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Department of Industrial Policy and Promotion Press Note No. 2 (2018) regarding FDI in e- commerce

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The Department of Industrial Policy and Promotion (DIPP) released a press note on December 26, 2018 (PN 2/2018), bringing into place some conditions related to e-commerce activities of entities which have FDI. PN 2/2018 will be effective from February 1, 2019.

The 2017 FDI policy prohibited the e- commerce entity from having more than 25% of sales value from the marketplace on financial year basis from one vendor or their group companies. This was undertaken with the intention of distributing the sales value of the e-commerce entity amongst many vendors and ensuring that sales are not predominantly concentrated in an entity controlled by the e- commerce marketplace. This was set as the criteria to ensure that the model does not become an ‘inventory’ based model, which was not permitted.

However, PN 2/2018 shifted the 25% restriction from the e-commerce entity to the vendor. It states that if more than 25% of purchases of a vendor are from the marketplace entity or any of its group companies, inventory of the vendor shall be deemed to be controlled by the e-commerce marketplace entity, and this would turn the business into an inventory based model, which is not allowed. It also expressly prohibits a marketplace from mandatorily requiring a vendor to exclusively sell products on its platform.

These restrictions may impact several exclusive sales tie-ups with specific brands, and even for new product launches exclusively on a particular marketplace. Also, the e-commerce entity will be required to demonstrate that a vendor has less than 25% of its total sales on that platform. The requirement increases data collection requirements for the e-commerce operator as it requires it to obtain total sales information of each vendor.

PN 2/2018 also provides that where the e- commerce marketplace entity or its group companies has / have an equity stake in an entity or exercises control over such entity, such entity will not be permitted to sell its products on the platform run by such marketplace entity. Further, an entity cannot sell its products on an e-commerce platform if its inventory is controlled by that e-commerce entity.

The third change in the FDI policy requires the ecommerce marketplace entity to provide other services such as logistics, warehousing, etc. on a fair and non-discriminatory basis. Thus, preferential treatment for one or more sellers will no longer be feasible. The provision clarifies that provision of services to any vendor on such terms which are not made available to other vendors in similar circumstances will be deemed to be unfair and discriminatory.

Further, cash backs provided by the group companies of the e-commerce entity must be fair and non-discriminatory i.e. other vendors must be permitted to provide similar terms. As per PN 2/2018, guarantees, warranties and after-sales services are to be provided by sellers. Payments can be facilitated by the e- commerce entity only in accordance with methods and guidelines of the Reserve Bank of India (RBI). The e-commerce marketplace entity will be required to furnish a report of compliance to the RBI annually by September 30 of each year, for the previous financial year.

Potential Impact: In addition to the impact as set out above, these modifications (a) could result in limiting the deep discounts provided by large e-commerce companies, (b) prohibit exclusive arrangements with a particular market place, (c) will result in e-commerce market place entities disposing their equity participation in selling entities.

SEBI norms for Debt Raising, RBI relaxation on Securitsation Norms

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SEBI Circular on issuance of debt securities by ‘Large Corporates’

With a view to providing an impetus to corporate bonds and being consistent with budget announcements, SEBI, on November 26, 2018 released guidelines for mandatory issue of debt securities by a Large Corporate, a term used for listed entities which have:

a) specified securities or debt securities or non-convertible redeemable preference shares listed on recognized stock exchanges (RSEs); and
b) which have outstanding long term borrowings of Rs 100 crores or above, with original maturity of more than one year (excluding ECBs and inter corporate borrowings between parent – subsidiary (ICBs)); and
c) which have a credit rating of AA and above for unsupported bank borrowings and plain vanilla bonds.

Notably, the term ‘Listed Entities’ also refers to those entities which have debt securities listed on the debt segment of the RSE. Therefore, this circular appears to apply to private companies whose debt securities are listed, if such company also fulfills the other criteria referenced in the circular.

The circular mandates a Large Corporate (LC) to meet at least 25% of its incremental borrowings, during the financial year subsequent to the financial year in which it is identified as an LC, by way of issue of debt securities. There is no minimum amount specified for the incremental borrowings and it covers all borrowings with maturity of 1 year or more (excluding ECBs and ICBs). This may be restrictive for entities since they might be required to incur the cost of public issue or privately placing debt securities even for smaller amounts of incremental borrowings.

The requirement to meet incremental borrowing norms by way of issuing debt securities shall be applicable for FY2020 and FY2021 on an annual basis, and if the LCs are unable to comply, the shortfall shall be explained to the stock exchange. Therefore, for entities following the April-March as their financial year, the framework shall come into effect from April 1, 2019.

However, from FY2022, the requirement must be met over a contiguous block of 2 years and a shortfall (i.e. amount required to be raised through debt securities but not so raised) shall be subject to a penalty of 0.2% of the shortfall. The penalty shall be paid to the stock exchanges, who will remit this amount to SEBI Investor Protection and Education Fund.

The Large Corporates are required to disclose the fact of their being Large Corporates as per the circular and the incremental borrowings during the financial year to the stock exchanges as well as to include the disclosures in their audited annual financial results. The disclosures made by the Large Corporates are to be certified both by the Company Secretary and the Chief Financial Officer of the Large Corporate.

Relaxation in NBFC Securitization Guidelines

The Reserve Bank of India vide circular dated November 29, 2018 (“RBI Circular”) relaxed the Minimum Holding Period (MHP) for certain transactions to facilitate assignment of loans / receivables by NBFC’s.

As per the RBI Circular, the MHP requirement for originating NBFCs, in respect of loans of original maturity above 5 years, has been reduced to receipt of repayment of six monthly instalments or two quarterly instalments (as applicable). Therefore, the MHP has effectively been reduced from 1 year to 6 months. Provided however, Minimum Retention Requirement for such securitisation/assignment transactions are to be 20% of the book value of the loans being securitised/20% of the cash flows from the assets assigned.

The above dispensation is only applicable to securitisation/assignment transactions carried out during a period of six months from the date of issuance of the RBI Circular.

SEBI Circular on Alternative Investment Funds (AIFs) in International Finance Service Centres (IFSCs)

These guidelines provide for the setting up of AIFs in an International Financial Service Centre (IFSC) (so far, only Gujarat International Finance Tec-City or GIFT) by incorporation as a trust, company, LLP or body corporate. The AIFs can apply for registration under SEBI AIF Regulations, 2012. Non-residents and resident institutional or individual investors eligible under FEMA to invest offshore can invest in these AIFs as per SEBI IFSC Guidelines, 2015. These AIFs can now invest in India through the FVCI / FDI route, in addition to the Foreign Portfolio Investment route. Some requirements in relation to such AIFs can be tabled as under:

Minimum scheme corpus USD 3mn.
Minimum investment from an investor (other than employees / Directors of AIF or Manager) USD150000
Minimum investment from employees or Directors of AIF or Manager USD40000
Minimum continuing interest of Manager or Sponsor (except for category III AIF) Two and half percent of corpus or USD750000 whichever is lower
Minimum continuing interest of Manager or Sponsor for category III AIF Five percent of the corpus or USD1.5mn whichever is lower

It is mandatory for a category III AIF to appoint a SEBI registered custodian, while for category I and II AIFs, it is mandatory to appoint a custodian if the corpus is more than USD70mn.

The circular also provides for Angel Funds to be set up in IFSCs, with the following requirements:

Minimum Corpus USD750000
Minimum net tangible assets of an individual investor who invests in an angel fund (excluding value of his principal residence) USD300000
Minimum net tangible assets of a corporate angel investor USD1.5mn
Minimum investment in angel fund by an angel investor USD40000 up to maximum 5 years
Minimum continuing interest of Manager or Sponsor Two and half percent of corpus or USD80000 whichever is lesser

Reserve Bank of India (RBI) issues guidelines for enabling interoperability of Prepaid Payment Instruments (PPIs)

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In accordance with the road map provided earlier by its Master Direction, the RBI has issued the consolidated guidelines on October 16, 2018 for enabling interoperability between Prepaid Payment Instruments (PPIs).

These guidelines enable wallet to wallet transfers and is likely to increase the use and acceptability of the payment wallets. PPIs issued in the form of wallets will be entitled to enable interoperability through UPI. Further, participating PPI’s will have to adhere to the technical specifications / standards / requirements as well as the reconciliation and grievance redressal mechanisms of National Payments Corporation of India (NPCI), which will facilitate the PPI issuers’ participation.

PPIs which are issued in the form of cards, will be entitled to enable interoperability in association with card networks. It opens up the whole domain of card payments to them, though such PPI Issuers will be required to follow all the technical requirements of the card networks such as membership type and criteria, merchant onboarding etc. PPI issuers operating in specific segments such as meal, gifts and money transfer services may also implement interoperability.

PPIs which have been issued in the form of wallets are required to adhere to the requirements of the sponsor bank arrangements in the UPI for settlement purposes.

Certain other salient provisions of the guidelines are:

a) PPI issuers are required to have a board approved policy for achieving interoperability.

b) Interoperability shall be facilitated on all KYC compliant accounts.

c) The new PPIs issued in form of cards would need to be EMV chip and PIN compliant. Participants will have to ensure that re-issuance / renewal of PPIs in form of cards is also EMV chip and PIN compliant. However, gift cards and cards for Mass Transit Systems (MTS) can be issued with or without EMV chip and PIN enablement.

For interoperability through UPI, PPI issuers shall link only their own customers’ wallets to the handle issued by NPCI and shall onboard only their own customers and not of any bank or other PPI issuer. The authentication i.e. checking the user’s identity will be completed by the PPI holders as per their existing wallet credentials and hence the transaction will be pre-approved before it reaches the UPI.

Personal Data Protection Bill 2018

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The Ministry of Electronics and Information Technology (“MeitY”) has released a draft of the Personal Data Protection Bill, 2018 (“Bill”), which was prepared by a committee constituted under the Chairmanship of Justice B.N. Srikrishna

Applicability: The Bill applies to processing of personal data if such data has been used, shared, disclosed, collected or otherwise processed in India, by a private or a government entity. In respect of processing by fiduciaries that are not present in India, the Bill shall apply if such processing is in connection with any business carried on in India activities such as profiling of data principals in India. The Bill extends to any personal data collected, used, shared, disclosed or otherwise processed by anybody corporate incorporated under Indian law or an Indian citizen will be covered, irrespective of whether it is actually processed in India.

Data Protection: Data protection is the process of safeguarding personal information from corruption, compromise or loss.

The Data Protection Authority of India (DPA): will be an independent regulatory body is responsible for the enforcement and implementation of the law.

Data Principal: the individual, who’s personal data is being processed, stored or collected.

Data Fiduciary: the entity who is in possession of the personal data of the data principal, for the purposes of storing, collecting and processing such principal’s data. Data fiduciaries are not limited only to persons who are processing data electronically, but even those persons who are processing, collecting or storing data physically.

Processing: The DPA will issue specific guidelines for processing of various categories of personal data and sensitive personal data in various contexts. Sensitive personal data will include passwords, financial data, health data, official identifier, sexual orientation, biometric and genetic data, and data that reveals transgender status, gender, caste, tribe, religious or political beliefs or affiliations of an individual.

Consent: Consent will be a lawful basis for processing of personal data. For consent to be valid it should be free, informed, specific, clear and capable of being withdrawn.

As a general rule, a copy of all personal data must be stored in India. The Government may issue rules specifying that certain categories of data can only be stored or processed in India.

Obligations of data fiduciaries: All processing of personal data by data fiduciaries must be fair and reasonable and for purposes which are clear, specific and lawful. A data fiduciary is obliged to provide notice to the data principal at the time of the collection of her personal data. The DPA will be notified when there is a data breach and in certain circumstances, to the data principal also.

Data principal rights: The right to confirmation, access, correction and data portability. The right to be forgotten provides a data principal the right against the disclosure of her data when the processing of her personal data has become unlawful or unwanted.

Transfer of personal data outside India: Other than critical personal data, all cross-border data may be transferred or processed on the basis model contract clauses containing key obligations. Critical personal data, as notified by the central government, will be subject to the requirement to process only in India. Personal data will however have permitted to be transferred for reasons of prompt action or emergency, such as for medical reasons.

Exemptions: Processing of personal or sensitive personal data if it is necessary in the interest of the security of the state, and for prevention, detection, investigation and prosecution of contraventions of law, are exempted. For enforcing a legal right or claim, for seeking any relief, defending any charge, opposing any claim or for obtaining legal advice from an advocate in an impending legal proceeding would be also exempted from the application of the Bill.

A mandatory approval requirement has been imposed on data processors who process data which carries a risk of significant harm to data principals. Such processors are required to implement Trust Scores, Data Audits as well as a Data Protection Impact Assessment.

The Bill introduces the concept of “privacy by design”, where privacy principles prescribed by the Bill are to be built into technology and operating systems of data fiduciaries and not be implemented as a reaction to new legal or other contractual requirements.

Appeals: An appellate tribunal will hear any appeal against an order of the DPA. Appeals against orders of the appellate tribunal will lie with the Supreme Court of India.

Penalties: Significant penalties of up to 2%-4% of global turnover in some cases and other monetary penalties in the range of USD 728,000 and USD 21,85,000, depending on the nature of harm and type of data which has been breached, may be imposed on data fiduciaries and compensation may be awarded to data principals for violations of the data protection law. In addition, the Bill also imprisonment for certain types of data violations. A person aggrieved by any action in violation of the Bill may also apply to the DPA seeking compensation for the harm caused.

Impact: The Bill is a welcome step towards the establishment of a statutory framework for privacy protection in India. However, the nature of obligations imposed on the data fiduciaries is in many instances ambiguous and onerous. The Bill contemplates the issuance of further guidelines and codes of conduct by the Government to facilitate the implementation of the Bill. This could lead to misalignment between genuine principles of data protection and commercial consequences such as costs and compliance required to satisfy future directions by the Government. MeitY will be required to have a wide range of discussions with stakeholders on the Bill so as to provide data fiduciaries with certainty as to the obligations that are required to be satisfied. MeitY, it is hoped, will also provide a sufficient window for data fiduciaries to put in place systems for complying with the provisions of the Bill.

Indian Law Updates April 2018 | Regulatory Practice

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SEBI REVISES CORPORATE GOVERNANCE STANDARDS BASED ON RECOMMENDATIONS OF THE KOTAK COMMITTEE.

 

The Securities and Exchange Board of India (“SEBI”) by way of a press release dated March 28, 2018 (“Press Release”) has announced actions taken at the SEBI board meeting including adoption of certain recommendations of the Uday Kotak Committee constituted in June 2017.

The Kotak Committee was constituted to make recommendations for improving standards of corporate governance of listed entities in India and the report (“Committee Report”) was released in October 2017. After having reviewed the Committee Report, on March 28, 2018, SEBI at its board meeting approved certain recommendations in toto and accepting some with modifications. This Press Release does not detail all recommendations of this committee which have been adopted by SEBI and is also silent on those which have been rejected.

These recommendations which have been highlighted in the Press Release will be applicable only after necessary amendments are made in the relevant regulations. Further, the points mentioned below are not exhaustive and indicate only the key highlights of the Press Release:

❖ Composition and Role of the Board of Directors – Recommendations accepted

→ CEO/MD: Separation of CEO/MD and Chairperson positions (modified recommendation in the Committee Report): Applicable to the top 500 listed entities in terms of market capitalization, effective from April 1, 2020. Note, the Committee Report had recommended that (a) listed entities with more than 40% public shareholding should separate the roles of Chairperson and MD/CEO with effect from April 1, 2020, and (b) after 2020, SEBI may examine extending the requirement to all listed entities with effect from April 1, 2022.

→ Gender Diversity (modified recommendation in the Committee Report): At least one ‘woman independent director’ to be on the Board of Directors of the top 500 listed entities by April 1, 2019 and in the top 1000 listed entities by April 1, 2020. The Committee Report had recommended that every listed entity have at least one independent woman director on its board of directors.

→ Minimum Directors (modified recommendation in the Committee Report): At least six directors to constitute the Board in the top 1,000 listed entities by April 1, 2019 and in the top 2,000 listed entities, by April 1, 2020. Currently, the minimum number of directors for such companies is 3. The Committee Report had recommended that this provision be adopted by all listed entities.

→ Maximum Directors: A director can be appointed on the Board of only up to 8 listed companies by April 1, 2019 and it will be reduced to 7 by April 1, 2020. Currently, the Companies Act, 2013 stipulates this as 10 directorships. This recommendation of the Committee Report has been adopted without any modification.

→ Quorum (modified recommendation in the Committee Report): Quorum for board meetings to be one third of the size of the board or three members, whichever is higher, for top 1,000 listed companies by April 1, 2019 and for top 2,000 listed companies by April 1, 2020. Currently, the Companies Act, 2013 requires a quorum of one-third of the total strength of the board of directors or two directors, whichever is higher. However, it is important to note that the Committee Report had also recommended that at least 1 independent director be required to constitute quorum.

❖ Disclosures and transparency- Recommendations accepted (without any modification)

→ QIPs: Disclosure on utilization of funds raised from Qualified Institutional Placement and preferential issues.

→ Quarterly: Mandatory disclosure of consolidated quarterly results with effect from FY 2019-20.

→ Auditor: Disclosures of auditor credentials, audit fee, reasons for resignation of auditors, etc. to be disclosed in the notice to the shareholders to allow shareholders to take an informed decision on the appointment of auditors of listed companies.

❖ Investor participation in meetings of Listed entities – Recommendation accepted (with modification)

→ Timeline for holding AGM: Top 100 entities to hold AGMs within 5 months after the end of FY 2018-19 i.e. by August 31, 2019. Currently, under the Companies Act 2013, listed entities in India are required to hold Annual General Meetings within six months from the end of the financial year. There is no specific provision in SEBI LODR Regulations on this matter. The Committee Report had recommended that the time period be reduced to 4 months over time.

→ Royalty payments: Mandatory approval of the majority of minority shareholders for any payments on account of brand or royalty to a related party exceeding 2% of the consolidated turnover. The Committee Report had recommended a 5% threshold in this regard.

❖ Enhanced disclosure of related party transactions – Recommendations accepted (without any modification)

→ Disclosure: SEBI has adopted the enhanced disclosure requirements for related party transactions as prescribed in the Committee Report. The Committee Report had inter alia recommended that listed companies submit within 30 days of publication of its standalone and consolidated financial results for the half year, disclosures of related party transactions on a consolidated basis, in the format prescribed in the relevant accounting standards for annual results, to the stock exchanges and publish the same on its website.

❖ Monitoring of group entities – Recommendations accepted (without any modification)

→ Secretarial Audit: Secretarial Audit is mandatory for listed entities and their material unlisted subsidiaries under SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015.

❖ Enhanced obligations on the listed entities with respect to subsidiaries- Recommendations accepted (without any modification)

→ Subsidiaries: The recommendations in the Committee Report on the enhanced obligations with respect to subsidiaries were accepted by SEBI. Therefore, amongst other amendments, the monetary threshold in the definition of ‘material subsidiary’ will now be reduced to 10% (as against 20% currently). These recommendations aim for better transparency on the governance levels of downstream investee entities of the listed entity and also to improve the monitoring of the listed entity at a consolidated level.

❖ Enhanced obligations on the listed entities with respect to subsidiaries- Recommendations accepted (without any modification)

→ Eligibility criteria: The recommendations for expanding the eligibility criteria for independent directors was adopted by SEBI. The Committee Report inter alia sought to specifically exclude persons who constitute the ‘promoter group’ of a listed entity from the definition of an ‘independent director’. Further, it also excluded “board interlocks” arising due to common non-independent directors on boards of listed entities.

India – IBBI Effects Amendment To Ensure Confidentiality Of Liquidation Value And Better Price Discovery Of Stressed Assets.

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In a fourth amendment dated 31st December 2017, the Insolvency and Bankruptcy Board of India (“IBBI”) amended the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (“Regulations”). The amendments provide literature on the following issues:

A)

Pre-Amendment: A ‘dissenting financial creditor’ implied only a member of the Committee of Creditors (“COC”) who voted against the resolution plan.

Post-Amendment: Section 2(1)(f) of the Regulations now includes plan apart from one who has voted against it.

Impact: This amendment is a step towards expediting the resolution process as it prevents creditors who do not participate in the process from blocking the timely approvals of the plan.

B)

Pre-Amendment: The resolution professional was required to disclose the liquidation value in the information memorandum circulated to the members of the COC and prospective bidders of the stressed asset.

Post-Amendment: The Regulations have been amended to exclude the requirement of including the liquidation value of the stressed asset in the information memorandum.

Impact: By way of this significant change, the IBBI has sought to weed out the anomaly whereby prospective bidders, already cognizant of the liquidation value, were basing their bids on such a guiding price and precluding the stressed asset from realizing its maximized value.

The objective is prevent banks from taking haircuts, as absence of benchmarks will likely force bidders to make their own assessment while submitting a resolution plan. Furthermore, the resolution professional is now mandated to provide members of the COC with the liquidation value of the asset only after having obtained an undertaking from each of the members, as to the confidentiality of the information. This is in addition to the resolution professional, itself maintaining confidentiality to avoid loss or damage of any kind.

The Amendment is a part of the Government’s continuing and concerted efforts to make the IBC a viable and seamless mechanism to resolve the mounting bad loans in the economy by ensuring optimal price discovery for assets and reduction of haircuts for lenders.

RBI Notifies New Framework For Resolution Of Stressed Assets

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 The Reserve Bank of India (RBI) has issued a notification dated February 12, 2018 (“Rules”) setting out a revised framework governing the resolution process for stressed assets.
 The Rules set out a comprehensive mechanism for banks to follow in monitoring, reporting and resolving stressed assets. It reduces the ambiguity of multiple stressed asset schemes which existed prior to the Rules therefore, leaving less scope for either lenders or promoters to delay the resolution of stressed assets.
 Keys highlights are as follows:

A. Timeline for Reporting & Resolution: The Rules require that lenders shall identify incipient stress in loan accounts, immediately on default, by classifying stressed assets as special mention accounts (SMA) and report them to the RBI’s large credit database (CRILC). If the principal or interest payment or any other amount wholly or partly overdue between one to 30 days, an account would be SMA-0, for 31-60 days SMA-1, and for 61-90 days, SMA-2 would be the categorization.
Upon the occurrence of a default in payment of dues under the loan agreements, the respective lender is required to initiate the resolution process and complete the same within 180 days from the date of the default.

B. Referral for Insolvency: If the resolution plan is not completed within 180 days from the date of the default then the lender must file an application under the Insolvency and Bankruptcy Code, 26 (“IBC”), within 15 days from the expiry of the 180-day time-period.

For large accounts where a resolution plan is being implemented, the account should not be in default at any point during the specified period (i.e. a period from the date of implementation upto the date on which at least 20% of the outstanding principal and interest sanctioned as part of the restructuring is repaid), failing which the lender must file an application under IBC, within 15 days from the date of the default.

For accounts with exposure of INR 100 crore to INR 2,000 crore a timeline for resolution will be announced by the RBI separately.

C. Resolution Plan / Process: In cases of change in ownership, the new promoter shall have to hold at 26 per cent of the share capital of the borrow, be the single largest shareholder of the borrower and be in “control” of the borrower. The Reserve Bank of India (RBI) has issued a notification dated February 12, 2018 (“Rules”) setting out a revised framework governing the resolution process for stressed assets.
 The Rules set out a comprehensive mechanism for banks to follow in monitoring, reporting and resolving stressed assets. It reduces the ambiguity of multiple stressed asset schemes which existed prior to the Rules therefore, leaving less scope for either lenders or promoters to delay the resolution of stressed assets.
 Keys highlights are as follows:

A. Timeline for Reporting & Resolution: The Rules require that lenders shall identify incipient stress in loan accounts, immediately on default, by classifying stressed assets as special mention accounts (SMA) and report them to the RBI’s large credit database (CRILC). If the principal or interest payment or any other amount wholly or partly overdue between one to 30 days, an account would be SMA-0, for 31-60 days SMA-1, and for 61-90 days, SMA-2 would be the categorization.
Upon the occurrence of a default in payment of dues under the loan agreements, the respective lender is required to initiate the resolution process and complete the same within 180 days from the date of the default.

B. Referral for Insolvency: If the resolution plan is not completed within 180 days from the date of the default then the lender must file an application under the Insolvency and Bankruptcy Code, 26 (“IBC”), within 15 days from the expiry of the 180-day time-period.

For large accounts where a resolution plan is being implemented, the account should not be in default at any point during the specified period (i.e. a period from the date of implementation upto the date on which at least 20% of the outstanding principal and interest sanctioned as part of the restructuring is repaid), failing which the lender must file an application under IBC, within 15 days from the date of the default.

For accounts with exposure of INR 100 crore to INR 2,000 crore a timeline for resolution will be announced by the RBI separately.

C. Resolution Plan / Process: In cases of change in ownership, the new promoter shall have to hold at 26 per cent of the share capital of the borrow, be the single largest shareholder of the borrower and be in “control” of the borrower.Mandatory appointment of credit rating agencies approved by the RBI for rating the residual debt, which will ensure fair and transparent risk assessment.

While, the Rules do not expressly stipulate a joint lenders’ mechanism for resolution, a resolution process is deemed to be completed only when the borrower is not in default with any of its other lenders and documentation between all lenders and the borrower and changes in ownership and security structure is completed.

D. Exemptions and frauds/willful defaulters: Restructuring of infrastructure projects involving deferment of the commencement of commercial operations date shall continue to be governed by the extant master circular dated July 1, 2015; and revival of Micro, Small and Medium Industries shall also continue to be governed by the extant circular dated March 17, 2016. Borrowers who have committed frauds/ malfeasance/ willful default will remain ineligible for restructuring.

Union Cabinet Approves Amendments in FDI Policy, Sectors Further Liberalized

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The government by way of a press release dated January 10, 2018 (“Press Release”) has indicated that the Union Cabinet has given its approval to the following amendments in the FDI Policy. The amendments in the Press Release will have to be notified by the RBI in applicable FEMA regulations. Highlights of the changes introduced in key sectors are as follows:

A Single Brand Retail Trading:

100% FDI in single-brand retail trading (SBRT) via the automatic route is now permitted. The extant FDI policy on SBRT allowed 49% FDI under automatic route, and FDI beyond 49% and up to 100% through Government approval route.

In addition, the sourcing requirements have also been liberalized to permit single brand retail trading entity to set off its incremental sourcing of goods from India for global operations during initial 5 years, beginning 1st April of the year of the opening of first store against the mandatory sourcing requirement of 30% of purchases from India. After completion of this 5-year period, the SBRT entity shall be required to meet the 30% sourcing norms directly towards its India’s operation, on an annual basis. The Press Release has also indicated the scope of the term ‘incremental sourcing’.

B Civil Aviation:

Foreign airlines have now been permitted to invest up to 49% under the approval route in Air India subject to (a) FDI in Air India including that of foreign airlines shall not exceed 49% either directly or indirectly, and (b) Substantial ownership and effective control of Air India shall continue to be vested in Indian National.

C Construction Development:

The Press Release has clarified that that the real-estate broking service does not amount to real estate business and therefore eligible for 100% FDI under the automatic route.

D Pharmaceuticals:

The definition of ‘medical device’ is amended to exclude the reference to the Drugs and Cosmetics Act. Therefore, entities engaged in the manufacture of medical devices need to merely qualify under the parameters set out in the FDI Policy for receiving foreign investment under the automatic route.

E Power Exchange:

Foreign Portfolio Investors /Foreign Institutional invest in secondary as well as primary market. Previously, investment/purchases were restricted to the secondary market.

F FDI in investment companies:

Foreign investment into an Indian company, engaged only in the activity of investing in the capital of other Indian companies/ limited liability partnerships and in ‘Core Investing Companies’ will be aligned with the FDI policy provisions on ‘Other Financial Services’. (i.e. foreign investment upto 100% under automatic route shall be allowed if the activities are regulated by any of the financial services regulators referenced in the relevant policy provision).

G Issue of shares for non-cash consideration:

Issue of shares against non-cash considerations for pre-incorporation expenses and import of machinery shall be permitted under automatic route for sectors under automatic route.

H Power Exchange:

Any foreign investor who wishes to specify a particular auditor/audit firm having international network for the Indian investee company, then audit of such investee companies should be carried out as joint audit wherein one of the auditors should not be part of the same network.

I Competent Authority for examining FDI proposals from countries of concern:

For FDI in automatic route sectors which require approval only on the matter of investment being from country of concern, FDI applications would be processed by Department of Industrial Policy & Promotion for Government approval. Cases under the government approval route, also requiring security clearance with respect to countries of concern, will continue to be processed by concerned Administrative Department/Ministry

RBI issues clarifications on NBFC – P2P Lending Platform Direction, 2017.

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The Reserve Bank of India (“RBI”) issued FAQ’s on January 3, 2018 to the Non-Banking Financial Company – Peer to Peer Lending Platform (Reserve Bank) Directions, 2017 (“Master Directions”).

The Master Direction mandated that “intermediaries providing the services of loan facilitation via online medium or otherwise”, are required to obtain an NBFC P2P license from the RBI for carrying on the business of P2P Lending within the time frame referenced in the Master Directions. The Master Directions required such ‘NBFC-P2P’ entities to adhere to certain prudential norms including imposing monetary caps on aggregate exposure of a lender to all borrowers at any point in time and the exposure of a single lender to a borrower across all P2P platforms.

Pursuant to discussions with market participants, the difficultly for platforms connecting only regulated entities such as banks and financial institutions with borrowers to comply with these additional prudential norms and compliances were highlighted. The RBI has through the FAQ’s has now clarified that “Electronic Platforms that assist only banks, NBFCs and other regulated AIFIs to identify borrowers are not to be treated as P2P platforms. However, in cases where, apart from banks or NBFCs or AIFIs, other retail lenders use the platform for lending, the platform will have to register separately as an NBFC-P2P”

The RBI also clarified on the issue of whether an existing NBFC can operate as an NBFC-P2P and the RBI has disallowed them from doing so.

The FAQ’s are a welcome clarification from the RBI as platforms which assist regulated financial institutions are not considered as an ‘NBFC- P2P’ and therefore not governed by the provisions of the Master Directions. In our view these clarifications are consistent with the premise in the consultation paper released by the RBI prior to the Master Directions where the objective is to govern unregulated retail lenders or crown funding platforms.
IBBI effects amendment to ensure confidentiality of liquidation value and better price discovery of stressed assets.

In a fourth amendment dated 31st December 2017, the Insolvency and Bankruptcy Board of India (“IBBI”) amended the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (“Regulations”). The amendments provide literature on the following issues:

A) Pre-Amendment: A ‘dissenting financial creditor’ implied only a member of the Committee of Creditors (“COC”) who voted against the resolution plan.
Post-Amendment: Section 2(1)(f) of the Regulations now includes within the meaning of a ‘dissenting financial creditor’, a creditor who has abstained from voting on a resolution.plan apart from one who has voted against it.
Impact: This amendment is a step towards expediting the resolution process as it prevents creditors who do not participate in the process from blocking the timely approvals of the plan.

B) Pre-Amendment: The resolution professional was required to disclose the liquidation value in the information memorandum circulated to the members of the COC and prospective bidders of the stressed asset.
Post-Amendment: The Regulations have been amended to exclude the requirement of including the liquidation value of the stressed asset in the information memorandum.
Impact: By way of this significant change, the IBBI has sought to weed out the anomaly whereby prospective bidders, already cognizant of the liquidation value, were basing their bids on such a guiding price and precluding the stressed asset from realizing its maximized value. The objective is prevent banks from taking haircuts, as absence of benchmarks will likely force bidders to make their own assessment while submitting a resolution plan. Furthermore, the resolution professional is now mandated to provide members of the COC with the liquidation value of the asset only after having obtained an undertaking from each of the members, as to the confidentiality of the information. This is in addition to the resolution professional, itself maintaining confidentiality to avoid loss or damage of any kind.

|| The Amendment is a part of the Government’s continuing and concerted efforts to make the IBC a viable and seamless mechanism to resolve the mounting bad loans in the economy by ensuring optimal price discovery for assets and reduction of haircuts for lenders ||

Government of India issues Insolvency & Bankruptcy Code (Amendment) Ordinance, 2017

By | Resources

Government of India issues Insolvency & Bankruptcy Code (Amendment) Ordinance, 2017: Introduces strict restrictions; willful defaulters, persons who are habitually non-compliant or are associated with NPA’s restricted from being resolution applicants.

On November 23, 2017, the Government of India issued the Insolvency & Bankruptcy Code (Amendment) Ordinance, 2017 (“Ordinance”), to amend the Insolvency & Bankruptcy Code, 2016 (“Code”). As per the press release by the Ministry of Corporate Affairs, the Ordinance intends to bar certain persons from participating in the insolvency resolution process including those who have wilfully defaulted, are associated with non-performing assets, or are habitually non-compliant.

The Ordinance brings forth the following key changes to the Code:

(i) Personal guarantors now included within the ambit of the Code: Section 2 of the Code has been amended to include personal guarantors who have executed personal guarantees in favor of any corporate debtor within the ambit of the Code. This would in effect allow debtors to initiate an insolvency process against any person, who has provided a personal guarantee in favor of a creditor. However, it is not clear as to whether such an application can be filed prior to the guarantor defaulting on its obligations under the guarantee or the exact relief that can be sought from the guarantor, given it will not be possible to structure a resolution process against the guarantor.

(ii) Certain persons ineligible to be resolution applicants: The Ordinance bars certain persons from submitting a resolution plan (“Ineligible Persons”). This includes any person or the promoter in management control of any person who:

(a) have been classified as undischarged insolvents;
(b) have been classified willful defaulters as per the Reserve Bank of India regulations;
(c) whose account has been classified as a non-performing asset and one year or more has lapsed from the date of such classification and such person has still failed to make the overdue payments prior to the submission of a resolution plan;
(d) have been convicted for any offence punishable with imprisonment for 2 years or more;
(e) have been disqualified to act as a director under the Companies Act, 2013;
(f) have been prohibited by the Securities & Exchange Board of India from trading in securities or accessing the securities market;
(g) have indulged in a preferential transaction or an undervalued transaction or fraudulent transaction in respect of which an order has been made by the Adjudicating Authority under the Code;
(h) have executed an enforceable guarantee in favor of a creditor, in respect of a corporate debtor undergoing insolvency resolution process under this code;

Further, the prohibitions as set out in (a) to (h) above are also applicable to any “connected person” of the applicant. For the purposes of this clause, a “connected person” has been defined to mean:

i. any person who is a promoter or is in the management or control of the resolution applicant;
ii. any person who shall be the promoter or in the management or control of the business of the corporate debtor during the implementation of the resolution plan;
iii. the holding company, subsidiary company, associate company or related party of a person referred to in clauses (a) and (b).

(h) have been subject to any disability, corresponding to clauses (a) to (i), under any law in a jurisdiction outside India;

(iii) Committee of creditors to approve a resolution plan only after considering feasibility and viability: The Ordinance places a duty on the committee of creditors to consider the feasibility and viability of a resolution plan prior to approval. The committee of creditors (“CoC”) shall not pass a resolution plan in case it is submitted by an Ineligible Person, and in a situation where there are no resolution plans available with it which have been submitted by non Ineligible Persons, it may require the resolution professional to make a fresh call for resolution plans.

(iv) The CoC shall not sell any of the movable or immovable properties or actionable claims of the corporate debtor to an Ineligible Person.

The Ordinance further provides, that any CoC shall reject a resolution plan, which is submitted before the commencement of the Ordinance but is yet to be approved, if the resolution applicant is classified as an Ineligible Person as per the amendments pursuant to the Ordinance.

The Ordinance intends to ensure that promoters or their related parties are unable to take control of a company undergoing insolvency resolution and to further ensure that such promoters are unable to purchase the assets of the corporate debtor at a discount as a result of insolvency. This Ordinance is a further step from the recent amendment to the Code requiring resolution plans to contain additional information and disclosures about resolution applicants. The previous amendment required the CoC to consider such information prior to approving the resolution plan. However, as per this Ordinance, the new Section 30(4) of the Code prohibits the CoC from approving resolution plans presented by Ineligible Persons.

Given the strict nature of the restrictions imposed by the Ordinance, it may give rise to certain specific challenges such as limiting the pool of resolution applicants and including promoters who could be termed as ‘ordinary defaulters’ rather than “habitually non-compliant” or “willful defaulters”. Further, any ongoing unapproved resolution plan by an Ineligible Person will now not be permissible and all such plans will have to be re-submitted to ensure that it is not presented (individually or jointly) by an Ineligible Person. Revisions of such plans may take substantial amount of time and possibly affect all stakeholders of the company. It is likely that the retrospective nature of the Ordinance and its classification of Ineligible Persons will be subject to legal challenge.