Kente mines being operated by Adani Mining and owned by Rajasthan. The Korba power plant however, has issues of obtaining power sale contracts. It was only 5 per cent of the generation to the host state Chhattisgarh.

Bankers, lawyers and insolvency professionals say the delays in resolutions are crippling what promised to be a law with strict time lines. If this situation continues then it could undermine the law itself. “One of the most important facets of the IBC (Insolvency and Bankruptcy Code) over earlier regimes for resolution of distress assets was the stricter time lines,” said said Manoj Kumar, partner at Corporate Professionals, aDelhi-based firm. “However, many insolvency cases are increasingly crossing the stipulated time period as those are mired in rising litigations. The share of cases crossing 270 days in proportion to ongoing IBC matters has significantly increased which authorities have to ponder over.”

“The amendments in respect of shares with differential voting rights is in line with expectations,” said Ankit Singhi, partner at law firm Corporate Professionals. “This will enable promoters, who have been hesitant about raising equity capital for fear of losing control over their company, to raise fresh capital.”

Another key change brought about is the removal of the requirement of distributable profits for three years for a company to be eligible to issue shares with DVRs. “These amendments are certainly a welcome step. This will surely help promoters, especially start- ups, in raising capital without diluting their control over the company,” said Ankit Singhi, partner, Corporate Professionals.

Barely a week after Finance Minister Nirmala Sitharaman’s assurance to corporate entities to review the jail-term provision in the corporate social responsibility (CSR) law, a high-level committee has recommended that non-compliance with CSR norms be made a civil offence and moved to a penalty regime.

This is a departure from the recent policy change which had provided for a three-year jail term for violating CSR norms.

The committee chaired by Injeti Srinivas, secretary, corporate affairs ministry, submitted its recommendations to Sitharaman on Tuesday, suggesting that CSR expenditure be made tax deductible, in order to incentivise CSR spending by companies. “There is a need to address the distortions in CSR spending arising from prevalent tax structure.”

It has suggested a provision to carry forward unspent CSR balance for three to five years.

“We are glad that our voices have been heard. It is a step in the right direction,” said Rumjhum Chatterjee, chairperson, National Committee of CSR, Confederation of Indian Industry.

A clarification may be issued that for newly incorporated companies the CSR obligation under Section 135 of the Companies Act “shall lie only after they have been in existence for three years”, the committee said in its report.

The committee has also said that CSR should not be used as a “means of resource-gap funding for government schemes”.

According to the new CSR norms under Section 135 of the Companies Act a company has to earmark a part of its profit for social activities and transfer all unspent amount to an escrow account if it is an ongoing project.

This account will be opened by the company concerned in a bank and be called the unspent corporate social responsibility account.

The CSR expenditure which remains unspent in three years would be transferred to any fund specified in Schedule VII of the Companies Act such as the Swachch Bharat Kosh, the Clean Ganga Fund, and the Prime Minister’s Relief Fund.

The central government funds should be discontinued as CSR spend, the committee report said and instead a special designated fund should be created for transfer of unspent CSR money beyond three to five years.

The committee has recommended that Schedule VII be aligned with the sustainable development goals to include sports promotion, senior citizens’ welfare, welfare of differently abled persons, disaster management, and heritage protection.

The idea behind this is to ensure that the CSR amount should be spent by the company — “it must not be lying with the company.”

According to government dataof the total 21,337 companies liable for CSR 9,753 companies did not report CSR activity in 2017-18.

The panel, according to a press statement emphasised that CSR spending has to be a “board-driven process to provide innovative technology-based solutions for social problems” and that the board has to assess the credibility of an implementation agency, which have to be registered with MCA to carry out CSR activities.

It has also suggested third-party assessment of major CSR projects and bringing CSR under the purview of statutory financial audit. CSR spending will have to become part of the financial statements of the company. The committee has said that companies having CSR prescribed amount below ~50 lakh may be exempted from constituting a CSR committee.

Government may identify 5 per cent of the CSR mandated companies on a random basis for third-party assessments.

The other recommendations of the committee include developing a CSR exchange portal to connect contributors, beneficiaries and agencies, allowing CSR in social benefit bonds and promoting social impact companies.

The committee constituted in October, 2018 has among its members N Chandrasekaran, chairman, Tata Sons, and Amit Chandra, managing director, Bain Capital Private Equity, among others.

The government will not operationalise the new corporate social responsibility (CSR) provisions in the recently amended Companies Act that make violations punishable by jail, following intense lobbying by a panicked India Inc.

The government will not issue followup rules required to implement the provisions that had drawn sharp criticism.

“These changes will not be commenced,” a senior government official told ET.

The decision follows recommendations by a high-level committee on CSR that submitted its report on Tuesday to finance minister Nirmala Sitharaman. It suggested that violations should be regarded as civil offences that are liable to monetary penalties along with a number of other suggestions to make CSR provisions more effective and less burdensome for companies. In light of the recommendations by the committee, the government won’t proceed with the new rules, said the official cited above.

The companies law was amended in the budget session that concluded last week to provide for imprisonment of up to three years for executives of companies that broke CSR rules apart from fines of ?50,000 to ?25 lakh. While such provisions existed in the companies law, introduction of specific ones for CSR irked industry leaders, who sought a rollback.

Sitharaman, who also handles the corporate affairs portfolio, had assured companies of a review at a Confederation of Indian Industry (CII) meeting last week.

The panel also suggested CSR spending should be eligible for tax deductions and companies be allowed to carry forward unspent balances for three-to-five years.

The committee, headed by corporate affairs secretary Injeti Srinivas, had been set up in October 2018 to review the CSR framework and make recommendations on strengthening the ecosystem, including monitoring implementation and evaluation of outcomes.

“The committee has made far-reaching recommendations,” an official statement said.

Inclusion of Other Activities

If the report is accepted and tax deduction is allowed, it would lower the outgo on CSR to 0.67% as against the mandated 2%, experts said. All companies with a net worth of Rs 500 crore or more, turnover of ?1,000 crore or more or net profit of ?5 crore or more are required to spend 2% of their average profit of the previous three years on CSR activities every year.

The panel wants banks and limited liability partnerships also to be covered by a mandatory CSR expenditure framework. The committee has emphasised that CSR should not be regarded as a means of resource-gap funding for government schemes. CSR spending should be made a board-driven process to provide innovative technology-based solutions for social problems, it suggested.

The panel has backed exemption from constituting a CSR committee for those companies that spend less than ?50 lakh on the activity. It has also recommended aligning CSR activities with Sustainable Development Goals (SGDs). Also prescribed is the inclusion of sports promotion, senior citizens’ welfare, welfare of differently abled persons, disaster management and heritage protection under permitted CSR activities.

The panel has recommended development of a CSR exchange portal to connect contributors, beneficiaries and agencies. It suggested social benefit bonds and promoting social impact companies besides third-party assessment of major CSR projects.

The committee recommended impact assessment studies for CSR obligations of ?5 crore and more, and registration of implementation agencies on the Ministry of Corporate Affairs (MCA) portal.

The panel’s members included Tata Sons chairman N Chandrasekaran, Bain Capital Private Equity managing director Amit Chandra, former additional solicitor general BS Narasimha, Luthra and Luthra Law Office founder Rajeev Luthra, Apollo Hospitals Enterprise Ltd executive vice chairperson Shobana Kamineni, Indian Institute of Management-Ahmedabad professor Anil Gupta, Indian Institute of Corporate Affairs director general Sameer Sharma, former NBCC chairman and managing director AK Mittal, Indian Olympic Association president Narinder Batra, chartered accountant S Santhanakrishnan and Helpage India CEO Mathew Cherian, the release said.

Sources said the government is also considering making a submission explicitly stating the intent of the law before the Supreme Court where the Essar Steel ruling has been challenged by the CoC led by State Bank of India. The idea is to ensure that the NCLAT verdict doesn’t set a precedent and undermine the CoC’s say on the distribution of recovery proceeds.

Stung by the NCLAT orders that have trimmed lenders’ say on the recovery from what is envisaged in the insolvency code, the government has reinforced their authority in deciding how to disburse the proceeds under the insolvency process. Essentially, this would mean financial creditors’ precedence over other claimants in laying hands on the recovered amounts would be cemented and the tribunals would find it impossible to upset the order of distribution prescribed in the code.

The Cabinet on Wednesday approved a clutch of amendments to the Insolvency and Bankruptcy Code with an intent to make the resolution/liquidation process faster and also remove ambiguities, if any, that might have resulted in various NCLT/NCLAT benches giving rulings that were divergent and even went against the spirit of the legislation.

“Inclusion of commercial consideration in the manner of distribution proposed in resolution plan (will be) within the powers of the committee of creditors (CoC),” a government spokesperson tweeted after the Cabinet meeting. The CoC comprises only financial creditors.

The government thinks that the appellate tribunal’s order, asking secured lenders of Essar Steel to disburse a larger share of recoveries to operational creditors than what was decided by the CoC, was clearly against the intent of the IBC.

The NCLAT had trimmed lenders’ share of the recovery from 90% to 60%. “The proposed amendment clarifies that the CoC has the discretion to decide on the amount that operational creditors will get, with safeguards so that certain sum is indeed received by them,” said Sapan Gupta, national practice head (banking and finance), at Shardul Amarchand Mangaldas.

Sources said the government is also considering making a submission explicitly stating the intent of the law before the Supreme Court where the Essar Steel ruling has been challenged by the CoC led by State Bank of India. The idea is to ensure that the NCLAT verdict doesn’t set a precedent and undermine the CoC’s say on the distribution of recovery proceeds. Analysts say any such government intervention will potentially alter the apex court’s verdict in favour of banks in the Essar Steel case.

To cut delays, the amendments have mandated that the entire resolution process, including litigation, will have to be completed in 330 days. Currently, while the IBC allows a maximum of 270 days for resolution to be over, it doesn’t set any time-frame to complete the litigation process, resulting in several high-profile cases, including Essar Steel, dragging on months together.

At the time of its constitution, the CoC will also be empowered to decide on the liquidation of a stressed company (if there is no case for a revival of it), instead of waiting for months to entertain resolution plans for it. Analyst say as per the amendments, votes of financial creditors like home buyers will be cast “in accordance with the decision approved by the highest voting share (over 50%) of such financial creditors”.

“The law (IBC) is already very, very clear. But if there is any further clarity required to make it even more explicit, the government is open to doing that as well,” an official source had told FE earlier in the day. There should be no confusion that operational creditors were not on a par with the secured financial ones, he added.

While approving ArcelorMittal’s Rs 42,000-crore offer for Essar Steel, the NCLAT recently modified the resolution plan cleared by the CoC, holding that secured creditors will get only Rs 30,030 crore, or 60.7% of their (admitted) claims of Rs 45,559 crore, and the rest will go to operational creditors, treating the latter on a par with financial creditors. Operational creditors had made total claims of Rs 19,719 crore and could get Rs 11,969 crore, or 59.6%, as per the NCLAT’s order.

The earlier plan approved by the lenders had provided for 90% recovery for all financial creditors and around 20.5% for operational creditors (with dues of more than Rs 1 crore), based on their claims admitted by the adjudicating authority.

In another case, the NCLAT is trying to ensure that Provident Funds recover their dues ahead of secured lenders on grounds that it involves savings of people.

In the Essar Steel case, the NCLAT noted that distributing a larger share of the proceeds only to secured financial creditors at the cost of operational creditors was against the provisions of Sections 30(2) (b) and Regulation 38 (IA). However, legal experts have pointed out that Section 30(2)(b) clearly says that as long as the operational creditor gets a minimum of liquidation value, the CoC can decide on the amount to be distributed. Moreover, Section 31 says that once the resolution plan is approved by the Adjudicating authority, it is binding on the corporate debtor, employees, members, creditors and so on. They also say that Regulation 38, which says the amount due to the operational creditors under a resolution plan shall be given priority in payment over financial creditors, simply means that the former should get their money back earlier.

According to another amendment approved by the Cabinet, the financial creditors who have not voted for a resolution plan that is approved by a 66% majority and the operational creditors will get the resolution proceeds or the liquidation value, whichever is higher. “This will have retrospective effect where the resolution plan has not attained finality or has been appealed against,” the government said. This means the Essar case could be covered under it.

The cross-border insolvency framework will be based on UN model law, which is expected to aid creditors enforce their rights over corporate assets of corporate debtors located in other jurisdictions through cooperation between countries. Experts believe that the crossborder insolvency regime will benefit suppliers of capital as well as goods and services. “Many countries have already adopted the model UN insolvency law. It will make is easier for Indian person supplying outside India as well as outside to recover their claims.” said Manoj Kumar, head of M&A and insolvency at law firm corporate professionals. Kumar also said that India’s insolvency regulator, the Insolvency and Bankruptcy Board of India will also have to enter into MoUs with regulators in other countries before creditors can benefit from the new cross-border insolvency framework.

In the wake of increased scrutiny of promoters signing side-deals to raise more debt from banks and mutual funds, the Securities and Exchange Board of India (Sebi) on Thursday widened the definition of “encumbrance” to make it more inclusive.

The definition, when notified, will include any restrictions on free and marketable shares of promoters which affect tradeability of shares. It will also include lien, negative lien, pledge and non-disposable undertakings (NDU).

Under the current takeover code, “encumbrance” includes a pledge of shares, lien or any such transaction.

“Even today the definition is wide enough but there were certain structures that were escaping scrutiny such as NDU. Now it is being more inclusive to cover all structures,” said Amarjeet Singh, whole-time member, Sebi, after the market regulator’s board meeting.

Promoters would need to disclose reasons if 20% of their share capital is pledged or 50% of their shareholding in the company.

Sebi also tweaked its earlier proposal of capping royalty at 2% to 5% due to a push-back from the industry. The regulator had earlier proposed that any royalty payment above 2% would need a shareholder nod.

The Uday Kotak committee on corporate governance had originally recommended that royalties above 5% should need approval from shareholders.

Even though royalty payments were related-party transactions, they escaped shareholder approval since these did not exceed 10% of revenue or net worth and companies maintained that royalty payments were in the ordinary course of business and on arm’s length terms.

“We had received representation from the industry that it should be retained at 5%. We have agreed to the representation,” Sebi chairman Ajay Tyagi said at a press meet.

In 2017-18, 27 multinational companies (MNCs) paid an aggregate ₹6,737 crore in royalties, more than half of which was accounted for by Maruti Suzuki India Ltd at ₹3,818 crore, or 25.8% of profits before tax, proxy advisory firm Institutional Investor Advisory Services India Ltd (IiAS) said in a report dated 27 March.

These royalty payments account for 16% of these 27 MNCs’ pre-tax pre-royalty profits and almost 27% of their aggregate ₹25,040 crore profit after tax.

Another major change is the reintroduction of differential voting rights for new age or technology companies to protect them from a hostile takeover.

There will two categories of shares—superior voting rights shares for promoters and founders and normal shares which will be issued to other shareholders.

Superior shares will have voting rights in the range of 2:1 to 10:1 as compared to normal shares. These shares will give promoters and founders superior rights in the appointment and removal of independent directors and auditors, for transferring control and related party transactions.

India Inc may soon have to make higher disclosures on their corporate social responsibility (CSR) spending, a government official said.

A high-level panel on CSR is likely to propose increased disclosures to bring transparency in spending on these activities.

All companies with a net worth of Rs 500 crore or more, turnover of Rs 1,000 crore or more, or net profit of Rs 5 crore or more are required to spend 2% of their average profit of the previous three years on CSR activities every year.

“There is a view that disclosures need to be enhanced,” the official told ET, adding that this was needed to facilitate a “social audit”, or an examination of CSR spending.

These could include disclosures on amounts spent on foundations or trusts related to companies and spending in the local area of the company relative to that in other areas. The move comes in the backdrop of reports of companies spending CSR funds on trusts related to the group.

At present, companies are required to disclose only their CSR policy and the composition of the CSR committee. The report will also make recommendations to deal with implementation issues related to CSR expenditure.

The committee is expected to moot creation of an online exchange portal from where companies can pick projects pitched by district-level government officers and connect with implementation agencies that have been registered with the government, another government official said. The panel is expected to submit its report next month, said the official, who is privy to the talks.

The government may also begin publishing an annual report on CSR spending by companies.

Any ban on audit firms may not impact those entities that are part of their networks or their lead partners, a senior government official said. This implies that disruption from a possible prohibition on Deloitte Haskins & Sells and BSR & Co, a KPMG network firm, may not be as widespread as earlier presumed.

On the other hand, the government is set to tighten restrictions on audit firms to minimise conflicts of interest, the official said. These will apply to non-audit services offered to the companies they’re auditing, he said. Earlier, this month, the Reserve Bank of India had barred audit firm SR Batliboi & Co, an EY member firm, from auditing commercial banks for a year starting April 1, citing lapses in a statutory audit.

“There is a lot of difference between an audit firm being debarred and the network being debarred,” he said. “There may be more than one firm associated with the brand name. The ministry has not asked for debarring the use of the brand name.”

The Ministry of Corporate Affairs (MCA) has sought a five-year ban on Deloitte Haskins & Sells and BSR & Co following an investigation into their role as auditors of IL&FS Financial Services (IFIN). The Serious Fraud Investigation Office (SFIO), MCA’s inquiry wing, has alleged that the auditors colluded with the management to conceal information and falsify accounts.

ET reported on June 12 that KPMG network firms audit 175 listed companies while the count is 167 for the Deloitte network.

Prohibited List of Non-audit Services

These companies account for about 40% of the market capitalisation of listed companies, according to Prime Database. Deloitte has seven firms while KPMG has six in India. In India, the Big Four firms — EY, KPMG, Deloitte and PwC — operate through separate local entities to abide by Institute of Chartered Accountants of India (ICAI) rules. The official said that conflict-of-interest rules will be strengthened.

“The prohibited list (of non-audit services) may have to be extended, or there can be a cap on the revenue you generate though non-audit services as a percentage of (revenue from) audit service or you can completely ban nonaudit services to an auditee firms or its associates and subsidiaries,” he said.

The Companies Act prohibits some non-audit activities, including accounting and bookkeeping, investment advisory, investment banking and management services. The idea is that audits should not be influenced by any other consideration, said the official.

Such steps are being debated in developed economies as well, the person said. The UK government, for instance, is considering a plan to get the Big Four firms to separate their audit and consultancy businesses.

Some auditors backed the Indian proposal, saying it will eliminate the subjectivity that clouds the current list of such non-audit services.

The shock default by Infrastructure Leasing & Financial Services (IL&FS) on repayments in September last year led to a liquidity crunch at nonbanking finance companies (NBFCs) that has roiled the country’s financial markets.

The government is fine-tuning the draft rules for individual insolvency and is likely to introduce three categories of debt resolution based on the loan amount, a senior official told Business Standard. The focus, the official added, would be on resolution through mediation in most cases. “The current draft (for individuals) imitates the corporate insolvency procedures, which seems a bit disproportionate to the defaulter.

We need to correct that,” the official said. The entry-level debt of up to Rs 35,000 will not have to go through any adjudication process, with the …

The department of telecommunications (DoT) plans to oppose the sale of airwaves held by bankrupt telcos during the insolvency resolution process, a move that will make Aircel and Reliance Communications less attractive to buyers and hit their lenders.

A senior DoT official told ET that the department will take all legal steps, including moving the Supreme Court if necessary, to ensure that that the resolution professional doesn’t get the right to sell spectrum during the bankruptcy proceedings. To begin with, DoT is expected to state its position at the ongoing hearings of the Aircel bankruptcy process at the National Company Law Tribunal (NCLT).

“DoT’s view is that this spectrum belongs to the government and it does not come under the definition of property of the telco,” said this official.

The department believes that the government is the licensor of the airwaves and is the only one authorised to sell it through auctions, according to existing law. More so, since spectrum is a finite and sovereign asset, it makes the government the sole authority responsible for allocating it, the official explained.

‘Legal Opinion Being Sought’

“A legal opinion is being sought… All legal options are also being explored,” said a second official aware of the matter.

The DoT is of the view if the spectrum is sold by the resolution professional under the Insolvency and Bankruptcy Code 2016, the value will be far less than the market price of airwaves. In addition, the sale proceeds will first accrue to banks and other financial lenders, with operational creditors like the DoT way down in the priority list, in terms of getting paid.

“We’re examining what should be the way forward…whether this category of transaction can be removed from IBC,” the second official said.

One of the officials said that if NCLT, which is the dedicated insolvency court, were to give a decision on the lines that spectrum could be sold by the RP managing the bankrupt telco, the government would be “within its rights to move the Supreme Court”.

The move assumes huge significance as the result of the decision will affect the insolvency, bankruptcy and revival proceedings of defunct carriers Aircel and Reliance Communications. Without the prized airwaves, the companies would have little value, or perhaps no value at all, to potential buyers. In addition, the outcome in this issue could impact sectors such as mining as well.

UV Asset Reconstruction Company Ltd. (UVARCL), which has put in a bid with Aircel’s RP Deloitte to take over Aircel, will argue forcefully against the DoT’s view. “The spectrum is part of the other assets that will be with the company. The DoT cannot take away the spectrum,” said a person aware of the development.

“We are bound by confidentiality obligations and are unable to comment on client-specific matters,” a Deloitte spokesperson said, while UVARCL said it “can’t comment at this stage”. The NCLT will next hear the Aircel matter on June 10.

The NCLT will next hear the Aircel matter on June 10 while the next hearing on RCom is scheduled for June 21.

The NCLT appointed interim resolution professionals (IRPs) of RCom — which has a debt of Rs 46,000 crore — and two of its subsidiaries have admitted claims of about Rs 66,000 crore against the companies. Aircel, on its part, has a debt of about Rs 20,000 crore.

Mails to RBSA Advisors LLP, IRPs of RCom and its two units didn’t elicit a response till the time of going to press.

As many as 378 companies with total creditor claims of Rs 2,57,642 crore have so far been sent into liquidation under the Insolvency and Bankruptcy Code till March 31, 2019, latest data from the Insolvency and Bankruptcy Board of India (IBBI) showed.

Of these, 64 companies, or more than 16%, had received bids higher than the liquidation value of the assets, but lenders rejected them— not being comfortable with the deferred payments offered by the bidders.

These included Lanco Infratech, Nicco Corp, Bharati Defence and Loha Ispaat.

Liquidation value is the estimated realisable value of the assets of a corporate debtor if it is liquidated at the beginning of the insolvency proceeding. Based on the liquidation value, creditors to the companies sent into liquidation would on an average recover only 7.1% of their admitted claims.

IBBI data also showed that in the 88 cases of successful resolutions under the bankruptcy law since it came to effect in December 2016, operational creditors and financial creditors recovered about 48% of their claims.

On those 64 companies that have gone into liquidation even after getting bids higher than the liquidation value, experts said creditors had rejected those offers because of the uncertainty around deferred payments.

“In cases of deferred payment plans, the viability is questionable as most of these plans contemplate making payments to lenders through the cash generated from the company,” said the head of PwC’s restructuring services, Mahender Khandelwal.

Experts also said such decisions by the committees of creditors, controlled mostly by financial creditors, were likely to hurt operational creditors.

In case of liquidation, dues of secured creditors and workmen are to be fully paid off before operational creditors, who are usually unsecured, are entitled to any payment.

In a crucial move, the government is preparing individual insolvency regulations under the Insolvency and Bankruptcy Code (IBC) that will provide for debt waiver up to `35,000 to the poorest of the poor, who have borrowed money from not just banks but also informal sources like village money lenders.

Once the regulations are in place, the poor who don’t own houses, earn up to `60,000 a year and have assets up to `20,000 will be eligible to apply for such a relief, according to sources.

While, as per the current proposal, such applications will have to be endorsed by the adjudicating authority (the debt recovery tribunal), given the tiny size of loans and limited ability of debtors to go through any rigorous insolvency process, the government is considering facilitating such a waiver through out-of-court settlements as well. The regulations will be among the first set of measures to be implemented under the new government, whatever its political hue.

A section of the government believes it will be more effective than populist moves like farm loan waivers that involve relief from just bank debt and is mostly exploited by rich farmers; it will also deal a deadly blow to money lenders who charge exorbitantly high interest rates (30-40% a year in many cases) from the poor by taking advantage of their vulnerability and often force them into a debt trap (many farmers have committed suicides due to this).

The sources said the individual insolvency framework recognises two broad categories of debtors — the poor (who meet the stipulated criteria of income, asset and debt size); and those who have offered personal guarantee to stressed companies, proprietary/partnership firms (not registered under the Companies Act) and everybody else who is not covered under the first category.

Unlike in corporate insolvency, the adjudicator here will be the DRT, and not the National Company Law Tribunal (NCLT); similarly, insolvency resolution plans involving the second category of debtors (personal guarantors to stressed firms, proprietary/partnership firms etc) will have to be approved by 75% of lenders, instead of 66%. The minimum default amount to trigger individual insolvency is set at just Rs 1,000 (In case of corporate insolvency, it’s Rs 1 lakh). Bankruptcy proceedings will be allowed only for the second category of debtors, if the resolution plan fails.

The poor will have the option to get rid of their debt under the so-called “fresh start process”. Under this, only the debtors can apply for the discharge of their debt. A resolution professional will examine the application of the debtor and submit a report with the DRT. After considering the report if the DRT admits the case, the creditors will get an opportunity to object on limited grounds. If the adjudicating authority still passes an order for the discharge of the debtor, the debt will be written off, enabling the borrower to start afresh.

Also, at a time when a very large number of promoters of big corporate houses have each defaulted on loans of Rs 30,000-40,000 crore or more, a haircut of Rs 20,000 crore for lenders on ten million underprivileged debtors — assuming an average loan size of Rs 20,000 — appears insignificant. As for informal-sector lenders, the government won’t compensate them for potential losses due to write-offs. While hailing the new regulations, some analysts, however, fear the move, unless implemented properly, could distort credit behaviour of these individuals and may choke credit flow to them in future.

However, since any such relief will be part of their credit history, potentially discouraging lenders to lend them again, these small debtors could also have the flexibility to opt out of the insolvency process and settle with lenders on their own.

As for the insolvency resolution process for personal guarantors to stressed companies, proprietary/partnership firms and others, once the insolvency application of either the debtor or the lender(s) is admitted by the DRT, a public notice will be issued, inviting claims from all creditors. The debtor will then have to firm up a repayment plan in consultation with the resolution professional. This plan has to be approved by creditors with a voting share of 75% before it’s submitted with the DRT for clearance. However, where the resolution process fails or the repayment plan is not implemented, the debtor or creditor will have to again apply for liquidation of the insolvent’s assets.

“This will be one of the biggest haircuts in a big-ticket insolvency. The banks will now onwards have to increase their provisioning amount in order to take the hit of any further insolvencies,” said Manoj Kumar, head of M&A and insolvency at Corporate Professionals.

The Ministry of Corporate Affairs (MCA) is working on an artificial intelligence-based mechanism to ease the process for companies seeking to register their names, an official said.

The government recently liberalised norms for registration, allowing entities to choose names that may form part of an existing trademark as long as the businesses operate in different sectors. The new rules were notified in the gazette on May 11.

“Earlier, if the name was a part of a trademark, it could be stopped,” said the official. “We have made it clear that (this applies) only if the name includes a trademark registered in the same class of goods.”

The aim is to reduce the level of discretion in deciding on the names that can be accepted, he said. To make the registration process easier, the government has provided examples — “Ultra Solutions Ltd. is same as Ultrasolutions.com Ltd.” and therefore won’t be accepted. “The rules with regard to nomenclature relative to ‘too general’, ‘too similar’ and trademark related (restrictions) have been simplified with both negative and affirmative illustrations,” said another official.

The AI system will be akin to entering a name in a search engine to check if it is available, the second official said. “We are studying how we will define ‘too close’ (to an existing name), so we are looking at phonetic letters and other things,” the official added. The simplification of rules was a key demand of industry, particularly startups.

“The illustrations provided in the notification should act as a good guide in the name selection process and the pitfalls to avoid,” said Vikas Vasal, national leader at Grant Thornton. The changes should help address some of industry’s concerns and provide more flexibility during name registration. Some experts said the changes don’t go far enough.

Lenders to Reliance Communications (RCom) are expected to claim dues of up to Rs 90,000 crore, almost double the Rs 46,000 crore debt that the telco has on its books, making it among the highest demanded from companies that have gone for insolvency.

Indian and global banks as well as operational creditors including the government, mobile phone companies and telecom tower firms have started submitting demands for dues to RBSA Advisors LLP, the interim resolution professional (IRP) appointed to oversee the insolvency process of the Anil Ambani-owned telco, people familiar with the matter said.

May 21 Last Date to Send Claims

“The last date to send claims is May 21 and as per the calculations, dues worth Rs 75,000-90,000 crore will be asked for. The total amount may even go beyond that,” one of them said.

Another person aware of the development said, “Besides the national banks, Chinese lenders and bond holders will demand their dues along with interests. This is one of the largest claim amount seen in an insolvency case.”

The claims will be in the form of “obliger and co-obliger,” which means besides RCom and its two units Reliance Infratel and Reliance Telecom, the debt of other subsidiaries and step-down companies of the telecom major will also be taken into account. Thus, the expected claim amount can go up to twice the telco’s debt of Rs 46,000 crore.

One of the largest cases under the Insolvency and Bankruptcy Code (IBC) so far is that of Essar Steel, which went into insolvency in 2017. Creditors had claimed about Rs 82,541 crore from the troubled steel company and the IRP appointed by the National Company Law Tribunal (NCLT) admitted Rs 54,565 crore.

RCom was forced to shut its wireless operations late 2017, dragged by its debt and widening losses amid intense competition since Reliance Jio’s entry in September 2016. It tried to sell its wireless assets, such as spectrum and towers, to Jio but failed due to a slew of legal cases, triggering its move to opt for insolvency proceedings under the IBC.

The government is set to provide relief to thousands of homebuyers and bankrupt builders awaiting rescue by preparing a clarification on passing bankruptcy resolutions that are stalled because many homebuyers did not vote.

This follows a reference from the National Company Law Tribunal (NCLT) to the ministry of corporate affairs in the Jaypee Infratech Ltd case, where the panel of creditors dominated by homebuyers could not clear a rescue plan from a Suraksha Realty Ltd-led consortium as many homebuyers stayed away.

“We are exploring all options by simulating various scenarios. The decision will be communicated to NCLT,” said corporate affairs secretary Injeti Srinivas.

The government will also assess if reinterpreting voting rights needs an amendment to the Insolvency and Bankruptcy Code.

The move will stop resolution plans from being rejected because a large number of homebuyers, who could be benami holders or those unaware of the consequences of not asserting their rights, do not cast their votes.

Homebuyers have 58% voting share in the panel of creditors of Jaypee Infratech, as they were the biggest source of funds for the firm more than lenders and deposit holders.

In such a case, homebuyers not voting en masse makes it impossible for the panel of creditors to clear resolution plans, which require favourable votes from 66% of the creditors by value.

The absenteeism by homebuyers has led to nine out of 10 proposals discussed by Jaypee Infratech’s panel of creditors being rejected, according to documents available on NCLT’s website.

Jaypee Infratech informed stock exchanges on Friday that a resolution plan submitted by Suraksha Realty and Lakshdeep Investments and Finance Pvt. Ltd was also rejected as 35% of homebuyers by value of advances given to the builder abstained from voting, against 22.5% who voted in favour.

Among the homebuyers who voted, 2.1% opposed the proposal. This has also impacted the efficacy of the bankruptcy resolution process in the company.

One option before the government is to classify homebuyers as one category of creditors among financial creditors and to treat the decision of those who vote under this category as that of the whole class of homebuyers, according to Srinivas. This will prevent absenteeism among homebuyers resulting in rejection of proposals. The other option before the government is to allow passage of resolutions by a majority of those present and voting.

Taking the opinion of tens of thousands of homebuyers is difficult for the resolution professional representing them, hence the proposal to find an alternative to break the deadlock is welcome.

Srinivas said the ministry was in the process of consulting the insolvency law committee attached to it that consists of Insolvency and Bankruptcy Board of India chairperson M.S. Sahoo and outside experts.

Policymakers want to make sure every effort is made to rescue bankrupt companies from slipping into liquidation.

India is looking at a comprehensive review of the decade-old Limited Liability Partnership (LLP) framework including steep penalties for nonfiling of returns. The ministry of corporate affairs will soon set up a committee to review the structure of LLPs, touted as a low compliance hybrid between companies and partnerships.

The review comes following representations about a Rs 100 per day penalty for delayed filing and difficulties faced in dissolution.

The ministry is also likely to ask the committee to consider the office memorandum by Registrar of Companies, Manesar, that said LLPs could not undertake manufacturing and stopped any one carrying out manufacturing activity to register as LLP or convert existing corporate structure to LLP.

The memorandum that had sent the industry into a tizzy has since been withdrawn.

“A committee would be soon set up to review the LLP framework and look at issues that have cropped up in the past decade in its implementation,” a senior government official told ET.

Since any dilution of the penalty clause would have required an amendment to the law, notified on April 1, 2009, itself, it was decided that a review of the entire framework should be carried out in a comprehensive manner with the underlying theme of ‘Ease of Doing Business,’ the official added.

The government has over the last one year received several representations on the penalty issue from individuals who registered an LLP, but did not carry out any business and wanted to dissolve.

Penalties were kept steep as this structure came with less compliance, but has led to people facing huge financial burden even if they genuinely could not run a business.

Besides, lesser compliance compared to companies, LLPs also offer tax advantages with exemption from dividend distribution tax (DDT) and minimum alternate tax.

Owing to flexibility in its structure and lesser cost of compliances as well as ease of formation, it is an ideal form of organisation for small entrepreneurs and for investment by venture capital.

Expert say that it was envisaged that over a period of time, instead of forming private limited companies, LLP form of organization would become the preferred choice and more and more private companies would choose to convert into LLPs.However, certain issues have prevented this from happening, they say.

“Globally, structures like LLPs exist and are encouraged for private businesses and professional services to adopt, as they provide a good balance between corporate governance and limiting the liability of the partners,” said Vikas Vasal, National Leader Tax, Grant Thornton in India.

Vasal said, in India, while LLPs are gaining traction, there are issues that require some consideration and clarity. “These include doubts raised on whether an LLP can carry out manufacturing activity, issues linked to transfer of partnership share in case of a partner leaving the firm or selling his share, return of capital, ownership of property in the name of LLP,” Vasal added.

Experts also point at issues like higher tax rate of 30% applicable on LLPs in comparison to 25% applicable on small companies besides a simpler process for dissolution.

Defaulting promoters, who are barred from submitting resolution plans and bidding for their stressed companies under the Insolvency and Bankruptcy Code (IBC), may get a last chance to make a comeback at the liquidation stage. A discussion paper on the corporate liquidation process along with draft regulations, floated by the Insolvency and Bankruptcy Board of India (IBBI), has proposed that a credible ‘compromise or arrangement’ proposal can be made by players (including promoters) to the liquidator under the Companies Act.

This means if a stressed firm undergoing insolvency process doesn’t attract any resolution plan and is deemed for liquidation under the IBC, a last-ditch attempt can be made to save the company from liquidation through the compromise scheme by invoking section 230 of the Companies Act. Importantly, section 29A of the IBC, which makes defaulting promoters ineligible to become resolution applicants, won’t be applicable in such cases.

In fact, the National Company Law Appellate Tribunal in the case of SC Sekaran has directed the liquidator to give the scheme of compromise a chance before selling any asset. The scheme of compromise and arrangement was also tried in cases of Amar Dye Chem and Gujarat NRE Coke during liquidation. The regulator has sought comments on the draft regulations from stakeholders and public in general by May 19.

The IBBI move came at a time when almost 53% of the CIRPs (corporate insolvency resolution processes) completed by the end of March ended in liquidation and only in 13% of cases, resolutions were found for stressed firms. Of course, most of these “dead cases” were transferred from an earlier regime where resolution was not expected. However, considering that liquidation directly causes job losses, the regulator seems to have floated the latest proposal, aligning the relevant sections of the IBC with the Companies Act, to keep the company a going concern and maximising the asset value, said analysts.

The draft regulations have also proposed that a stakeholders’ consultation committee — with representation from financial and operational creditors, among others — be set up to advise the liquidator on the sale of assets and/or business. Currently, under the IBC, only financial creditors are part of the committee of creditors that make decision on resolution plans.

The draft regulations also said that liquidation should be achieved in one year and any extension of the deadline may be granted only by the NCLT. Currently, while there is a 270-day deadline for resolution, there is no such time frame for liquidation. “While compromise or arrangement under section 230 of the (Companies) Act is proposed, it must be utilised first and only on its closure/failure, liquidation under the Code (IBC) may commence,” the draft said.

However, a credible proposal for “compromise or arrangement” must be made to the liquidator within seven days of the date of order for liquidation by the National Company Law Tribunal.

A day after Supreme Court set aside the February 12 circular of the Reserve Bank of India that dealt with resolution of stressed assets, cash-strapped Jet Airways on Wednesday told its employees that it has deferred the March-salary payments, citing “complexities” with the resolution plan, under which SBI-led consortium of lenders have taken over the control of the airline.

This marks a reversal of its position, given that only on Saturday, the airline’s CEO Vinay Dube had noted in a letter to its employees that Jet was remitting the salaries for December and said that the management was working as fast as possible to implement the resolution plan agreed with the consortium of its lenders.

A key part of the resolution plan proposed by the lenders, and cleared by Jet Airways’ board, was conversion of the airline’s debt into equity for a notional value of Re 1 per share picking up 50.1 per cent stake in the company. This move was based on the same RBI circular that the Supreme Court declared as ultra vires. “In the current difficult times, the management team has been working with the lenders and other institutions to finalise a resolution plan, which will help us stabilise our operations and build a sustainable future for the airline. However, given the complexities of such processes, it has taken us longer than expected.

However, please be assured that we continue to strive and are in continuous deliberations with the lenders and institutions to find a solution. In light of the current situation, please note that salaries for March 2019 will be deferred,” Jet Airways’ chief people officer Rahul Taneja wrote Wednesday in a letter to its employees. On March 25, Jet’s board had approved the resolution plan, under which the lenders had also agreed to infuse Rs 1,500 crore in the airline to meet immediate requirements. However, banking sources said that only a part of this amount was disbursed to the airline so far.

While banks are trying to resolve Jet Airways, many private power sector companies were on the verge of being referred to the National Company Law Tribunal (NCLT) for resolution under the Insolvency and Bankruptcy Code (IBC). Some stressed coal based-power plants — such as Athena Chhattisgarh Power, East Coast Energy, KVK Nilachal Power and Lanco Babandh Power — were referred for resolution under the IBC. Some of these cases will now get leeway as banks will have the option to restructure loans or devise plans resolve these assets outside IBC. For cases that could have been referred to the NCLT, bank will now have the flexibility to restructure these loans.

Rating agency CRISIL said stressed power sector assets in the private sector will get the biggest respite as most of them were on the verge of being referred to NCLT. The additional flexibility on timelines does away with the imminent threat of significant haircuts on these exposures for lenders. “Going forward, we should see banks having greater flexibility in deciding which stressed assets to be resolved using the IBC. The IBC is a very effective mechanism that has been upheld by courts in its entirety and the banks’ decisions to resolve stressed accounts through IBC could be led by whether such accounts involve wilful defaults or have become stressed due to adverse business conditions and environmental factors,” said Krishnan Sitaraman, senior director, CRISIL Ratings.

While banks will get flexibility, the improvement in credit discipline in the past year and the expectation of quick turnaround in stressed assets resolution could come under some cloud. Improvement in credit discipline can be gauged from the fact that incremental NPA formation is estimated to have halved to 3.7 per cent (of opening net advances) for the full year ended March 31, 2019, compared with 7.4 per cent in fiscal 2018

The deadline for new disclosure norms that require companies to upload pictures of their registered premises and at least one director may be extended, likely giving temporary relief to startups.

The last date for companies to submit INC 22 form, which ensures compliance with these norms, is April 25.

The ministry of corporate affairs has received representations from industry associations, including startups. The startup community, in particular, was riled about these norms that came soon after the resolution of the angel tax issue. A large number of startups operate out of business suites or homes of their directors. “It is being looked into….Some more time could be given for compliance,” said a government official. The new norms came into effect in February this year and are part of the government’s crackdown on shell companies.

Companies have to upload a photo of the external profile of the registered office showing the nameplate, including CIN, registered address, e-mail and phone numbers, besides photos of the internal premises of the registered office. These photos must include at least one director who would also sign the form.

“LocalCircles had received complaints from startups about the impracticality of putting the company board on buildings as many of them operate out of shared and small spaces,” said Sachin Taparia, chairman, Local-Circles. Taparia said that Local-Circles has told the MCA about these complaints. “We have been advised by MCA that they are considering the extension request,” he said, adding that Local Circles counts over 30,000 startups as members of its online community. “They will likely come up with a revised form and a revised date soon as per their inputs to us.”

The new e-form INC 22A, which is also known as e-Form ACTIVE (Active Company Tagging Identities and Verification), was notified as part of Companies (Incorporation) Amendment Rules, 2019.

There is no fee charged if the form is filled within due date, but companies will have to pay Rs 10,000 by way of penalties after the deadline of April 25. A company that does not comply would also not be able to make changes to its capital structure or go ahead with merger or amalgamation deals.

“There is a need to increase competition in the banking sector, which calls for a review of the ownership guidelines that have been the cause for non-participation to obtain licence. More specifically, around maximum permissible promoter holding, which needs to be hiked beyond 15 per cent to a minimum of 26 per cent, which would be on par with the voting cap. There is a great need to create uniformity in the ownership and control parameters in all sectors,” said Pavan Kumar Vijay, founder, Corporate Professionals, a leading corporate legal firm.

Lenders have recovered about half the defaulting advances of Rs 1.43 lakh crore stuck in 82 cases that have been resolved so far in the past two years, signalling that the Insolvency and Bankruptcy Code (IBC) has become increasingly effective in extricating funds from bad assets.

The law came into effect in December, 2016. The National Company Law Tribunal, the dedicated bankruptcy mechanism, has admitted 1,627 cases until February. More than a fifth of these cases have gone for liquidation, while the rest are either under insolvency resolution process or resolved.

Analysts said proving irregularities, however, could be easier said than done, due to the wide subjectivity involved in the valuation process. Manoj Kumar, head (M&A, Transactions and Insolvency) at consultancy firm Corporate Professionals Capital said, “It may be the right thing to review the distressed loans transferred by banks to ARCs to judge the fairness of such transactions but practically it is very difficult to determine the realisable value of such distressed loan accounts.”

There are several factors which determine the possible realisation from bad assets, such as the scope of revival, value of securities, risks of litigation and timelines of resolution etc. “In fact, the new insolvency resolution mechanism, which is quite transparent and effective, has also given varied realisation and the ratio of resolutions to liquidation is approximately 1:2. Bankers have to take all these risks and facts into account while deciding on transfer of loan accounts to ARCs,” Kumar added.

The IL&FS crisis has once again put the issue of governance at the forefront of discussion in the financial services sector. Each time a case of mis-governance erupts, clamour grows for having more stringent governance norms, with the belief that additional regulations will deter future such events.

RBI has, over the years, issued guidelines relating to ownership of banks, believing that diversification of ownership is the primary pillar on which governance can be improved. It is implicit in this assumption that ownership is synonymous with voting rights.

In 1991, the Narasimham Committee recommended that new players should be allowed, towards creating a competitive environment in the Indian banking space. In January 2001, guidelines for new private banks were issued. Since then, shareholding and ownership norms have undergone multiple changes. In January 2001, RBI mandated minimum 40% stake of the sponsor at the time of granting banking licence that has to be locked-in for a period of 5 years, and any stake over and above 40% was queried to be diluted within 1 year of its commencement of banking business. In February 2013, RBI issued guidelines that specified norms for new private banks—asking the licensee to hold a minimum 40% of paid-up voting equity capital of the bank with a lock-in period of 5 years from the commencement of banking business and then queried to reduce the shareholding to 15% within 12 years of the commencement of banking business. In August 2016 guidelines, RBI included existing banks with the dilution norms and issued ‘on-tap’ licensing of universal banks in the private sector, whereby promoters were directed to finally reduce their holding to 15% within 15 years of the commencement of banking business.

The guidelines so framed have primarily focused on diversified ownership for the promoters, with a belief that such an ownership structure will lead to better governance.

It has been recognised widely, including by RBI, that ‘banks are special’ as they not only accept and deploy large amounts of uncollateralised public fund in fiduciary, but also leverage such funds through credit creation. The fiduciary responsibility of running an institution, particularly a bank, is vested primarily with the board of directors (and not shareholders), under the regulation and supervision of the banking regulator. Hence it is crucial that enough control is exercised on the constitution and functioning of the board and key management. Under the Indian corporate law, as with most other countries, it is the shareholders who vote by majority for a director to be appointed. Hence, the shareholders’ role is limited to voting. Thus, if control needs to be exercised on who gets appointed, as far as shareholders are concerned, one should ensure there is no ‘squatting’ by an owner. This is effectively achieved in two ways: one with a cap on voting rights, and two with the number of directors such owner can appoint. RBI has, for long, recognised that ‘control’ over operations of a management needs to be monitored, and hence the evolving policies and guidelines relating to management and board structures of banks.

Prohibiting the promoters not to hold more than 15% in private banks opens the doors to other scattered investors to invest. Globally, most banking jurisdictions require banks to be widely held and there are no separate limits for promoters’ shareholding. In the US, UK, Germany, Japan and China, there is no maximum cap over shareholding of promoters.

Also, due to the bevy of ownership prescriptions, at times contradictory and ambiguous, as well as different yardsticks for banks licensed under different conditions, even some of the well-run banks are faced with an insurmountable requirement: of diluting owner stakes by as much as the entire market capitalisation of these banks, which is practically impossible.

Against this backdrop, there is a need to revisit the guidelines related to ownership norms in the Indian private sector banking sector and it would be a prudent idea to have a minimum level of promoters’ ownership, which is in consonance with the voting cap of 26%, so as that promoters have a ‘skin in the game’ for greater accountability at all times.

Justice delayed is justice denied, they say. And time value seems even bigger where big money — an estimated Rs 3.5 lakh crore —is involved. A dedicated bankruptcy law, enacted two years ago, seeks to help extricate this cash stuck in bad loans, and re-deploy the funds into productive assets.

Hence, quick resolution of the pending cases, referred to courts by the Insolvency and Bankruptcy Code (IBC), is crucial for the success of the bankruptcy platform that promised both quick resolution and immediate control change for assets freed up.

While the maximum time period is 270 days, practically every two out of three such cases go beyond the stipulated time due to litigation, shows an estimate by Corporate Professionals Capital, a Delhi-based firm.

For instance, the resolution of Essar Steel, one of the large cases, is going on for more than 400 days.

So far, 1,310 cases have been admitted for insolvency proceedings since December 2016, when the law came into force. About 4% of such cases have seen successfully resolved. Liquidation was ordered in one-fifth of these cases.

The government has intensified efforts to ease the pressure on the National Company Law Tribunals (NCLT) trying these cases, and is learnt to be in the final stages of hiring judicial and technical members for it, ET reported this month.

The number of NCLT members would be raised to 60 from 32, with additional hands in Delhi and Mumbai, which handle the highest traffic.

IBC prescribes only 14 days for admission and 180 days for resolution of insolvency, with a possibility of extension by a maximum of 90 days in deserving cases.

Still, interpretation of the law is also blamed for the delays beyond the stipulation. “It is due to improper application of law which was not in alignment with its intent,” said Ashutosh Agarwala, senior advisor at Duff Phelps, a global firm engaged in insolvency advisory.

The government is looking to alter several sections of the Companies Act to simplify the law that came into force in 2013.

The ministry of corporate affairs is actively considering the changes, which include fasttracking mergers and acquisitions, doubling the penalty for repeat offences, increasing remuneration of independent directors and prohibiting Section 8 companies, or companies formed with charitable objects, from converting into commercial companies.

Several offences that are essentially procedural and technical lapses have been proposed to be shifted to in-house adjudication mechanism, a senior government official said.

If the same default is committed again within three years of imposition of the penalty, twice the amount of penalty has been proposed.

The maximum remuneration of an independent director from a company is proposed to be raised to up to 25% of his total income.

The current law says pecuniary relationship should not exceed 10% of his income. This includes sitting fee and commission.

Even this remuneration was allowed in June this year through a change in the provisions under Section 149 of the Act to enhance availability of independent directors.

Under the earlier rules, there was a blanket ban on pecuniary relationship, other than sitting fee and commission, between a company and its independent directors to ensure complete independence.

The government is also looking at disallowing Section 8 companies to convert into commercial companies.

“Presently, a Section 8 company can be converted into a commercial company. We are looking at omitting provision under Section 8 companies, which get several tax exemptions, from getting converted into a commercial company,” said the official quoted earlier.

Section 8 of the Act allows formulation of companies for promoting commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment or any such other object, provided the profits, if any, or other income is applied for promoting only the objectives of the company and no dividend is paid to its members.

The Supreme Court of India on Wednesday will take up an appeal filed by Quantum Securities challenging an order passed by the Securities Appellate Tribunal (SAT). The outcome of this case could decide the fate of several orders passed in recent months by the tribunal, a quasi-judicial body which hears pleas of entities aggrieved by market regulator Securities and Exchange Board of India.

The case pertains to an order passed by SAT in a matter related to NDTV. Quantum Securities is a shareholder in the media company. Vishvapradhan had acquired indirect control of NDTV through a loan agreement in 2009. The Delhi-based wholesale trading firm had told the regulator that it had sourced the loan from Reliance Strategic Investment Limited, a wholly owned subsidiary of Reliance Industries Limited. The firm is currently owned by the Nahata Group. In June, Sebi came out with an order directing Vishvapradhan to makes an open offer with 10 per cent annual interest to its minority shareholders. Vishvapradhan subsequently moved SAT, which stayed the Sebi order. Quantum Securities has now moved the apex court against this stay granted by a single member SAT bench.

Quantum had challenged an order passed by SAT dated August 13 on the grounds that the order was passed by a single-member bench of SAT who was a non-judicial member. Rules say appeals filed against regulators such as the Securities and Exchange Board of India (Sebi) in SAT need to be taken up by a bench that consists of aleast one judicial member and one technical member.

In the last hearing, the Supreme Court had pulled up the central government for delay in filling the vacancies in SAT. The apex court had also sent a notice to Attorney General of India seeking response on the matter.

“The composition of the SAT today is not in line with the statutory mandate, which requires both judicial and technical members,” said Shruti Rajan, partner, Cyril Amarchand Mangaldas. “The presence of a judicial member is necessary and up until such time that the vacancy is filled, the tribunal will have to play it by the ear and allow for temporary rulings that may then need to be reviewed by the new bench.”

If the Supreme Court rules in Quantum’s favour, lawyers said others would approach the apex court to appeal against SAT’s recent rulings. Last week, SAT had dismissed an appeal by global audit firm Price Waterhouse (PW) against an order by Sebi in the Satyam Computer Services case.

The full-bench strength of SAT is three members. The tribunal is currently running with a single member – CKG Nair since July. Former Presiding Officer and judicial member J P Devadhar had retired from the office in July while another member Jog Singh remitted office in February. Both these positions have remained vacant ever since.

SAT is a quasi-judicial body that takes up appeals pertaining to capital markets, insurance and pensions. The tribunal passes around 200-250 orders every year, a large chunk of which are matters related to capital markets.

The government takeover of debt-laden conglomerate Infrastructure leasing and Financial Services Ltd (IL&FS) has brought the practice of keeping several listed companies under an unlisted holding company under government scrutiny, a top government official said.

The ministry of corporate affairs will examine whether an holding company with presence in key sectors of the economy such as infrastructure and finance can remain unlisted.

IL&FS is not listed in any exchange although its key subsidiaries, including IL&FS Transportation Networks Ltd (ITNL), IL&FS Engineering and Construction Co. Ltd, and IL&FS Investment Managers Ltd are publicly traded.

The government believes this needs to be reviewed to see how more transparency can be brought into the affairs of companies.

“There is a need to see if keeping the holding company unlisted is the right way of organizing a business. It is better if it is the other way around,” the official said, requesting anonymity.

The proposed review will also cover the regulatory framework of independent directors, board as a whole, auditors and credit rating agencies—the defenders of good governance in the corporate sector.

Unlisted companies need to file only annual financial statements, unlike listed companies that are required to file quarterly financial statements.

Quarterly reports are seen as more current and useful by investors. Getting the holding company listed will make the group disclose on a quarterly basis information related to its unlisted subsidiaries too.

Keeping the holding company unlisted and listing the subsidiaries that need to raise capital from the market is an established practice among business groups in the country. Tata Sons, the holding company of Tata group entities, too is unlisted.

Ved Jain, a former president of accounting rule maker Institute of Chartered Accountants of India (ICAI), said that getting the holding entity listed is not important so long as the operating subsidiary is listed. “Besides, listing means maintaining 25% public float in the company,” said Jain.

The government has been tightening the rules regarding incorporation of subsidiaries and tightening the know your customer (KYC) requirements of directors on the board of companies to make the corporate sector more transparent about business ownership, routing of investments and who is taking decisions in board rooms.

The ministry in June mandated that any person who owns 10% beneficial interest in the shares of a company or exerts significant influence over it has to disclose the same to the company. The company in turn, has to keep a record of such persons and report it to the registrar of companies.

The government last September had capped the level of step-down subsidiaries prospectively at two layers and mandated that all businesses have to disclose details of all step-down subsidiaries.

Earlier this month, the ministry de-recognised nearly 1.8 million director identification numbers (DINs) out of the 3.3 million active ones for failing to meet KYC obligations.

The government and the state-appointed board of directors of IL&FS have agreed to do a series of quick asset sales to turn around the bankrupt infrastructure lender within six months. The immediate asset sale plan indicates that the equity infused by existing shareholders is not enough to get the company back on its feet.

A few proposals for assets of IL&FS group have already come in and the board will take a call shortly, said a person familiar with the discussions on the board of directors.

“Although the tenure of the state-appointed board of directors is not fixed, the government and the board members agree that all problems of the group should be resolved and that it should regain financial stability in six months. Resolving bankruptcy is not an easy feat and cannot be achieved in days or weeks,” said the person quoted above. The group had a debt of more than ₹91,000 crore at the end of March 2018.

The IL&FS group has assets across highways, toll bridges, power projects and transmission networks, and holds them through various special purpose vehicles, which allows quick valuation and sale when needed. IL&FS Transportation Networks Limited (ITNL) holds 40% of the group’s assets in India and abroad.

The government, meanwhile, is moving cautiously with its investigations into the failure of the group, aiming to pinpoint weaknesses in the financial sector for correction rather than to carry out a witch hunt and alarm the market, something that could put investors on the backfoot and affect liquidity in the system.

Including IL&FS, the financial system is now going through a series of bankruptcy resolutions, the success of which depends on investors coming forward with viable plans and bailing out failed projects. IL&FS’s revival is court monitored, but outside the Insolvency and Bankruptcy Code.

“We cannot spread an atmosphere of distress. It (resolving IL&FS bankruptcy) is a huge task. If you make a wrong move, you are jeopardizing the outcome. There has to be a strategy,” said a government official, who asked not to be named. This does not mean that regulators will go soft in their task, the official said. “The Serious Fraud Investigation Office (SFIO) and other agencies will not be trigger happy. They will do their work professionally,” the official said.

The government earlier this month superseded the board of directors of IL&FS and said an SFIO probe was on into the management failure in the company.

“It has become more than evident that the company has been mismanaged. Now the issue is whether it has been mismanaged with a mala fide intent, knowing the outcome, or is it negligence or something else. We have to identify the nature of mismanagement, and then figure out how accountability is built into the governance structure,” said the second official quoted above.

The government is considering a purge of company board rooms to remove independent directors who haven’t played the oversight role required of them, the latest instance being the debacle at Infrastructure Leasing & Financial Services (IL&FS). The recommendation emerged from an internal review of the Companies Act by the ministry of corporate affairs, a senior official said.

The exercise will involve changes to the Companies Act that will allow the government to evaluate independent directors and then, based on findings, asking the National Company Law Tribunal (NCLT) to dismiss them. Those disqualified under this process won’t be able to hold a board position in any company for five years, according to the proposal.

“The scrutiny will mostly be on the basis of financial integrity, absence of convictions or civil liabilities, competence, good reputation, efficiency and character,” said the official cited above. “The detailed guidelines would be worked out later.” The law currently doesn’t have any provision that allows the government to look into the eligibility of directors although Reserve Bank and Securities & Exchange Board of India stipulate “fit and proper” conditions for persons in those roles. The Companies Act only requires “a person of integrity and” one who “possesses relevant expertise and experience”. If the proposal is accepted, the government will initially implement the regime for companies with a high “public interest” quotient, the official said without elaborating.

“Application under Section 241 for a prescribed class of companies will be filed before the principal bench of NCLT,” said the internal report of the government, which ET has seen.

“If NCLT finds that any person is not fit and proper then such person will be debarred from taking any board positions or any other office connected with the conduct and management of affairs of any company for a period of five years,” the internal report said.

Section 241 of the Companies Act allows minority shareholders to hold majority shareholders to account for mismanagement or actions that are detrimental to public interest.

Debt defaults by IL&FS, which owes a total Rs 91,000 crore, sparked panic in the markets that engulfed other NBFCs. The government was forced to oust the board for failing to detect the brewing crisis and replaced it with its own nominees.

Sacked directors of Infrastructure Leasing and Financial Services Ltd (IL&FS) will have to face questions on negligence, diversion of funds, failed risk management and misrepresentation of facts that are viewed seriously under the Companies Act. They will also need to explain charges of mismanaging the infrastructure lender that is threatening the stability of the financial system.

A statement issued on Monday by the corporate affairs ministry and its petition filed before the National Company Law Tribunal blamed the erstwhile directors for a host of failures at IL&FS which affected the markets and the financial system, though it is for the Serious Fraud Investigation Office (SFIO) to dig out facts and initiate prosecution.

The charges against these directors include siphoning off of funds through excessive executive pay, financial mismanagement, misrepresentation of true state of the group’s financial fragility, suppression of material information, misrepresentation of facts to camouflage debt stress and exaggerated depiction of non-current assets. Some of these failings, if found to be done intentionally such as making a false statement, could get covered under definition of fraud which makes a defaulter liable to imprisonment of up to 10 years and a fine of up to three times the amount involved, as per section 447 of the Companies Act.

A government official, who spoke on condition of not being named, said the SFIO investigation was ordered given the “enormity and depth of the violations.” “169 group companies of IL&FS are under probe. The new board of directors will review decisions of the previous management,” said the official. The government is also likely to impose travel restrictions on some of the ex-directors.

The auditor of IL&FS will also be covered under the proposed investigation by SFIO, a multi-disciplinary agency with members from different financial regulators, said a person informed about the charges being pressed by the government.

The auditor SRBC & Co and IL&FS did not respond to emails seeking comment.

The government took the serious step of replacing the board as a significant portion of the money invested in IL&FS is public money from financial institutions and the failure of the group has led to contagion effect in markets and posed risks to financial stability. As much as 40% of IL&FS is owned by Life Insurance Corporation of India (LIC), Central Bank of India and State Bank of India.

Experts said in the case of entities which are large and the failure of which could impact markets, negligence and failure are taken seriously by regulators.

Creditors, mainly banks, are staring at the prospect of an average haircut of 92% in 124 of the 136 stressed firms that were facing liquidation under the Insolvency and Bankruptcy Code (IBC) at the end of the June quarter due to the absence of resolution plans to turn them around, according to the data compiled by the Insolvency and Bankruptcy Board of India (IBBI).

The liquidation value of the 124 companies has been pegged at just Rs 4,817 crore, while the total admitted claims of creditors (both financial and operational) stand at Rs 57,121 crore. The liquidation values of a dozen others were yet to be determined, although the total admitted debt involving all the 136 stressed firms stood at Rs 57,378 crore, showed the IBBI data, based on inputs from resolution professionals.

By contrast, creditors recovered Rs 49,783 crore, or almost 56% of their admitted claims, from 32 stressed companies where insolvency resolution plans were approved by the National Company Law Tribunal (NCLT) by the end of June.

Commenting on liquidation, IBBI chairman MS Sahoo told FE: “The not-so-good results in the initial set of cases is no indication of the performance of the IBC. As and when fresh cases of defaults regularly come up for being admitted, the resolution performance of the IBC will look much more impressive.”

More importantly, Sahoo said, “Going forward, the best use of the IBC will be not to use it at all. The inevitable consequence of a resolution process that a promoter and the management of a corporate debtor vests in a third party, which would bring in behavioural changes, is discouraging the debtors from committing defaults.”

Analysts also termed the massive haircut in old cases unavoidable, given that most of these companies had been stressed for years before the IBC came into being in 2016. So liquidation at scrap value was the only natural outcome. The huge haircut in such cases, however, only reinforces the indispensability of the IBC, they concede. This is because the IBC promotes resolution and gives the chance to lenders to invoke insolvency at the very first default when chances of turning around the stressed firms are much higher, and recovery prospects much better.

The total admitted claims of financial creditors, such as banks, were to the tune of Rs 52,671 crore, or close to 92% of all admitted claims in all these 136 sick firms . Claims of operational creditors — including raw material suppliers — stood at Rs 4,967 crore. Some of the key stressed firms that are undergoing liquidation are REI Agro, with total admitted debt of Rs 8,626 crore, Gujarat NRE Coke (Rs 5,251 crore), Rotomac Global (Rs 3,944 crore), Roofit Industries (Rs 3,943 crore), Gupta Coal India (Rs 3,895 crore), Gupta Corporation (Rs 3,561 crore), JODPL (Rs 3,011 crore), Rotomac Exports (Rs 2,886 crore), Jenson & Nicholson India (Rs 2,899 crore) and Lohaa Ispat (Rs 2,081 crore). These debt amounts include claims of both financial and operational creditors.

Tax officials have an embarrassing admission to make—94% of the ₹9.3 trillion outstanding direct tax demand as of December 2017 is difficult to recover because assessees are not traceable. These untraceable entities have played a big role in generation and laundering of unaccounted wealth by entering into bogus transactions on paper and cash deals. Prime Minister Narendra Modi, who is committed to a minimum government machinery, is pursuing a simple but effective strategy to deal with corporate fraud and tax evasion—higher transparency in the affairs of companies. Some of the recent measures taken by the government throw more light on the conduct of companies, especially on corporate ownership and the way funds are routed. Experts said that in the process, genuine businesses are also denied some operational flexibility. Mint takes a look at some of these measures and their significance.

Revealing beneficial interest

The ministry of corporate affairs in June widened the scope of disclosure requirement of persons who have a beneficial interest in a company. The rules notified in June say that any person who owns 10% beneficial interest in the shares of a company or exerts significant influence over it has to disclose this to the company. The company in turn, has to keep a record of such persons and report it to the Registrar of Companies.

“Over a period of time, the practice of setting up several layers of subsidiaries have made it difficult to know who is the ultimate owner of some companies. Disclosure of beneficial ownership will bring transparency and fairness in the affairs of companies,” said Ved Jain, former president of accounting rule maker Institute of Chartered Accountants of India (ICAI). Jain, however, said that anonymity of ownership does not per se imply intent to do wrong. Globally, many businesses do strategic operations like land acquisition through step-down subsidiaries so that the cost does not go up rendering the venture unviable.

The Companies Act mandated disclosure of beneficial ownership of 25% or what is to be specified in rules later. The ministry exercised this flexibility to narrow the threshold to 10% in the rules. The 10 September deadline for persons to file this declaration to the companies concerned has now been extended. Bringing anonymously held corporate ownership to light is important as other stakeholders will be able to detect instances of related-party transactions by companies and other implications of such ownership. Shareholders with a 10% stake in a company can approach tribunals claiming mismanagement and oppression. Shareholding information is vital for tax authorities who look for mismatches between assets and income in their efforts to combat tax evasion.

Disclosure, limits of step-down subsidiaries

After the ₹7,000 crore Satyam Computer Services Ltd scam that surfaced in January 2009, there was a demand from policy advocates to limit the number of subsidiaries a company can set up. The government eventually limited it to two layers in the case of investment companies in the Companies Act 2013. But industry observers said some entities have abused the law by routing investments through several layers of subsidiaries meant for conducting manufacturing activity.

Over 225,000 companies and 7,000 limited liability partnerships (LLPs) face the threat of being struck off official records, with the government launching a fresh drive against companies defaulting on filing statutory returns.

The identified companies include entities with no economic activity, called defunct companies, as well as those used for financial irregularities, or shell companies.

A total of 225,910 companies and 7,191 LLPs have been identified for regulatory action due to non-filing of financial statements for the two years starting FY16, the corporate affairs ministry said in a statement. The fresh crackdown will be launched this financial year.

The identified entities will be given an opportunity to be heard and action will be taken after considering their response, said the statement.

In an earlier drive launched in the last financial year, the Registrar of Companies (RoCs) had struck off a total of 226,000 companies for having failed to file their financial statements or annual returns for a period of two or more successive financial years.

More than 300,000 directors were also disqualified for non-filing of annual returns by the companies for three years. Disqualified directors will not be in a position to sit on the boards of other companies.

About 14,000 companies got relief under the ‘condonation of delay scheme, 2018’ which was in force for four months from 1 January for regularization of returns.

The removal of the large number of defaulting entities from the records will clean up the system. However, only a small part of the entities struck off from records may have actually been involved in financial fraud.

A task force set up in 2017 to identify shell companies listed 16,537 entities as “confirmed shell companies”. It also listed 16,739 other entities having common directorships with the confirmed shell companies. The task force has also zeroed in on more than 80,000 suspected shell companies. The agencies use certain parameters to identify shell firms, including identifying persons of no means sitting on the board of directors and finding discrepancies between the volume of transactions done by a company and the profits reported.

Regulatory agencies will pursue cases against officers who are in default of statutory obligations even if the company is no longer in existence.

The crackdown highlights the importance of closing down a company as per law as many defaulting firms may actually be cases of entrepreneurs abandoning their venture and not bothering to close down the company as per law, which makes them defaulters for not filing returns in subsequent years. Also, many entrepreneurs open new companies just to hold their intellectual property rights such as trade marks but miss filing the annual returns as such companies have no operations.

“The government expects that its efforts to clean up the registry will create a transparent and compliant corporate ecosystem in India, promote the cause of ‘ease of doing business’ and enhance the trust of the public,” the official statement explained.

Many know the story of how vegetable oil maker Western India Vegetable Products changed its name to Wipro and subsequently became a technology behemoth.

Many other listed firms appear to be attempting a similar feat.

The number of companies that have undergone a change in name since 2008-09 is 1,230, including three in the current financial year, according to a Business Standard analysis of data-provider Capitaline’s records. Many of the companies undergo name changes for branding reasons, others because of demergers or changes in ownership, or to become part of an emerging market trend, suggest experts.

The trading and finance sectors account for 343 of the companies that have undergone such name changes. Technology companies account for 110. There are 70 realty companies and 63 textile companies on the list.

This year’s list includes Galaxy Commercial, which changed its name to Latent Light Finance; Pudumjee Industries, which became 3P Land Holdings; and Kallam Spinning Mills, which renamed itself Kallam Textiles.

Kallam’s name change happened in April. Pudumjee and Galaxy underwent name changes in May. It can also be the outcome of a change in ownership. Sometimes foreign partners request a change in name when they come on board. Also, partners who are no longer directly involved in the firm’s running may ask that their name not be used as part of the firm, said the executive director of a firm where such a change took place.

Experts said it could also be because of a change in the business model. Sometimes companies add a sector to which they only have a nominal exposure if the segment is popular in market circles, as it can help their share price. For example, technology was popular around the year 2000; then came infra, realty, and finance.

He said regulatory changes required that companies got a certain portion of their revenues from a sector if they wished to make it part of their name. For example, a technology company can include pharmaceuticals in its name if it has a division that contributes meaningfully to its revenue.

Deven Choksey, managing director, KRChoksey Investment Managers, said scrutiny was higher today than it was before, which helps limit chances of malpractices.

There may also be other reasons such as mergers or demergers resulting in name changes.

The latest ordinance on the Insolvency and Bankruptcy Code (IBC) has defined “relatives” and “related party” in relation to individuals who have run a stressed firm and will now be barred from bidding for it. Analysts said the move will make the disqualification of family members of defaulting promoters more explicit and could impact cases like Essar Steel in which Rewant Ruia, son of the company’s co-promoter Ravi Ruia, is alleged to be one of the end beneficiaries and a shareholder of Numetal that has bid for the stressed steel firm.

Mamta Binani, former president of the Institute of Company Secretaries of India and the country’s first registered insolvency professional, told FE: “The related party rules will be implemented prospectively and applicable to cases where verdict hasn’t yet been delivered by the adjudicating authority.” The National Company Law Appellate Tribunal is yet to decide on Essar Steel case.

Noted insolvency lawyer Sumant Batra said: “Unless the legislation itself gives a retrospective effect to the amendment, it will have prospective application.” While the IBC had earlier defined ‘related party’ of a company facing insolvency, it hadn’t defined ‘related party’ (or ‘relatives’) of individuals running the firm. The latest move is also aimed at ending any ambiguity over the ineligibility of the kin and many people associated with promoters of stressed firms to bid. It also defines “relatives” that include members of the Hindu undivided family as well. FE was the first to report such a proposed change to the IBC on May 7.

Binani said: “The rules have become enlarged, and a lot of hygiene factors have been added. The government wants to ensure that the stressed firm doesn’t fall into related hands. It’s quite a welcome step.” Batra, however, cautioned that those who want to benefit from amendments will argue these are clarificatory in nature and should be applied retrospectively. However, others will insist they have prospective effect. “It will take a few months for the dust to settle on this issue through jurisprudence,” he said.

The ordinances defines “related party” in relation to the individual (like promoters or others running a stressed firm) as one who is a relative of the individual concerned or his spouse; one who is a partner at a partnership firm in which the individual concerned is associated with; a trustee of a trust in which the beneficiary of the trust includes the individual; a private company in which the individual is a director and holds with his relatives over 2% of share capital, among others.

Some analysts, however, said the scope of the definition of related party is broad enough to disqualify many people unless more clarity is brought in. For instance, it includes “a person on whose advice, directions or instructions, the individual is accustomed to act” in the definition of related party.

“Relatives” has been defined as anyone who is related to another, if they are members of a Hindu undivided family or if they are husband and wife. Relatives will also include father and stepfather; mother and stepmother; son and stepson; son’s wife; daughter and her husband; brother and stepbrother; and sister and stepsister.

The ordinance is based on the recommendations of a 14-member committee on the IBC under corporate affairs secretary Injeti Srinivas, which had recognised the absence of a clear-cut definition of “related party in relation to an individual” (or relatives) in the IBC.

In the report, the panel said: “With respect to persons considered as related party in the context of an individual, the committee noted that the Code does not expressly define the same. The committee observed that the term ‘related party’ was generally used in the context of a corporate debtor or other company under the Code.”

However, sections 28 and 29A of the Code and regulation 33 of the Liquidation Regulations use the term ‘related party’ in a manner which may also include ‘related party’ in the context of individuals such as a promoters or directors or the liquidator, it said.

“Accordingly, the Committee felt that the term related party in relation to an individual must be defined in the Code,” it added. The definition of ‘relatives’ would be added to the IBC alongside that of ‘related party’ under Section 5(24) of the IBC.

Even under the extant IBC provisions, resolution professionals (RPs) handling insolvency cases have been cautious about allowing any such bids where promoters are suspected to seek a backdoor entry to their companies using their relatives. In the case of Essar Steel, for instance, its RP Satish Kumar Gupta had earlier informed the Ahmedabad bench of the National Company Law Tribunal that Rewant Ruia is one of the end beneficiaries and a shareholder of Numetal (which has bid for Essar Steel, co-promoted by Rewant’s father Ravi Ruia) through various holding companies and trusts.

Gupta had said Numetal “is nothing but a newly-incorporated joint venture between Aurora Enterprises, Crinium Bay, Indo International Ltd and Tyazhpromexport through which its shareholders have the resolution plan”. Essar Steel lenders have already moved the National Company Law Appellate Tribunal, seeking an early hearing of appeals filed by suitors for the insolvency-bound firm.

While the adjudicating authority will continue to encounter such cases in future as well, a clear-cut definition of ‘relatives’ will better equip RPs and lenders with legal muscle to reject bids placed by such related parties even though fronts.

An insolvency tribunal ordered bankruptcy proceedings against Reliance Communications on a petition filed by Ericsson, a development that could scupper the Anil Ambaniowned telco’s .₹ 18,000-crore deal to pare debt by selling its wireless assets to Reliance Jio Infocomm. The Mumbai bench of the National Company Law Tribunal on Tuesday admitted three petitions filed against the telco and its subsidiaries by Swedish telecom equipment maker Ericsson under the Insolvency and Bankruptcy Code. RCom, once India’s second-largest mobile phone operator, now becomes the second operator, after Aircel, to be hauled through bankruptcy proceedings.

“All three petitions have been admitted and Ericsson has to suggest the name of the interim resolution professional (IRP) tomorrow (Wednesday) morning,” Anil Kher, senior lawyer representing Ericsson in the matter, told ET. A two-member panel headed by Justice BSV Prakash Kumar said an IRP will be nominated in a couple of days.

RCom is likely to move the National Company Law Appellate Tribunal aga-

makes RCom effectively bankrupt jeopardise RCom’s wireless assets sale to Reliance Jio inst the NCLT order as early as Wednesday, people familiar with the matter said. The full order in the matter, where Ericsson wants to recover .₹ 1,150 crore in dues, is expected to be released on Wednesday.

RCom – burdened with .₹ 46,000 crore of debt – was unable to survive the intense competition in the Indian telecom market, especially after the entry of Jio. It was forced to shut wireless operations in late 2017, after a merger attempt with Aircel fell through, mainly due to legal hurdles. It signed a deal with Jio in late December to sell its spectrum, towers, fibre and switching nodes to repay lenders, a deal that’s now in jeopardy.

As things stand, none of the bankers, secured or unsecured creditors can get anything from RCom as the company can no longer sell its assets.

TRIBUNAL’S DECISION IRP TO BE APPOINTED, to be given total 270 days to come up with a resolution plan

“Now they cannot do any business, litigation or sell any of its assets… at times, there are orders that directors cannot leave the country,” said a person aware of the process.

Jio did not respond to ET’s queries on the impact of the NCLT’s order on the deal as of press time Tuesday.

RCom and its subsidiaries Reliance Telecom and Reliance Infratel are awaiting the detailed orders of the NCLT Mumbai allowing the Ericsson application for admitting the companies to debt resolution under IBC, the company said. “The companies will decide the next course of action after studying the orders,” RCom said in a stock exchange filing.

The beleaguered mobile phone operator’s stock fell 7.8% on the BSE, closing at .₹ 12.45. The NCLT order was announced after market hours.

According to lawyers, the case is likely to reach the Supreme Court since neither side will back down. RCom will now be run by the IRP, who will take charge of all its assets and prepare a list of debtors and creditors and the amount of pending dues. If no plan is agreed upon to get the company back on track within a 270-day period, RCom will be pushed into liquidation. It’s not clear if Jio can bid for RCom’s assets as part of the insolvency resolution process. Jio may need to clear a legal hurdle before being allowed to bid because under Section 29A of the Insolvency and Bankruptcy Code, related promoters are not allowed to participate.

After Ericsson filed its petitions in mid-September, representatives of RCom and the 28 banks led by State Bank of India had argued that admitting the pleas would stop the sale of assets and lead to a major loss for the financial lenders, apart from hurting public interests.

Ericsson had contended that if the sale goes through, the lenders would get the money while operational creditors like them would be left at large. Ericsson said it had 9,000 employees working on RCom and its sub- sidiaries and despite promises and renegotiations on payment schedules, its dues were never cleared.

There is also an arbitration case going on between the two sides on similar lines. Separately, Reliance Infratel, the tower subsidiary of RCom, is battling HSBC Daisy Investments and other minority shareholders opposed to the sale of the company’s assets in the NCLAT, Delhi.

RCom is in a quagmire, with its second attempt in two years to cut debt getting thwarted due to legal hurdles. Last year, courtroom battles were one of the main reasons why its merger deal with Aircel did not go through, RCom had said, because of which asset management company Brookfield did not pick up RCom’s towers as well, leading to further drop in its valuation.

After the deal with Aircel fell through, RCom shut its voice and data services in December 2017, having also defaulted on interest payments to bond holders. It entered a debt restructuring process in the hope of finding buyers, but said it had moved out of the programme after it signed the asset sale deal with older brother Mukesh Ambani’s Jio.

The government is set to define the term ‘relatives’ in the context of persons considered ‘related parties’ who will be ineligible to bid for stressed assets under the Insolvency and Bankruptcy Code (IBC), sources told FE. Analysts said any such move could make the disqualification of family members of defaulting promoters more explicit, and will likely impact cases like Essar Steel in which Rewant Ruia, son of the company’s co-promoter Ravi Ruia, is said to be one of the beneficiaries, and owners of a shareholder of Numetal that has bid for the stressed steel firm.

While IBC has already defined ‘related party’ of a company facing insolvency, it hasn’t defined ‘related party’ (or ‘relatives’) of those (individuals) who were running such a stressed firm, said the analysts. So even though IBC says ‘related party’ in the context of a stressed company means “a director or partner of the corporate debtor or a relative of a director or partner of the corporate debtor”, among others, it doesn’t, at present, say clearly who qualifies to be a relative of a director or promoter.

The latest move is aimed at ending any ambiguity over the ineligibility of kin, such as sons and daughters, of defaulting promoters to bid, as the definition of “relatives” would include members of the Hindu undivided family as well. “Relatives” will be defined as “anyone who is related to another, if—(i) they are members of a Hindu undivided family; (ii) they are husband and wife; or (iii) one person is related to the other in such manner as may be prescribed”, in sync with the definition stipulated under the Companies Act, said the sources. The third category of relatives would include father and step-father; mother and step-mother; son and step-son; son’s wife; daughter and her husband; brother and step brother; and sister and step-sister.

A 14-member committee on the IBC under corporate affairs secretary Injeti Srinivas, in its recently-submitted report, had recognised the absence of a clear-cut definition of “related party in relation to an individual” (or relatives) in the IBC, although it didn’t offer any.

In the report, the panel said: “With respect to persons considered as related party in the context of an individual, the committee noted that the Code does not expressly define the same. The committee observed that the term ‘related party’ was generally used in the context of a corporate debtor or other company under the Code.” However, sections 28 and 29A of the Code and regulation 33 of the Liquidation Regulations use the term ‘related party’ in a manner which may also include ‘related party’ in the context of individuals such as a promoters or directors or the liquidator, it said. “Accordingly, the Committee felt that the term related party in relation to an individual must be defined in the Code,” it added.

The definition of ‘relatives’ would be added to the IBC alongside that of ‘related party’ under Section 5(24) of the IBC.

Even under the existing IBC provisions, RPs handling insolvency cases have been cautious about allowing any such bids where promoters are suspected to seek a back-door entry to their companies using their relatives. In the case of Essar Steel, for instance, its RP Satish Kumar Gupta has informed the Ahmedabad Bench of the National Company Law Tribunal that Rewant Ruia is one of the end beneficiaries and owners of a shareholder of Numetal (which has bid for Essar Steel, co-promoted by Rewant’s father Ravi Ruia) through various holding companies and trusts. Gupta said Numetal “is nothing but a newly-incorporated joint venture between Aurora Enterprises, Crinium Bay, Indo International Ltd and Tyazhpromexport through which its shareholders have the resolution plan”. While the adjudicating authority will continue to encounter such cases in future as well, a clear-cut definition of ‘relatives’ will better equip RPs and lenders with legal muscle to reject bids placed by such related parties even though fronts.

Bharti Airtel’s acquisition of Telenor India may hit roadblocks, with the Norwegian company’s local unit considering filing for bankruptcy protection amid mounting daily losses and a tussle over a bank guarantee poised to delay government approval of the deal. The acquisition plan, announced in February 2017, has not closed and is well past the 12-month closure timeline expected by the two companies.

The Department of Telecommunications (DoT) is likely to move the Supreme Court this week against a telecom tribunal order that told the government to clear the deal without having Bharti Airtel submit a bank guarantee for about Rs 1,700 crore, people familiar with the matter said.

Amid the wrangling between Airtel and DoT, Telenor India is racking up losses of Rs 4 crore daily from operations in six circles, adding to its present debt of almost Rs 6,000 crore, a person aware of the matter at the company said. The company’s financial situation and the delay in approval of the deal are “pushing” Telenor India to consider filing for bankruptcy under the Insolvency and Bankruptcy Code, the person said, adding that the matter has been conveyed to DoT officials over the past couple of weeks.

“If the IRP (interim resolution professional) believes that the Airtel deal itself is the best option, it may go with that and recommend that to the committee of creditors. Or, if it feels the Airtel deal won’t be fair to lenders, then it can call for a bidding as well.” The law doesn’t make bidding mandatory and also allows private arrangements. At stake also are Telenor’s investments worth Rs 24,000-25,000 crore in its local operations over the years and almost 900 employees.

Telenor India and Bharti Airtel did not respond to ET’s queries as of Monday press time. Airtel plans to buy Telenor India in a no-cash deal and take over its outstanding spectrum payments of Rs 1,650 crore. The deal will help Airtel narrow the revenue market share gap with Vodafone India-Idea Cellular combine, which will become No. 1 after their merger.

Airtel will also get Telenor’s 4G airwaves in Andhra Pradesh, Bihar, Maharashtra, Gujarat, UP (East), UP (West) and Assam, besides operational contracts, tower leases and about 40 million subscribers as of January. Telenor hasn’t started services in Assam.

The Competition Commission of India, Sebi, the stock exchanges and NCLT have already approved the acquisition and only DoT has to endorse it. The DoT is bent on getting a bank guarantee from Airtel equal to Rs 1,499 crore for one-time charges for airwaves allocated to the telco and over Rs 200 crore for spectrum payment owed by Telenor before approving the deal.

“The plan is to move SC within this week” to challenge the telecom tribunal’s April 12 order mandating DoT to approve the Airtel-Telenor merger without the bank guarantee, a department official said, adding that the government’s demand is backed by M&A rules.

With Alok Industries heading into likely liquidation, about 12,000 permanent employees of the company are set to lose jobs in what could be the biggest labour casualty since the implementation of the bankruptcy code.

These employees earned an average salary of Rs 1.45 lakh a year, show data compiled by Corporate Professionals that used the financials reported by the company for 2016-17. Alok Industries was subsequently referred for insolvency proceedings.

Any Flipkart-Amazon deal is likely to face close scrutiny for the competition watchdog, according to experts, given the dominant market share the two entities have in the ecommerce space and the weight the combined entity would have if the merger goes through.

There have been reports that global ecommerce major Amazon is in talks to acquire Flipkart, India’s biggest homegrown online retailer, though no formal announcement has come.

Walmart, too, is believed to be in discussion, and is considered a frontrunner to acquire Flipkart. Both online retailers together, according to estimates, have nearly 90% market share in ecommerce space.

Deals that involve entities with turnover in excess of `6,000 crore or assets of over `2,000 need approval of Competition Commission of India (CCI). Flipkart-Amazon deal, if it goes through, would require CCI approval.

CUTS International, a consumer advocacy group, has said the deal may impact merchants negatively as their bargaining power would go down if there is reduction in competition.

“Any abuse of dominance, in the form of the merged entity dictating its terms and conditions on merchants, is also a perceived threat. The merger may also impact offline retailers, if lower cost products are available on online platforms, owing to lower costs associated with using information and communication technology,” it said in a statement.

Amazon and Flipkart can approach CCI with the pre-filing request seeking the regulator’s opinion on the deal. One of the issues, if such a deal takes place, would be how is the relevant market defined? If it is taken narrowly as online market then there would be serious anti-competition issues as the two compete fiercely that benefits consumer.

“Relevant market is key in every competition assessment. It is to be seen how CCI works it out in the case of Flipkart-Amazon deal as their markets are overlapping,” GR Bhatia, former additional director general of CCI and currently head of the competition law practice group at Luthra & Luthra said.

If the relevant market is defined as the entire offline and online space then there may not be an issue given that online market is still a fraction of the total market. MM Sharma, lawyer at Vaish Associates Advocates, said that it is improbable that CCI will include offline in the relevant market defined in this deal as both players are exclusively in the online space.

The possible coming together of online retailers Amazon and Flipkart is likely to face close scrutiny on competition issues as the combined entity will be a dominant player in the fast-growing Indian e-commerce market, according to experts.

While there is no formal announcement from any quarter on the possible multi-billion dollar deal, reports indicate that discussions involving Flipkart and Amazon are going on.

Engaged in intense competition, home-grown Flipkart and Amazon India are leading players in the Indian online retail marketplace.

Deals beyond a certain threshold require the approval of Competition Commission of India (CCI) before they are consummated. In cases where the watchdog finds possible anti-competition issues, it can call for remedial measures to address the concerns.

There have been instances where the anti-trust regulator had given approvals for mega deals subject to strict conditions.

Not-for-profit group CUTS (Consumer Unity and Trust Society) International said the merger of Flipkart and Amazon might impact the merchants negatively though, as they would have limited bargaining power due to the absence of competition among online market platforms.

“Any abuse of dominance, in the form of the merged entity dictating its terms and condition on merchants, is also a perceived threat. The merger may also impact offline retailers, if lower cost products are available on online platform, owing to lower costs associated with using information and communication technology,” it said in a statement.

The group also noted that the merger would also make the resultant entity the biggest harvester of consumer data for online shopping.

“While the merger may result in the rise of a dominant player (approximately 90 percent online market share), it will have limited impact on consumers, who will keep benefiting from the competition among merchants. However, they might have no choice in case of poor grievance redressal or consumer servicing by the platform,” the statement said.

The Cabinet on Wednesday approved reducing the size of the Competition Commission of India (CCI) in line with the government’s policy of “minimum government and maximum governance” as well as global standards. It attributed the move to its earlier decision of not having additional benches.

At present, the CCI can have six members and one chairperson. This will now be reduced to three members and one chairperson.

The commission currently has four members. Two existing vacancies will not be filled, while none will be appointed in place of the one member, who is due to retire in September.

The government termed the move “right sizing” and said this would result in faster turnaround in hearings and speedier approvals, stimulating the business processes of corporates and resulting in greater employment opportunities in the country.

Experts said the move would not result in any adverse impact on the CCI.

Of the six members, one has to be a judicial member and the remaining five are technical members. However, in the past, ex-bureaucrats filled the posts of technical members. Hence, reducing the strength would not adversely affect the CCI’s functioning.

Section 8(1) of the Competition Act, 2002 provides that the commission will consist of a chairperson and between two to six members.

An initial limit of one chairperson and not more than 10 members was provided in the Act, keeping in view the requirement of creating a Principal Bench, Additional Bench or Mergers Bench, comprising at least two Members each, in places as notified by the government.

Section 22 of the Competition (Amendment) Act, 2007 was changed to remove the provision for creation of Benches.

In the same Amendment Act, while the Competition Appellate Tribunal comprising one chairperson and two members was created, the size of the commission itself was not reduced and was kept at one chairperson and between two to six members.

The government said the commission has been functioning as a collegium right from its inception.

In major jurisdictions, including Japan, the US and the UK, competition authorities are of a similar size, it said.

A 14-member panel set up to review the Insolvency and Bankruptcy Code (IBC) has recommended some sweeping changes to the IBC, ranging from the grant of the financial creditor status to home-buyers and allowing promoters of micro, small and medium enterprises who are not wilful defaulters to bid for stressed assets to offering a conditional chance to unsuccessful players to sweeten their offers.

The panel, headed by corporate affairs secretary Injeti Srinivas, also suggested that a case admitted for resolution can be withdrawn (before the plan is approved) by the appellate body if 90% of creditors agree. Since the recommendation is unlikely to be made into law until the next session of Parliament, it may not be applicable to the current legal tussle involving the sale of Binani Cement, where the promoter company, backed by UltraTech Cement, wants to terminate the insolvency proceeding, even though the Dalmia Bharat-led consortium has been declared the highest bidder.

However, in future, unsuccessful bidders may stand a chance to bid for a stressed asset if they come up with better deal, which could ultimately lead to a lower haircut by creditors. The panel also recommended that the vote share required for approving a resolution plan by the committee of creditors be reduced to 66% from the current 75%.

A top government official told FE that the amendments to the IBC, based on the panel’s report, are unlikely to be placed before this session of Parliament that is ending on April 6. The government will first finalise the draft amendments, based on the reports, which will then be sent for vetting by the law ministry.

It will then be placed before Cabinet for approval following which parliamentary clearance will be sought. However, in case the government believes that certain recommendations are so urgent that it can’t wait until the monsoon session of Parliament, it may bring in an ordinance.

While suggesting financial creditor status to home-buyers, the panel observed that “not all forward sale or purchase are financial transactions, but if they are structured as a tool or means for raising finance, there is no doubt that the amount raised may be classified as financial debt under section 5(8)(f)”. Accordingly, home-buyers will form a part of the committee of creditors (CoC) that approves a resolution plan and their voting rights will be in step with their advances. However, the panel said certain members — Shardul Shroff, Sudarshan Sen and B Sriram — differed on this matter.

The committee also said that the power of the central government may be used for “granting relaxations to not only corporate MSMEs but MSMEs in the form of sole proprietorships, partnerships, etc covered under Part III of the Code from time to time, albeit cautiously”. However, the power should be used to make limited exemptions and modifications for MSMEs (or any other class of entities).

While the panel adopted caution in loosening the related party criteria, it said the IBC does not expressly define the persons considered as related party in the context of an individual and recommended that it must be defined in the code. But it hasn’t provided any definition yet.

The law has been made more stringent in recent months after allegations of related-party transactions in some cases reinforced fears of a back-door entry of dubious promoters. The issue of related party came into focus after JSW Steel, in partnership with Aion, emerged as the lone bidder for Monnet Ispat. JSW Group chairman Sajjan Jindal’s sister is married to Monnet Ispat promoter Sandeep Jajodia.

A recent notification asking the resolution professionals (RPs) of insolvent companies to engage two registered valuers is working as a double-edged sword.

While the move helps in a better valuation, there is no clarity on how to decide between differing ones. While some are already conducting valuations by two valuers, all others need to start this process from April 1. Those already conducting two valuations for a company state both are often starkly different. RPs say they are going by the average of both values in such cases, as no mechanism is mentioned in the insolvency code. Sources say this is being remedied; new norms will state under what heads the RPs should ask the valuers to work, so that there is no anomaly.

The Insolvency and Bankruptcy Board of India had notified the rule change with the intention of maximising the asset value of companies undergoing insolvency. The regulator also believes a valuation report is key in providing clarity on encumbered and unencumbered assets.

Also, experts say, while there is no set measure for creditors to weigh resolution plans, two sets of valuations will help them better assess these. And, help the RPs ensure funds for operational creditors, as the liquidation value will be known.

RPs are supposed to get the enterprise value and liquidation value of a company undergoing insolvency resolution. Liquidation value is the total worth of a company’s physical assets when it goes out of business or if it were to go out of business. It is determined by assets such as real estate, equipment and inventory. Intangible assets like brand value are not included. Enterprise value is the market capitalisation plus debt, minority interest and preferred shares, minus total cash and cash equivalents.

In its newsletter, the regulator says the difference between the two values would help the committee of creditors to decide in favour or against a resolution plan. Liquidation value needs to be kept confidential, declared only to the committee.

India’s bankruptcy law, the Insolvency and Bankruptcy Code (IBC), is set for a major overhaul as policymakers seek to decisively deal with business failures that slow down expansion in Asia’s third-largest economy.

The ministry of corporate affairs is finalizing a series of IBC amendments based on a panel’s recommendations to remove difficulties in turning around businesses and to strike a balance between the interests of lenders, customers of failed businesses and their promoters, according to the insolvency law panel’s report which was submitted to the government last week.

The IBC amendments proposed by the panel, led by corporate affairs secretary Injeti Srinivas, make a strong case for treating homebuyers as financial creditors, enabling them to take builders defaulting on their obligations to a bankruptcy court and decide their future along with lenders. The amendment was proposed because in many cases, advances from homebuyers account for more than the bank lending secured by the builder, but homebuyers have no say in the bankruptcy proceedings whereas lenders get a favourable position.

The bankruptcy code of 2016 will also be amended to make it easier for the panel of creditors to make key decisions for resolution or liquidation with 66% of the vote, less than the 75% required now. Routine decisions to run the company can be taken with 51% votes from creditors.

The ministry is preparing a bill to amend IBC, which experts called a milestone in the evolution of the bankruptcy law in India. It will make sure that the provisions enacted in January to disqualify wilful defaulters and those ‘acting jointly’ with them from bidding for the bankrupt firm do not unfairly bar entities like asset reconstruction companies (ARCs), banks and alternative investment funds. The fear is that these entities may get covered by the definition of disqualification. The definition of disqualified promoters will be narrowed by dropping the expression “acting jointly/acting in concert”.

Also, pure-play financial institutions such as ARCs, alternative investment funds, foreign institutional investors and venture capital funds which may be related to companies classified as non-performing assets (NPAs) will not be barred from bidding for the bankrupt firm. The code will also define financial entities which are not covered by the disqualification in a move aimed at widening the pool of potential bidders. Lenders holding equity from an earlier debt recast will not be treated as a related party and will be allowed to vote on the rescue plan.

The amended code is also expected to make it easier for entities like ARCs to provide interim finance to companies undergoing bankruptcy process, which will improve their valuation and facilitate a quick turnaround. Also, it will be ensured that regulators such as stock exchanges will not be able to drag a company to bankruptcy court for defaulting on dues by clarifying that regulatory dues are not operational credit.

The IBC amendments, which will apply prospectively once enacted, will also clarify that lenders’ action against any guarantor to a bankrupt firm do not enjoy the same protection from recovery proceedings that the insolvent company enjoys while a rescue plan is prepared.

The idea is to prevent many promoters, who personally stand as guarantors to their companies, from abusing the moratorium on recovery allowed under the law. The proposed amendments will also make sure that companies filing for bankruptcy have to notify their banks and suppliers of their decision.

likely to see successful resolution plans

“IBC has sent a strong message to errant promoters,” said Mamta Binani, a Kolkata-based resolution professional who was involved in some successful resolution plans. “In many cases, smaller companies are found guilty of mi- susing bank loans, which resulted in defaults. Potential bidders showed little interest in those companies enmeshed in financial irregularities.”

Of the top 12 default cases, 11 companies for which insolvency was filed, the maximum stipulated deadline for resolution will end either in April or May this year. A corporate resolution process will have to be completed within nine months. Tata Steel has been declared the successful resolution applicant for Bhushan Steel, one of the first 12 companies taken to the insolvency courts. Monnet Ispat, Electrosteel, Binani Cement and Essar Steel have already attracted bidders keen to submit a resolution plan. In all such companies barring Binani Cement, the sums offered are generally less than the actual financial debt.

The government can sell the 24% stake it will be left with after the Air India sale, whenever it chooses to, although it has restricted the strategic investor from selling its stake in the national carrier before three years, a finance ministry official said.

“The government can exit at any time after the transaction, if it wishes,” the official said on condition of anonymity.

He said the government can sell its stake anytime through the market, by issuing employee stock ownership plan (ESOPs) or as part of the mandated compulsory listing of Air India. Air India has 11,214 permanent employees as on 1 December 2017 and 2,913 contractual employees.

However, call or put options cannot be exercised by any party. “The investor will not be forced to buy the remaining stake,” he added.

In a document titled ‘Understanding the strategic sale agreement’, the department of investment and public asset management (Dipam) said there could be a lock-in period after which the government can exit from the balance holding at any time.

“This may be desirable in some cases where the strategic partner may like to have government as a partner for some time at least, during which period, using the government’s presence, some issues (licenses, land issues etc) involving dealings with the government can be resolved quickly,” it added.

The document seeking expressions of interest, prepared by the transaction adviser EY India, did not mention a lock-in period for the minority stake but said that it is the intention of the government to sell its residual shareholding through the process of dispersed disinvestment and not as a block “on such terms as may be prescribed in the RFP (request for proposal)”.

The finance ministry official clarified that this means government will not sell a chunk of shares to another party that may bring its representative in the board of Air India. “We will not trouble the majority stakeholder. We will give a free hand to the majority stakeholder,” he added.

According to the plan, the government will sell 76% stake in the wholly-owned national carrier along with 100% stake in low cost international carrier Air India Express Ltd and 50% in Air India SATS Airport Services Pvt. Ltd, a joint venture services company.

The official said the transaction is likely to be completed by September this year.

Successful completion of disinvestment of Air India will be crucial to achieve the Rs80,000 crore disinvestment target set by the government for 2018-19. The government has achieved the revised target of Rs1 trillion disinvestment proceeds in 2017-18.

According to the document, potential buyers need to have a minimum net worth of Rs5,000 crore and should have reported profit in three of the five previous years.

The highest bidder will have to remain invested in the company for three years before any stake sale, except for a compulsory listing of Air India.

Seven companies have shown interest in acquiring Lanco Infratech, one of the first 12 stressed assets identified by the Reserve Bank for resolution under the Insolvency and Bankruptcy Code, people familiar with the development said. Lanco, holding company of several power and infrastructure projects, has debt of more than Rs 45,000 crore, taken from 29 financial creditors.

Bidders include US asset management company Ingen Capital, energy firm Penn Energy, Odisha-based mining firm Thriveni Earthmovers, DivyaSree Developers from Bengaluru, Solarland China, Cube Highways backed by ISquared and Kalyani Developers, Bengaluru, sources told ET.

The committee of creditors is expected to approve one of these bids. They had earlier invited bids for individual assets, but extended the deadline to March 2018 after tepid response. According to people in the know, most bids for Lanco Infratech are for specific assets and few offer a consolidated plan for the entire company.

In the case of Roofit Industry, another insolvency admission in June last year, the Mumbai bench of National Company Law Tribunal said bidders cannot submit resolution plans with offers for select assets and leave the rest for liquidation under Insolvency and Bankruptcy Code.

On Friday, Lanco Infratech share dropped by 4.46% to close at Rs 1.07 on the Bombay Stock Exchange.

India has rolled out the long-awaited regulations to allow cross-border mergers and amalgamation that could boost foreign direct investment into the country.

The Reserve Bank of India (RBI) has framed the regulations for mergers amalgamation and arrangement between Indian and foreign companies.

The Foreign Exchange Management (Cross Border Merger) Regulations, 2018, will cover both inbound and outbound investments.

The ministry of corporate affairs had already notified Section 234 of the Companies Act, 2013, paving the way for merger and amalgamation of a foreign company with an Indian company and vice-versa.

With the RBI framing the regulations under FEMA, the regulations can now take effect.

“The real beneficiaries of these regulations would be MNCs which in many cases want to consolidate the business of a region and require mergers involving an Indian company with other companies in foreign jurisdictions. The clarity of law also makes corporate planning possible for all Indian business houses having overseas business,” he added.

In the case of inbound merger, the rules allow the resultant company to issue or transfer any security to a person resident outside India subject to pricing and sectoral foreign investment conditions and FEMA rules.

In a case of outbound merger, the rules allow resident Indian entities to acquire or hold securities of the resultant company in accordance with FEMA regulations.

“The valuation of the Indian company and the foreign company shall be done in accordance with Rule 25A of the Companies (Compromises, Arrangement or Amalgamation) Rules, 2016,” the regulations issued by the RBI say.

The central bank has stated that any transaction done in compliance with its regulations will be deemed to have its prior approval which will hugely impact the timeliness of cross border M&As;.

The rules will allow Indian companies to merge their foreign businesses with their domestic companies while foreign companies will no longer be required to maintain an Indian company after a merger and instead fold it up into a single entity. This is expected to encourage cross-border M&A activity.

The move is likely to have an impact on insolvency and bankruptcy proceedings as well, since it will encourage foreign bidders to consider buying Indian assets.

RBI has stated that the assets can also be held by the Indian company outside India and anything which is not permitted to be acquired or held has to be disposed off within a period of two years from National Company Law Tribunal’s sanction date.

Any borrowing of the foreign company which due to the merger becomes the borrowing of an Indian company must confirm the External Commercial Borrowing Regulations within a period of two years.

a period of two years. This is subject to condition that no remittance or repayment from India will be made within such period and the conditions with respect to end use shall not apply.

Any office in India of the foreign company shall be deemed to be a ‘branch office’ of the foreign company.

The government is set to increase the number of bankruptcy courts to ease the load on existing benches overburdened by creditors suing defaulting businesses and expedite resolution of insolvency cases, corporate affairs secretary Injeti Srinivas said.

The government will also hire more judicial and technical officers—the hiring is expected to start in about two months—to take into account the requirement of the new NCLT benches at Cuttack, Jaipur and Kochi.

Srinivas said the idea is to resolve bankruptcy cases in less than a year compared to the over-four years it used to take under the earlier system.

“The heavy load in some benches will have to be addressed by having more courts. If we can reduce the time taken for resolution from 4.3 years in the earlier system to less than a year, it will be a real achievement,” Srinivas said in an interview. The idea is to turn around a bankrupt firm quickly before its value erodes. Liquidation may take longer.

Experts said bankruptcy courts are over-burdened as they also address other company law matters relating to mismanagement and oppression, mergers and acquisitions and cases of de-registration of companies on account of defaulting on statutory annual return filing requirements. Cases relating to mergers and acquisition were earlier handled by high courts.

Last October, the government modified rules to ensure that turnaround plans for failed companies should specify how the interests of stakeholders, including financial and operational creditors are dealt with, highlighting the need to protect the interests of employees, vendors and customers such as home buyers. Advances that real estate firms take from home buyers often far exceed their borrowings from financial institutions. Giving home buyers the status of financial creditors will give their representatives a say in the company’s turnaround plan, along with the committee of creditors.

Srinivas said the long-term impact of the insolvency and bankruptcy code’s functioning has been salutary. One benefit that has already accrued from the code is that banks are much more thorough in their appraisal of loan applications while businesses are cautious about unsustainable levels of debt, he said.

A panel reviewing the Insolvency and Bankruptcy Code (IBC) is in no rush to suggest easing the related party criteria for the bidding of stressed assets, as it decides to staunchly guard against any scope for a back-door entry to dubious promoters from any such relaxation, sources told FE. The government is also considering another proposal to empower the National Company Law Tribunal (NCLT) to stop insolvency or bankruptcy proceedings once a matter is admitted with it but has not yet reached the resolution stage, upon requests by a majority of the committee of creditors. A source, however, said the panel hasn’t taken a final call on this issue, given a view that such a proposal might give errant promoters a window to evade the resolution process.

Currently, only the Supreme Court has the power to stop the insolvency proceedings once a matter is admitted with NCLT. “There are strong views both for and against the proposal (to empower NLCT),” the source added. The panel’s likely move to maintain status quo on related party has wide ramifications amid clamour for a cautious relook of the law, with some analysts saying the definition of connected persons who are barred from bidding from stressed assets is too exhaustive. The Section 29A of the IBC explicitly disallows undischarged insolvents, wilful defaulters and anyone with a non-performing account for a year or more, among others, from bidding for stressed assets. Similarly, clause (j) of Section 29A restricts the participation of those connected to a person already disqualified under the section.

It defines “connected person” (related party) as “(i) any person who is the promoter or in the management or control of the resolution applicant; or (ii) any person who shall be the promoter or in management or control of the business of the corporate debtor during the implementation of the resolution plan; or (iii) the holding company, subsidiary company, associate company or related party of a person” who is already disqualified under the provisions of the Code. The law has been made more stringent in recent months after allegations of related party transactions in some cases reinforced fears of a back-door entry of dubious promoters.

In one case, the debtor company (Synergies Dooray Automotive) transferred its debt to its sister concern (Synergies Castings), which, in turn, transferred the debt to a third party (Millennium Finance). Edelweiss ARC, the minority financial creditor of the debtor, resisted the transfer of debt from Synergies Castings to Millennium Finance on the grounds that the sole purpose of such a transfer was to dilute the voting power of Edelweiss ARC. This is because Synergies Castings, being a related party, would not otherwise have been able to vote in the committee of creditors.

More recently, the issue of related party came into focus after JSW Steel, in partnership with Aion, emerged as the lone bidder for Monnet Ispat. JSW Group chairman Sajjan Jindal’s sister has been married to Monnet Ispat’s promoter Sandeep Jajodia. The 14-member Insolvency Law Committee, set up under the corporate affairs secretary that had its last meeting on March 12, will soon submit its report with the government.

Analysts said if the government empowers NCLT immediately to stop insolvency proceedings, it could have bearing on the ongoing legal tussle involving the sale of Binani Cement, where the promoter company, backed by Ultratech Cement, wants to terminate the insolvency proceeding, even though the Dalmia Bharat-led consortium has been declared the highest bidder. In a few cases such as Uttara Foods, the Supreme Court allowed termination of insolvency proceeding on settlement with the creditor by invoking special power under Article 142 of the Constitution. But some others said the problem with making provisions for termination or closure of insolvency proceedings mid-way is that it may make the IBC a tool of recovery rather than a law for resolution of insolvency.

The panel has also decided now to tread cautiously on giving any immediate relief to promoters of micro, small and medium enterprises (MSMEs) to bid for their companies if they are not wilful defaulters. As for diluting the related parties provision, analysts say given the public uproar over the $2-billion fraud at Punjab National Bank involving jeweller Nirav Modi and the general mood against dubious promoters, the panel may have decided against offering any window that can potentially be exploited by unscrupulous elements.

On February 1, 2018, history was rewritten and what was scrapped in 2004-05 was brought back in a new avatar. The Union Budget 2018 assured that it will be primarily remembered for one and only thing, i.e. LTCG, or long-term capital gains tax. This year’s Union Budget has finally ushered back in the LTCG era and this change can really impact your investments in multiple ways. The rationale given for such introduction in the memorandum is that the existing tax regime is biased towards manufacturing, which has led to diversion of investments in financial assets. The introduction of capital gains tax would provide a level-playing field.

Now, it is sought to tax long-term capital gains arising on the sale of listed equity shares, units of equity-oriented fund or units of business trust at a rate of 10% (plus applicable surcharge and cess). Additionally, the said tax rate would apply to the following:

*To the listed equity shares, where both the acquisition and sale have been subjected to the Securities Transaction Tax, or STT.

* To the units of equity-oriented funds and the units of business trusts, where the transfer of such assets was subjected to STT.

Hence, with this, the employee stock option, which is given by a company to its employees as a reward for hard work and dedication, among other things, will also fall under the ambit of the new taxation norms. Suppose Mr A has 1,00,000 shares allotted pursuant to an employee stock option scheme at a cost of Rs 65 per share. Now, if Mr A sells those shares at, say, Rs 85 each after a period of two years, the taxability effect pre- and post-Budget would be poles apart.

For example, in the pre-Budget era, the total long-term capital gains would have arrived to Rs 25,00,000—Rs 85 (-) Rs 60 (x) 1,00,000—however, the tax on long-term capital gains was exempted if the STT was paid at the time of acquisition and sale of equity shares.

On the other hand, in the post-Budget era, the tax on long-term capital gains would amount to 10% of Rs 25,00,000 (-) Rs 1,00,000, i.e. Rs 24,00,000. The payable long-term capital gains tax would amount to Rs 2,40,000 as compared to nil in pre-Budget era.

Here it must be noted that in case the STT is not paid, then the long-term capital gains will be levied at the rate of 20% (with indexation) or 10% (without indexation), in both the pre- and post-Budget times.

The Union Budget 2018 has impacted only the long-term capital gains, and the short-term capital gains were left untouched. Further, the LTCG amendment has only impacted the listed entity, and the tax implications in case of unlisted entity were left untouched.

A 10% capital gains tax, while not significantly decreasing the attractiveness of investment in the financial sector, will surely affect the purpose for which employee stock options are given. The wealth creation tool will lose its effectiveness and only 90% of what was offered to an employee in return of her sweat and hard work will reach its owner.

The Rs 1 lakh exemption may not prove fruitful to the employees, as the current scenario indicates that the company is giving employee stock option benefits worth much more than what the exemption limit states. With no investment aim, an employee is still liable to pay 10% of the profits, which she has gained in return of giving her sweat and soul to the company. The shares sold pursuant to the exercise of employee stock options should have been given an exemption from tax on LTCG. As the present scenario is still shaky, time will tell what the future holds for employees.

“The law should not be retrospective as it will then be very difficult to implement and we will see a rise in litigation,” said Manoj Kumar, partner, Corporate Professionals. “It has to be made applicable from a specific date. The only drawback could be that more cases would go to liquidation for want of clarity in the law.”

The government on Monday set up a panel to find ways to make it easier for financial technology firms to do business and for authorities to deploy their services to further the goals of financial inclusion.

The eight-member panel, led by department of economic affairs secretary Subhash Chandra Garg, will find ways of using fintech in “critical sectors of the economy”, including the financing of micro, small and medium enterprises (MSMEs), delivery of e-services to the vulnerable sections of society, and management of land records and other government services, said an official statement.

The panel, which includes Ajay Prakash Sawhney, secretary in the ministry of electronics and information technology; Rajiv Kumar, secretary in the department of financial services, and Arun Kumar Panda, secretary in the ministry of micro, small and medium enterprises, will look into the regulatory regime for the fintech industry and explore the creation of a regulatory ‘sandbox model’ to foster new ideas.

A sandbox is a hub where regulators enable limited roll-out of new products to customers to ensure they do not pose any risk to consumers or to the stability of the sector.

“There will always be a regulatory vacuum whenever something new comes up. Setting up of a regulatory sandbox helps in such cases, fosters innovation and encourages entrepreneurs to experiment with fresh ideas,” said Dewang Neralla, chief executive, Atom Technologies Ltd, a payments service provider.

The panel will examine means of using data available with Goods and Services Tax (GST) Network, the company that processes indirect tax returns, and information utilities such as credit information companies to make applications for financing of MSMEs, the statement said.

GST transactions represent the paying capacity of registered taxpayers, which may be valuable information for lenders keen to finance the MSME sector.

MSMEs, unlike larger companies, often do not have immovable assets, which banks often require as collateral for lending.

The panel will also work with entities such as the Unique Identification Authority of India (UIDAI) to create and use the unique enterprise identification number.

The legal battle that has broken loose in the insolvency resolution process of Bhushan Power & Steel underlines the importance a confidentiality clause in bidding or deals involving mergers and acquisitions. The two bidders, Tata Steel and Liberty House, seem to know each other’s offer price and have been throwing that as an argument supporting their claim for bailing out the troubled lenders to the steel company.

Abhishek Manu Singhvi, the Tata Steel lawyer, last week stated in the National Company Law Tribunal (NCLT) that Liberty House’s bid was higher by “only Rs 10 billion”. The Liberty offer, he argued, came after it was informed that the Tata Steel bid was the highest. He said the Liberty offer should not be considered on this ground.

London-based Liberty House, too has been claiming its bid is higher than that of the Tata’s. While there seems to be no contradiction in the statements by the two sides, other stakeholders are questioning the breach of confidentiality in the whole process.

“It’s a sealed bid. I do not know where Tata Steel got this information. I am surprised how Tata Steel can make such statement. I don’t wish to comment more on this matter,” Rajiv Bajaj, executive director, Business Development (Asia), Liberty House, told Business Standard.

Calls and text messages to Singhvi and his office did not get any response, while questions emailed to Tata Steel remained unanswered.

Independent directors appointed for a second term at corporates can now be removed only by a special resolution passed by shareholders, with the government tightening the norms. Before removal, such independent directors should also be given “reasonable opportunity of being heard”, according to the corporate affairs ministry.

The move comes against the backdrop of concerns in certain quarters about the independence of independent directors in carrying out their functions and instances of such people being removed from the boards of companies by promoter entities. A special resolution requires approval from at least 75 per cent shareholders present at a meeting whereas only a minimum of 50 per cent is needed in case of ordinary resolutions.

Coming out with the new provision, the ministry said the decision is to ensure better corporate governance and balancing of powers of the boards. In this regard, the ministry has issued a ‘Removal of Difficulties’ order to introduce a new provision under Section 169 of the Companies Act which pertains to removal of directors.

An independent director appointed for a second term shall be removed by the company only by passing a special resolution and after giving him a reasonable opportunity of being heard, the order, issued on Wednesday, said. Till now, an independent director can be appointed for a second term only through a special resolution whereas such a person can be removed by way of an ordinary resolution.

“To ensure better corporate governance in companies and balancing of powers of the board of the company, it is felt that there is a need for an amendment in Section 169 of the Companies Act, 2013 to provide for removal of such re-appointed independent director by way of a special resolution,” it noted.

The ministry is looking to bolster the regime for independent directors and plans to carry out a comprehensive review of their functioning as part of efforts to strengthen the corporate governance framework. Last month, a senior official had said the ministry would be creating a database of independent directors under the Companies Act.

The government wants to create a mechanism to make independent directors more accountable and ensure that they are discharging their duties. The Ministry of Corporate Affairs is considering provisions in the Companies Act to measure compliance by independent directors.

“Independent directors are so central to better corporate governance. As a nation of half a million independent directors, a strong system should be in place,” a senior government official told ET. “There is so much reliance on this entity as a separate class of directors and no one is looking at their code of conduct,” the official said.

The ministry could designate an institution for maintaining a database for independent directors of listed companies and describe the eligibility criteria and indexation method for them. It could also serve as a reporting mechanism for independent directors of listed companies.

“Independent directors (IDs) are supposed to keep an eye on the board, flag non-promoter group issues. Many IDs have no idea about their role and responsibilities … They should know everything about disclosures, related-party transaction, etc.,” the senior official said.

The ministry is also studying UK’s Corporate Governance Code to bring the international best practices of corporate governance with respect to independent directors. According to law, the board of a company has to appraise the performance of every independent director. The independent directors, in turn, evaluate nonindependent directors. But industry experts say the process has become more of a customary job and there is hardly any adverse report on any independent director in annual reports.

The committee, under the chairmanship of Kotak Mahindra Bank managing director Uday Kotak, suggested that companies induct at least six directors, up from the current minimum of three under the Companies Act, with at least one independent woman director among them.

The ONGC acquisition of HPCL sets off speculation about the top posts

Remember the saying ‘Two swords won’t fit into one sheath’? A similar situation may emerge in the high-profile ?36,915-crore marriage between the two public sector entities ONGC and Hindustan Petroleum Corporation Ltd (HPCL).

The coming together of these two behemoths could lead to unease at the top management levels, say merger and acquisitions trackers.

They might just be right.

Today, the top post – Chairman and Managing Director – in both the entities is held by individuals of the same rank. Shashi Shanker leads ONGC and Mukesh Kumar Surana helms HPCL. This has generated a debate as to what will happen to Surana’s post after the Government offloads its majority stake in HPCL in favour of ONGC for a valuation. (When this will happen is still not clear). As ONGC has now become the majority stakeholder in it, will the CMD position in HPCL be converted to only Managing Director?

Both ONGC and HPCL are Central public sector units. Though the government remains the main promoter, HPCL will end up being a subsidiary of ONGC.

As with all such transactions the biggest dilemma is how to manage the leadership equation. Who will be the boss?

Coal India Ltd (CIL, which has eight subsidiaries) or State Bank of India with several mergers under its belt are some examples to look at. Even more interesting is the question of Mangalore Refinery & Petrochemicals Ltd. It is a subsidiary of ONGC but HPCL holds a minority stake in it – and it might be merged with HPCL in the future. But that’s another story.

Leadership fix

According to a former ONGC executive closely involved with the deal, neither the Coal India nor the MRPL kind of scene will play out here. In the case of Coal India, each subsidiary has its own Chairman as CIL is only a financial investor. In the case of MRPL, the company has a Managing Director, while in SBI the subsidiaries became a part of the main bank after the merger so there was just one Chairman. However, in the case of HPCL it will be a different story, as the refinery-cum-retailer will work as an independent entity and it is not a merger but transfer of majority stake from one owner to another.

Within ONGC and HPCL, those who are associated with the development remain ‘politically’ correct and simply say, “A decision on Board composition will have to be taken by the government sometime soon. We would like to believe that organisations are much above individuals.”

However, internally all agree it is easier said than done. There will also be the issue of corporate governance and transparency. “The last thing that one should do is not clearly define role and responsibility of the CEOs,” said Mukesh Butani, Partner, BMR Legal.

Matters of contention

Should both CMDs continue? Without over-simplifying, as HPCL is being acquired, the ONGC CMD becomes the super boss and it should function typically the way a holding and a subsidiary company work.

For example, in the case of MRPL, the ONGC Chairman is a non-executive Chairman. This helps prevent any conflict of interest. A non-executive chairman of the board does not occupy a management position, and the chair operates independently from the company. Besides, a non-executive chairman receives proposals from the CEO.

Says Bimal Jain, Chairman, Indirect Taxes Committee, PHD Chamber, “It is highly advisable that one person holds one post, which is good from the audit and transparency perspective, otherwise things can go wrong.”

Though there is no legal binding – under the Companies Act – that the Chairman of the joint entity should be from ONGC, the question is will the ONGC top management let go of the powers that they get with this acquisition?

The Sunil Bharti Mittal-led Bharti Airtel is considering listing its subsidiary Bharti Airtel International (Netherlands) BV (BAIN), which controls the group’s African operations, on a stock exchange overseas.

The company has started discussions with banks and intermediaries to evaluate the feasibility of the listing.

“The board of directors of BAIN BV on February 12 has authorised its management to initiate non-binding exploratory discussions with various banks/intermediaries to explore the possibility/feasibility of listing of its shares on an internationally recognised stock exchange,” Bharti Airtel said in regulatory filing. The discussions were of an exploratory nature and there was no certainty over their outcome, it added.

Bharti Airtel operates in 14 African countries and all the operations are managed by BAIN. A focus on optimising capital requirements and costs is bearing fruit, with Airtel’s Africa operations reporting profits for the last few quarters.

The net income for Africa for the quarter ended December was $76 million against a loss of $93 million in the corresponding quarter last year.

The Africa revenues grew by 5.3 per cent to $783 million from $744 million in the corresponding quarter last year on increases in penetration of data and Airtel Money services. Analysts said this was the right time to list the Africa operations as the company had become profitable.

“An IPO may help Airtel either to reduce the exposure of the parent company or in investing further for international operations,” he added. Airtel has over the last three years embarked upon a strategic deleveraging in Africa. It has sold 10,540 towers in 10 countries and its operations in Burkina Faso and Sierra Leone for $3.25 billion. The company has decided to be among the top two players in all the countries it operates in.

Analysts said by listing, Airtel was also likely to improve the ratio of its enterprise value to its earnings before interest, taxes, depreciation and amortisation (EBITDA). Airtel’s EV/EBITDA ratio is in the range of 5 but after listing, it may climb to 7-9. The EV/EBITDA ratio is a crucial important parameter in determining the value of the company. Acquirers look at this ratio to know if a company is undervalued or overvalued.

With Africa turning profitable, Airtel is expecting a better valuation after listing.

The company offers 3G services and Airtel Money in 14 African countries and 4G services in four. As on December 31, 2017, the company reported 84.13 million customers in Africa.

The government has introduced the concept of fair value for bankrupt companies undergoing resolution and an evaluation matrix for applicants under the Insolvency and Bankruptcy Code, bringing in more clarity and transparency in the insolvency resolution process.

The amended rules for the insolvency resolution process for corporate persons have made it mandatory for resolution professionals to ascertain “fair value” of the corporate debtor besides the liquidation value.

This will enable banks to ascertain the market price of the distressed company. Earlier, the banks only had the usually much lower liquidation value as a guidepost before starting the resolution process.

As per the rules, the committee of creditors, the resolution professional and the valuer will have to maintain confidentiality of both the fair and liquidation value.

The resolution professional will appoint two registered valuers to determine the fair value and the liquidation value of the corporate debtor undergoing resolution.

The new rules also require the resolution plan to provide for measures for insolvency resolution of the corporate debtor for maximisation of value of its assets.

“These may include reduction in the amount payable to the creditors, extension of a maturity date or a change in interest rate or other terms of a debt due from the corporate debtor, change in portfolio of goods or services produced or rendered by the corporate debtor, and change in technology used by the corporate debtor,” the amended rules say.

The amended rules also require the resolution professional to issue an evaluation matrix for the applicants before submission of the resolution plan. “The prospective resolution applicant will get at least 15 days from the issue of evaluation matrix or modification thereof, whichever is later, to submit resolution plans,” the amended rules say.

The Insolvency and Bankruptcy Board of India (IBBI) has amended the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 with immediate effect.

The Indian Banks’ Association recently took the decision to let the committee of creditors negotiate only with the highest bidder in the resolution process.The resolution plan approved by the committee of creditors will have to be submitted to the adjudicating authority, the National Company Law Tribunal, at least 15 days before the expiry of the maximum period permitted for the completion of the corporate insolvency resolution process, the IBBI has said.

The Insolvency and Bankruptcy Board of India (IBBI) has made it mandatory for a resolution professional to appoint two registered valuers to determine both the fair as well as liquidation value of a stressed company, instead of the existing practice of assessing only the liquidation value. The changes through amendments to IBBI’s Insolvency Resolution Process for Corporate Persons Regulations have come amid differences between lenders and bidders on the proper valuation of a stressed company. The bidders were of the view that such firms should be sold at the liquidation value, as indicated in the regulations under the Insolvency and Bankruptcy Code (IBC). However, lenders held that fair/enterprise valuation be taken into account as well so that bidding started from a higher point.

To maintain a standard formula and cut scope for differences on valuation methods, fair value has been defined as the “estimated realisable value of the assets of the corporate debtor, if they were to be exchanged on the insolvency commencement date between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing and where the parties had acted knowledgeably, prudently and without compulsion”. Similarly, liquidation value means “estimated realisable value of the assets of the corporate debtor, if the corporate debtor were to be liquidated on the insolvency commencement date”.

The amendments suggest after the receipt of resolution plans, the resolution professional will provide both the fair and the liquidation value to each member of the committee of creditors (CoC) in electronic form, on receiving a confidentiality undertaking. The resolution professional and registered valuers will also maintain confidentiality of the fair value and the liquidation value. The resolution professional will also issue an invitation, including the evaluation matrix, to the prospective resolution applicants. “He may modify the invitation as well as the evaluation matrix. However, the prospective resolution applicant shall get at least 30 days from the issue of invitation or modification thereof, whichever is later, to submit resolution plans. Similarly, he will get at least 15 days from the issue of evaluation matrix or modification thereof, whichever is later, to submit resolution plans,” the IBBI said. The IBBI said a resolution plan will provide for the measures to maximise the value of the assets of the stressed company. “These may include reduction in the amount payable to the creditors, extension of a maturity date or a change in interest rate or other terms of a debt due from the corporate debtor, change in portfolio of goods or services produced or rendered by the corporate debtor, and change in technology used by the corporate debtor.”

“The amendments have addressed many unaddressed issues, including timelines with respect to submission of resolution plan, mode and manner of inviting resolution plans, confidentially to be maintained,” said Manoj K Singh, founding partner at Singh & Associates. Also, the CoC will now have to specify the amount they will be paying out towards insolvency cost, operational creditors and dissenting financial creditors at the time of approving a resolution plan, he added.