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Regulatory Updates Insolvency Practice – August 2019

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Indian Law Updates August 2019 Insolvency Practice

Insolvency and Bankruptcy Code(Amendment) Bill, 2019

The Bill provides for the following:

  1. The Bill provides statutory recognition that maintaining a corporate debtor as a going concern would include ‘resolution plans’ that are in the nature of corporate restructuring schemes including mergers, amalgamation and demergers,where the corporate debtor itself may cease to exist.
  2. The National Company Law Tribunal, as the Adjudicating Authority shall be obliged to provide reasons in writing why it has not been able to ascertain the existence of a default, if it cannot make such ascertainment within a period of 14 days from the receipt of the application.
  3. The Bill brings in a total time limit of 330 days for completing the resolution process, including the time taken in any legal proceedings with regard to such resolution process of the corporate debtor. For proceedings pending on the date of the enactment of the Bill, which have already exceeded 330 days, the Bill brings in a transition time limit for completion within 90 days of Bill coming into force. This consequence of not completing the CIRP within the prescribed time period of 330 days presumably means that such a company will be subject to liquidation, which may not be the favourable outcome for the stakeholders. Further, the provision opens itself to legal challenge, especially in circumstances where there are pending legal proceedings, but the expiry of the 330 day period forces the corporate debtor into liquidation.
  4. At the proceedings of the Committee of Creditors (‘CoC’), where an authorised representative i.e. an agent or trustee for the financial creditors has been appointed, such representative shall cast his vote in accordance with the decision of vote of more than 50% voting share of the financial creditors who have voted, except in cases relating to the withdrawal of insolvency application where the authorised representative must vote according to the
    instructions received from each creditor to the extent of his voting share.
  5. The Bill provides that the COC in approving a resolution plan will be required to consider the proposed manner of distribution and if it recognizes the waterfall provided under the Code at the time of liquidation and the priority of the interests of the secured creditors. The Bill incorporates an earlier position of the CIRP which provides that any dissenting financial creditor must receive in the resolution plan an amount not less than its liquidation value
  6. The Bill seeks to address operational creditors who have disputed resolution plans on the grounds that the plans the Code are prejudicial to their rights and interests, by allowing for the resolution plan to disregard their claims. Accordingly, the Bill provides that the resolution plan will have to provide that operational creditors will receive not less than the higher of the liquidation value or the amount stated in the resolution plan if the stated waterfall under Section 53 of the Code is adhered to. This provision is retrospective in effect and will apply to all plans which are pending decision of the Adjudicating Authority or have been appealed against or where a legal proceeding has been initiated against the decision of the Adjudicating Authority as on the date of the Bill coming into force.
  7. The Bill further provides that the distribution plan should be “fair and equitable”. It unfortunately, does not lay down any definition of the principles of determining “fair and equitable” and thus leaves wide scope to judicial authorities to determine whether the plan is fair and equitable.
  8. Again, in order to expedite the timelines under the Code, the Bill provides that the CoC may decide to liquidate the company prior to the conclusion of the time period for completing the CIRP and even before the preparation of the information memorandum.

Regulatory Updates Banking Practice – August 2019

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Indian Law Updates August 2019 Banking Practice

Reserve Bank of India circular on rationalization of end use provisions for External Commercial Borrowings (ECBs)

The Reserve Bank of India (RBI,) pursuant to a circular dated 30th July 2019 (‘Circular’), liberalized certain end uses for the proceeds of which External Commercial Borrowings.

Under the earlier ECB regime, proceeds of an ECB could not be applied for working capital purposes or to repay Rupee loans, unless obtained from an equity holder.

In a move which is intended to improve the liquidity in the market for corporate borrower, pursuant to the Circular the proceeds of an ECB may be used by:

  1. An eligible borrower for working capital and general corporate purposes is permitted, if the minimum average maturity of the loan is for 10 years.
  2. NBFCs for on-lending, if the minimum average maturity of the loan is for 10 years.
  3. An eligible borrower for repayment of rupee loans availed of for capital expenditure, if the minimum average maturity is for 10 years.
  4. An eligible borrower for repayment of rupee loans availed of for purposes other than capital expenditure, if the minimum average maturity is for 7 years.
  5. NBFCs for on-lending, for the above purposes and for the above minimum maturity.

For the first time Indian lenders will be able to assign loans provided to corporates for capital expenditure in the manufacturing and infrastructure sector and which have been classified as SMA-2 or NPAs to eligible lenders under the ECB regulations. Indian corporates are also allowed to obtain loans from eligible lenders under the ECB regulations to re-finance.This has the potential to significantly boost the securitisation market in India and provide some relief to banks in managing their stressed assets.

Managing Distressed Assets In India

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Managing Distressed Assets In India

Jerome Merchant + Partners, presented sessions on Managing Distressed Assets in India for advisors, law firms and in-house counsels in Singapore on July 24 and July 25. Our partners, Vishnu Jerome and Murtaza Somjee discussed both developments and challenges in the insolvency regime and Dinesh Arora, partner PWC spoke on the insolvency resolution process and the management of resolution plans. Mohammed Reza and Justin Kwek of Simmons & Simmons presented the audience with a comparative analysis of insolvency laws in Singapore

IIFL, Lok Capital as well as existing investor Amicus Capital invests approximately USD 19 million (INR 130 crores) in insurance tech start up, Renew Buy

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New Delhi based insurance tech start up, Renew Buy, received an aggregate investment of USD 19 million from India Infoline, Lok Capital as well as existing investor Amicus Capital by way of Series C round of funding/investment

Role :Jerome Merchant + Partners advised IIFL

Members of JM+P team:The team was led by partner Sameer Sibal along with associates, Nirav Bakshi and Rishabh Gupta

Other Legal advisor 1:Shardul Amarchand Mangaldas, New Delhi advised Lok Capital

Members of SAM Co. team: The team was led by partner Visruta Kaul along with senior associate Pratyush Singh and associate Sonali Bhardawaj

Other Legal Advisor 2: Jyoti Sagar Associates (JSA), Mumbai advised Amicus Capital

Members of JSA team: The team was led by partner Anand Lakra along with senior associate Abhilash Chandran

Other Legal Advisor 3: PDS Legal, New Delhi advised the Company

Members of PDS Legal team: The team was lead by partner Probal Bhaduri along with principal associate Nidhi Arora, senior associate Shilpa M Ekka and associate Tanisha Gupta

Closing Date:24th June, 2019

Read More :https://www.financialexpress.com/industry/sme/renewbuy-raises-19-million-in-series-b-funding-round/1626601/

Oriental Structural’s Infra Investment Trust

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Oriental Structural Engineering launched an infrastructure investment trust (Invit) to issue units listed on the BSE and NSE for an amount of INR 2300 crores on June 12, 2019

Role : Jerome Merchant + Partners advised the lead bank, I-Sec

Members of JM+P team: The team was led by partner Shameek Ray

Other Legal advisors: 1) Shardul Amarchand acted as counsel to OSE 2) Cyril Amarchand acted as counsel to certain of the investors in the Invit 3) Latham & Watkins acted as international counsel to the issue

Closing Date: June 26th, 2019

Read More : https://economictimes.indiatimes.com/industry/banking/finance/global-investors-back-oriental-structurals-infra-investment-trust/articleshow/69766824.cms?from=mdr

Aditya Birla Retail acquires Jaypore for Rs 110 crore

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Aditya Birla Fashion and Retail Limited has acquired Jaypore, an ethnic apparel and accessories retailer for Rs110 crore

Role : Jerome Merchant + Partners advised the exiting promoters and angel investor Haresh Chawla

Members of JM+P team: The team was led by partners Kalpana Merchant and ­­­­­­­­Murtaza Somjee

Other Legal advisors: 1) Khaitan & Co advised Aditya Birla, Fashion and Retail Investor, the acquirer 2) S&R Associates for Aavishkar, an exiting investor

Closing Date: July 2nd,2019

Read More :https://economictimes.indiatimes.com/industry/services/retail/aditya-birla-retail-acquires-jaypore-for-rs-110-crore/articleshow/69724166.cms

Regulatory Updates – May 2019

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Indian Law Updates May 2019 Corporate Practice

SEBI Circular on Framework for Innovation Sandbox

The Securities and Exchange Board of India (SEBI) issued a circular on 20 May 2019 laying down the framework for an innovation sandbox, wherein FinTech firms and entities not regulated by SEBI will be provided an offline testing environment for their products or solutions.

The products / services or solutions should be intended for securities or commodities market in India, with the help of the datasets available in the sandbox and should be able to reach secure solutions which have clear benefits for consumers and the capital markets.

The data sets include data from depositories, stock exchanges and Registrars and Transfer Agents (RTAs) in a phased manner to conduct their testing, depending upon the validations. Such data shall be governed by comprehensive confidentiality and end user agreements. The testing on the datasets shall be conducted offline, in isolation from the live market, but with configurations similar to the live market for testing the innovative solutions. It will be ensured that such testing can be conducted without any regulatory breaches, and in compliance with the applicable laws on investor protection, KYC, data protection and integrity etc. This will help to have a testing process which is overseen by the regulator, thereby preventing non compliance or impact on the market due to malfunctioning of the product.

A steering committee comprising of Market Infrastructure Institutions (MIIs), Qualified Registrar and Transfer Agents (QRTAs), members from FinTech startups, academia, angel investors and a SEBI nominee shall develop operational guidelines for the features, structure and eligibility criteria for the innovation sandbox. Once such operational guidelines are in place, the steering committee shall be involved in the registering, onboarding and monitoring of the applicants. Clearly, the intention is to expedite the framework because the steering committee is to be constituted within 15 days of the circular and the committee is to provide the operating guidelines within 2 months of the circular.

The innovation sandbox can be set up in the form of a non-profit entity with a governing body comprising of representatives from stock exchanges, depositories and QRTAs. An operational team shall also be constituted in order to carry out the day to day tasks of the sandbox.

The whole participation process, including the application, tracking, onboarding, monitoring, reporting etc. is proposed to be made digital within a period of 24 months.

The outcome that is sought to be achieved through the innovation sandbox is to showcase working prototypes of solutions which can be used across industries and which would also be in compliance with the SEBI regulations. Such showcasing may help the FinTech firms to secure funding and encourage the use of financial technology.

It may be noted that the Reserve Bank of India (RBI) had also, in April 2019, released the draft guidelines for a regulatory sandbox, providing for the controlled testing of new products or services, with a similar objective.

The RBI guidelines stated eligible innovations as those which did not have governing regulations, those where there is need to ease the regulations and in cases where a proposed solution promises the ease / effectiveness of delivery of financial services. The RBI guidelines also provided an indicative list of the innovative products or services such as money transfer services, digital KYC, smart contracts etc. This reflects RBI’s recognition of transaction types in which fintech firms are currently most active.

The RBI criteria however, restricts the eligibility to companies incorporated in India which meet the start up criteria as per the Department of Industrial Policy and Promotion (DIPP) notification dated 11 April 2018 and should have a minimum net worth of INR 50 lakhs. This will be a huge disincentive for young fintech companies which have not been able to generate such monetary resources to participate in the sandbox.

In line with RBI not wanting the sandbox to stray into regulatory sensitive areas, the RBI guidelines also have an indicative negative list of products or services similar to those already available in India such as credit registry, crypto currency or initial coin offerings etc.

The RBI guidelines also provide for an established process for movement through the sandbox with laid down timelines, covering preliminary screening, test design, application assessment, testing and evaluation.

The RBI guidelines were however in a draft format inviting comments, while in case of SEBI, the framework has been issued by means of a circular.

Earlier, the Insurance Regulatory and Development Authority (IRDA) had also constituted a committee on a regulatory sandbox in the insurance space, which had provided its report in February 2019 with following major recommendations:

  1. The objective of the sandbox shall be to encourage innovations in the InsureTech and FinTech sectors by giving them flexibility to deal with regulatory requirements, without compromising on policyholder protection.
  2. Eligible applicants would be insurers and insurance intermediaries or other entities (but not individuals) having a minimum net worth of INR 25 lakhs for the last three years;
  3. Though there would be defined criteria for eligibility, process flow, timelines, success factors etc., there would also be flexibility to encourage wide experimentation, including no enforcement actions, waivers and relaxed reporting requirements. However, data would be subject to strict confidentiality restrictions.

SBO Rules and its impact on ownership structures of Indian companies

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Indian Law Updates March 2019 | Regulatory Practice

Aadhaar and other Laws (Amendment) Ordinance, 2019

Aadhaar and Other Laws (Amendment) Ordinance, 2019 has received the Presidential assent on March 4, 2019. The Ordinance effects changes to the Aadhaar (Targeted Delivery of Financial and Other Subsidies, Benefits and Services) Act, 2016, the Indian Telegraph Act, 1885 and the Prevention of Money-laundering Act, 2002. Certain salient changes effected by the Ordinance is as follows:

  • Deletion of Section 57:Earlier, the Supreme Court of India in the case of Justice Puttaswamy (Retd.) & Anr. vs. Union of India, had held Section 57 of the Aadhar Act to be partly unconstitutional, in so far as it enabled use of Aadhar number for establishing identity of an individual for any purpose by the State or a body corporate or a person pursuant to any law or any contract. The Ordinance removes Section 57 entirely from the statute but allows private entities to use Aadhaar or alternate virtual identification for authentication based on a framework of safeguards set out in the Ordinance.
  • Definition of Aadhaar ecosystem:The Ordinance defines the Aadhaar ecosystem, to include enrolling agencies, Registrars, requesting entities, offline verification-seeking entities and other entities which may be specified by regulations within the ambit of an Aadhaar ‘ecosystem’. Persons who qualify as part of the ecosystem will be governed and bound by the be directions and regulations by the UIDAI.
  • Creation of an alternate virtual id:An alternative virtual id which is connected to each Aadhaar number. Those who do not wish to provide Aadhaar number can provide a virtual id for electronic authentication. Each virtual id is connected to one Aadhaar number. The UIDAI may decide whether an entity can use Aadhaar number or must restrict itself to the virtual id for authentication.
  • Offline verification:Introduction of offline verification process to establish identity which does not involve authentication using biometric or electronic means. The Ordinance however does not spell out the offline verification methods but leaves such processes to be spelt out by UIDAI through separate regulations.
  • Voluntary option to provide Aadhaar number:A voluntary process for providing Aadhaar number for authentication to private entities, such as telecom and banking companies. Such use is only with the informed consent of the Aadhaar number holder.
  • Conditions for authentication by an entity: Section 4 has been amended to allow an entity to perform authentication if it is satisfied that the requesting is compliant with standards of privacy and security which are specified by regulations and permitted to offer authentication services under the provisions of any law made by Parliament or a purpose prescribed by the Central Government.
  • Purposes for use/ disclosure of information to be specified in writing at the time of data collection: Section 29(3) has been amended to clarify that any entity which requests authentication or offline verification shall not use or disclose any information available with it for any purpose, other than purposes informed in writing to the individual at the time of submitting information for authentication or offline verification.
  • Stipulation of regulation-making power of UIDAI:The UIDAI will now have power to make regulations governing the Aadhaar ecosystem, biometric and demographic information and the process of collecting the same, standards of privacy and security, etc
  • Other updates:There are other updates such as provision for children to cancel their Aadhaar number on attaining the age of eighteen years, prevention of denial of services for refusing to undergo authentication, establishment of a Unique Identification Authority of India Fund, provision of civil penalties, etc.

Analysis

The Ordinance which has been assented to by the President after the Aadhaar Amendment Bill lapsed in the Rajya Sabha. While, the Ordinance may be welcomed by banks and telecom companies, it does appear that other financial services players such as mutual funds, wealth managers will not benefit from the ability to use Aadhaar data immediately. Such intermediaries will need to firstly, determine based on rules and regulations the nature of processes than can be used for authentication of Aadhaar data and rationalise their KYC rules with the amendments to the money laundering regime effected by the Ordinance.

Further, and more importantly the Ordinance may be subject to constitutional challenge. The Ordinance disregards the judgment of the Supreme Court which held that the use of Aadhaar information by private parties enabled commercial surveillance and was therefore unconstitutional. The Ordinance may be further scrutinized in light of the judgment of the Supreme Court as it has been passed in the absence of a comprehensive data privacy law, which in the view of the Supreme Court enhanced the level of privacy rights violations of the original Aadhaar legislation.