PRE-PACK PROCESS UNDER INSOLVENCY AND BANKRUPTCY CODE

Introduction

The Central Government recently promulgated the IBC Amendment Ordinance 2021, allowing a pre-packaged insolvency process for micro, small and medium enterprises. The stated Ordinance has been introduced for minimizing the draconian impact of stress in the corporate segment amid COVID, with an objective to rescue business in stress and promote entrepreneurship and credit available in the economy. Apart from this new process, India’s Rank moved up from 132 to 52 in terms of resolving insolvency in the World Bank Group’s Doing Business Reports. In the global innovation index India’s rank improved from 111 in 2017 to 47 in 2020 in ease of doing Business.[1] It has different nomenclature as pre-plan sale in the USA, pre-pack sale in the UK and scheme of arrangement in the Singapore.

The scheme of Pre-Pack Insolvency envisages the debt restructuring of the stressed corporate business through there promoters by partially interference of the Adjudicating Authority(s), no transfer of management and control viz. control in the hand of corporate debtor qua appointment of the Resolution Professional (“RP”), protecting the commercial wisdom of the Committee of Creditors (“CoC”).
The Insolvency and Bankruptcy Board of India notified the Insolvency and Bankruptcy Board of India (Pre-packaged Insolvency Resolution Process) Regulations, 2021 (PPIRP Regulations) on 9^th April, 2021, to enable an operationalisation of PPIRP.[2] By virtue of PPIRP, Companies (MSMEs) can achieve debt restructuring by entering into direct arrangement with the creditors to reorganize the terms of their debt payments.

PPIRP in the Indian framework context is an arrangement where the resolution of a company’s business is negotiated with a buyer before the appointment of an Insolvency Professional. It is a blend of informal and formal mechanisms, with the informal process stretching up to NCLT admission, followed by the existing NCLT supervised process for resolution as specified under the Insolvency and Bankruptcy Code (IBC).

Corporate cum debt restructuring through Pre-Pack - a critical analysis
The entire and seamless dependency on the defaulters viz. promoter of the CD and paving the way for restructuring of the debt by the CD in itself leads to suspicious positions.
Absence of publication of any public announcement or inviting claims from the creditors is another drawback of the said Pre-Pack Process. It envisages the collation of claims by the Resolution Professional (“RP”) with the cooperation of the promoters in default of the Corporate Debtor. Regulation 19 of the Pre-Pack Process Regulations, 2021, provide that RP shall make a public announcement (Form-P9) within 2 days from the date of the commencement of the Pre-Pack Process[3] further the same shall be sent to every creditor listed in Form-P2,[4] sent to Information Utilities[5] and published on the website, if any, of the Corporate Debtor and the Board[6]. However, the regulation doesn’t provide the wider publication and the same is concerned on E-publication of public announcement i.e., Form-P9, which also provides uncertainty of filing of claim by different class of creditors and ultimately leads to legal dispute before the Hon’ble Adjudicating Authority (“AA”).  To make Pre-Pack friendly, the IB Code casts the duty on the Corporate Debtor to extent their full cooperation to the RP on the following subjects:

• Corporate Debtor should be obligated to make available and updated list of outstanding claims, including contingent and future claims to the RP;

• A Debtor in possession model is envisaged under Pre-Pack Process by virtue of which the RP depends on the Promoters of the Corporate Debtor for effective transparency of the Pre-Pack Process;

• Corporate Debtor should also be obligated to draft an information memorandum (IM), based on its books, which may be certified by its Chairman/Managing Director/Managing Partner on behalf of Board of Directors of the CD, handed over to the RP on the day he is appointed by the AA;

As the Swiss challenge method is taken into consideration by creditors for arranging the resolution plan from the selected investors and selecting the best of them to serve as the base plan which may increase the commercial of the plan proposed by defaulters/Promoters of the CD.
However, the unavailability of Resolution Applicants/Investors make the swiss challenge method far-fetch impractical amid pandemic.

Debtor-in-Possession and Creditor-in-Control - Hybrid Approach
While the Pre-Pack Process is carried out by the RP and at the same time the Business is run by the existing management, the RP would make sure the CD is managed during the process in a manner which is not detrimental to the interest of the creditor. As the model is also based on Creditor-in-Control the certain decision of existing management shall require the approval of committee of creditors. The actions enumerated under section 28 of the IB Code shall not be taken solely by the existing management and without the prior approval of the committee of the creditor. For maximisation of the value of the assets of the Corporate Debtor, the RP shall appoint two registered valuer(s) to determine the fair value and liquidation value of the CD to ensure that the Pre-Pack Process is not misused by the existing management of the CD to write off its debts, intending to defraud creditors and at the same time the process envisages the applicability of provisions relating to avoidable transactions to Pre-Pack. Further for effective creditor-in-control the interim finance should be available to the existing management of the CD subject to the approval of the CoC, as it is an essential under section 28 of the IB Code and it shall be included in the Insolvency Resolution Process cost.
For balancing the said Debtor-in-Possession and Creditor-in-Control - Hybrid Approach, the roles and responsibilities of the RP and the CD is demarcated under the IB Code, apart from that, the fastening of the criminal and civil liability with the actions of the existing management of the CD and seek indemnification thereof, shall lead to wider litigation simultaneously when the CD is under Pre-Pack Process and causes huge loss to the assets which are already in stress. The same is questioning the model of the Pre-Pack Process and the objective of the IB Code.

Swiss Challenge Method under Pre-Pack Process[7]   
The IB Code envisages the resolution of the stressed assets through submission of resolution plan by the Corporate Debtor itself and by various other resolution applicants wherein the Corporate Debtor shall submit a base resolution plan to the RP within two days from the date of commencement of PPIRP. The CoC shall invite the resolution plan from prospective resolution applicants keeping in view the base resolution plan and the base resolution plan submitted by the Promoters of the CD shall form the basis for swiss challenge, where the details of the plan are disclosed therewith. Further, the Pre-Pack Process shall offer two optional approaches namely, (i) without swiss challenge but no impairment to Operational Creditors; (ii) With Swiss Challenge inclusive of rights of Operational Creditors and dissenting Financial Creditors, subject to minimum provided under Section 30(2)(b) of the IB Code. The CoC may opt the base resolution plan on its weighted average score in consonance with the applicable provisions of the IB Code or may opt to swiss challenge resolution plan submitted by the other investors / Resolution Applicants. It shall not be necessary that the resolution value shall be higher than the realisable value.[8]

The CoC may decide to close the process with the approval of 66% voting share, present and voting[9], if the CD engages in any activity which has the potential to cause depletion of assets or value to the detriment of the creditors, even the CoC at any time after the PPIRP commencement date but prior to approval of Resolution Plan, may resolve to initiate a CIR Process in respect to the CD by a vote 66%, of the voting shares, if such Corporate Debtor is eligible for CIR Process under Chapter II of the IB Code.[10] Apart from the above-said, the CoC can liquidate the CD with 75% of voting share provided the said decision solely is the commercial consideration of the CoC or if the CoC may deem fit for any other reason. 

• Conclusively, it is observed that in absence of wider publication of public announcement for invitation of claims from all the creditors of the CD causes uncertainty in respect to the resolution of the disputed/undisputed claims and leads to further litigation for already stressed business of the CD.

• The other drawback is the direct approach to Investors/Resolution Applicants by CoC/RP and without publication for invitation to Resolution Applicants, seems restricted, unviable and unfeasible. Further, it also creates an impediment for revitalizing distressed assets and the limited participation of Investors/Resolution Applicants in absence of the publication for inviting them as a bidder qua adoption of secretive approach will have drastic impact and will lead to exponentially rise in cases of CIR Process or Liquidation process and termination of Pre-Pack Process. 

• This secretive approach leads to substantive interference by the Promoters of the CD and defeats the objective of swiss challenge method. Further, the Pre-Pack Process is too oriented for resolution by the CD itself and strict adherence of time period of 90 days with extension of 30 days may leads to unproductive results which tends to initiation of CIR Process or liquidation or closing of Pre-Pack Process without resolution of the debt of the Corporate Debtor/MSME.

Reviewing, revitalizing and restructuring of stressed assets of the CD with this additional tool of PPIRP in a time bound manner is beyond the approach of this framework. Even, there is need of sense of resolution of debt which must be imbued in such measures with the intent to not to allow things to drag further with keeping an eye over the situation emerging from suspension of the Insolvency Laws in the financial sector and it's a matter of concern that in both ways, the framework of Pre-Pack Process will become worthy to spike and maintain the balance in the financial sector.  

This Article has been Compiled by Himanshu Mohinani (Associate), and edited by Deepika Sharma (Senior Associate) You can direct your queries or comments to the author at himanshu@factumlegal.com or deepika@facumlegal.com
Disclaimer:

The contents of this article should not be construed as legal opinion. This article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. We expressly disclaim any financial or other responsibility arising due to any action taken by any person on the basis of this article.

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[1] Report of the Sub-Committee of the Insolvency Law Committee on Pre-packaged Insolvency Resolution Process
[2] Insolvency and Bankruptcy Board of India Notification No. IBBI/2021-22/GN/REG071 dated 09.04.2021
[3] Regulation 19(2)(a) of the INSOLVENCY AND BANKRUPTCY BOARD OF INDIA (PRE-PACKAGED INSOLVENCY RESOLUTION PROCESS) REGULATIONS, 2021
[4] Regulation 19(2)(b) of the INSOLVENCY AND BANKRUPTCY BOARD OF INDIA (PRE-PACKAGED INSOLVENCY RESOLUTION PROCESS) REGULATIONS, 2021
[5] Regulation 19(2)(c) of the INSOLVENCY AND BANKRUPTCY BOARD OF INDIA (PRE-PACKAGED INSOLVENCY RESOLUTION PROCESS) REGULATIONS, 2021
[6] Regulation 19(2)(d) of the INSOLVENCY AND BANKRUPTCY BOARD OF INDIA (PRE-PACKAGED INSOLVENCY RESOLUTION PROCESS) REGULATIONS, 2021
[7] Report of the Sub-Committee of the Insolvency Law Committee on Pre-packaged Insolvency Resolution Process
[8] Supreme Court (2020), Maharashtra Seamless Limited Vs. Padmanabhan Venkatesh & Ors., CA Nos. 4967-4968 of 2019
[9] Section 54-K (13) of the Insolvency and Bankruptcy Code, 2016
[10] Section 54-O (1) of the Insolvency and Bankruptcy Code, 2016

DPIIT ISSUED NEW SOPS FOR CLEARANCE OF FDI PROPOSAL

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INTRODUCTION:

With the aim of enhancing "ease of doing business" and "promoting the principle of Maximum Governance and Minimum Government", the Government of India abolished the Foreign Investment Promotion Board ("FIPB") on May 24, 2017. In its place, the relevant administrative ministry/department in consultation with the Department for Promotion of Industry and Internal Trade ("DPIIT") are now directly responsible for processing applications for foreign direct investment ("FDI") in India in sectors which require prior approval of the Government. However, (DPIIT) earlier known as Department of Industrial Policy & Promotion (DIIP).

The Government of India, vide its Notice No. 1/8/2016-FDI Policy Government of India, Ministry of Commerce & Industry, Department of Industrial Policy & Promotion on 9th November, 2020 revamp the existing Standard Operating Procedures (SOPs) for processing foreign direct investment (FDI) proposals to fast track approvals.

The Salient features of the updated SOPs for processing FDI proposals, inter alia includes:

     A.      Online Filing of Application:

• Proposals for foreign investment in sectors/activities requiring Government approval as per the Consolidated FDI Policy dated 15.10.2020, as amended from time to time (FDI Policy) and Foreign Exchange Management (Non-Debt Instrument) Rules, 2019 dated 17.10.2019, as amended from time to time (FEM Non-Debt Instrument Rules 2019) would be filed online through the Foreign Investment Facilitation Portal (FIFP).
• The applicant would be required to submit the proposal for foreign investment in terms of the guidelines and requirements under the FDI Policy, SOP and FIFP. The applicant shall make the application as per the format and requirements under the FIFP and have to upload 23 documents of which 9 are mandatory. The documents include details of ownership, control and significant beneficial owners of the entities involved, and registration of outlets with states.
• After filing the proposal, DPIIT will identify the concerned Administrative Ministry/Department and e-transfer the proposal within 2 days to the concerned Administrative Ministry/Department (Competent Authority) for processing and disposal of the case. In case if applications are not digitally signed, upon receipt of the online communication from DPIIT  the applicant would be required to  submit the signed physical copy of the application within 7 days of such communication from DPIIT. However, additional 7 days may be provided by the Competent Authority for submission of application.

         B.       Competent Authorities for Approval/Rejection of Foreign Investment:

After the abolition of the FIPB, the DPIIT issued a standard operating procedure ("SOP") for processing FDI proposals with guidelines, including detailed timelines, to ensure uniformity of approach across sectors. The SOP identified administrative ministries/departments (the "Competent Authority") for respective sectors in which FDI requires the prior approval of the Government.

Investments from an entity of a country that shares a land border with India, or where the beneficial owner of an investment into India situated in or is a citizen of any such country, would require clearance from the Ministry of Home Affairs.

 C.   Procedure for Processing of Applications Seeking Approval for Foreign Investment for a simpler and expeditious disposal:

1.     Upon receiving the proposal, DPIIT shall circulate the same within 2 days to RBI and Ministry of External Affairs for their comments. Additionally, if security clearance is required the proposal would be referred to Ministry of Home Affairs (MHA).

2.     If specific issues of proposals requires clarification in FDI Policy, the same shall be referred to DPIIT for clarification within 2 weeks of referral.

3.     Consultation with any other Ministry/ Department will require full justification and approval of the concerned Secretary.

4.     Comments of the concerned ministries/departments and MHA for security clearance shall be uploaded on the portal within 4 weeks and 6 weeks from the  online receipt of the proposal, respectively.

5.     Within 1 week of scrutinizing the application with additional comments, the Competent Authority shall raise queries or ask for additional documents from the applicant. Time taken by applicant to address the same to be excluded from time limit for disposal of application.

6.     Once the proposal is complete, the approval/rejection shall be communicated online to the applicant and the consulted Ministries/ Departments by the Competent Authority within 4 weeks.

7.     In case of proposals involving total foreign equity flow of more than Rs. 5000 crores, the Competent Authority will place the same for consideration before the Cabinet Committee on Economic Affairs within the timelines specified, with the decision to be communicated 1 week from such consideration concluding.

8.     Proposals which are sought to be rejected, or proposals stipulating additional conditions, shall require concurrence of DPIIT by the Competent Authority within 10 – 12 weeks (MHA should be consulted) from receipt of the proposal.

9.     All Mergers & Acquisitions involving FDI requires approval of the NCLT/Competent authority as a “necessary pre-condition”. In case if NCLT/Competent authority approval is not available the applicant may be advised to resubmit the application along with requisite approval(s).

10. Secretary, DPIIT is the competent authority that issued the approval letter in the prescribed format for rejection of the proposal/stipulation of additional condition.

11. DPIIT and each of the Competent Authorities shall maintain a database on the proposals received along with details such as date of receipt, investor and investee company details, volume of foreign investment involved, and date of grant of approval/rejection letter.

12. If an applicant proposes to surrender an approval letter granted to the investee entity/investor, then concerned administrative Ministry/Department may accept the withdrawal of the approval letter and an acknowledgement in this regard has to be sent to the applicant clearly indicating the date from which the approval letter stands withdrawn.

    D.  Monitoring & Reviewing:

• Competent Authorities will hold a regular monthly review on the foreign investment proposals pending with them.
• Regular Review meeting on pendency of FDI proposals with concerned Administrative Ministry(ies)/Department(s) would be convened by Secretary, DPIIT, periodically every four (04) to six (06) weeks. The Secretary of the concerned Administrative Ministry/Department may also attend the meeting.
• Administrative Ministries/Departments should update the information regarding date of physical receipt of the application and update the decisions taken on the portal.
• Administrative Ministries/Departments should furnish a fortnightly report on pending proposals. Also, administrative Ministries/ Departments should maintain an updated database of all proposals dealt by them.

CONCLUSION:-

DPIIT has issued a new set of guidelines in place of existing SOP issued in 2017, to expedite the process for clearances, including security, for processing FDI proposals on the fast track approval route in terms of the guidelines and requirements under the FDI Policy, SOP and FIFP. 

This Article has been Compiled by Deepika Sharma  (Senior Associate) You can direct your queries or comments to the author at deepika@factumlegal.com

Disclaimer:

The contents of this article should not be construed as legal opinion. This article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. We expressly disclaim any financial or other responsibility arising due to any action taken by any person on the basis of this article.

 

 

Revised Framework for Core Investment Companies

 The Reserve Bank of India (‘RBI’) vide its circular dated August 13, 2020 has revised the regulatory framework applicable to core investment companies (‘CICs’)  in order to ensure stability of the financial system and address systemic risks posed by CICs and their group companies.

CICs are non-banking financial company holding not less than 90% of their net assets as investments in equity shares, preference shares, bonds, debentures, debt or loans in group companies. Its investments in equity shares in group companies constitute a minimum of 60% of its net assets.

RBI had constituted a Working Group (WG) to Review Regulatory and Supervisory Framework for CICs, on July 03, 2019, with Shri Tapan Ray, former Secretary, Ministry of Corporate Affairs, GoI as the Chairperson. Based on the key recommendations provided by the WG, the revised framework has now been issued by RBI.

The key takeaways from the revised guidelines are as follows:

• Restriction on the number of layers in group structure: RBI has directed CICs to restrict the number of layers in their group structure to just two as it seeks to clean up the structure of complex financial groups. Existing CICs have been given until the end of March 2023 to comply with this simplified structure.
• Adjusted Net Worth (ANW) : While computing ANW, the amount representing any direct or indirect capital contribution made by one CIC in another CIC, to the extent such amount exceeds ten per cent of owned funds of the investing CIC, will be deducted. The deduction will take place immediately for any investment made by one CIC in another CIC from now on. If an investment by a CIC in another CIC is already in excess of 10% as of August 13, 2020, the entity need not deduct the amount till March 31, 2023.
• Constitution of a Group Risk Management Committee (GRMC): The parent CIC in the group or the CIC with the largest asset size, in case there is no identifiable parent CIC in the group, will constitute a Group Risk Management Committee (GRMC), to analyse the material risks to which the group, its businesses and subsidiaries are exposed. The GRMC shall report to the board of the CIC that constitutes it and shall meet at least once in a quarter. The GRMC shall consist of a minimum of five members, including executive members. At least two members shall be independent directors, one of whom shall be the chairperson of the GRMC. Members will be required to have adequate and commensurate experience in risk management practices.
• Corporate Governance and Disclosure Requirements: CICs are required to develop and maintain a functional website revealing the basic information about the entity and the group, annual report, corporate governance report, management discussion and analysis.
• CICs shall ensure that a policy is put in place with the approval of the Board for ascertaining the ‘fit and proper’ status of directors not only at the time of appointment, but also on a continuous basis.
• The RBI has mandated strict disclosure formats which require details of leverage, guarantees and investments. A detailed disclosure of the maturity pattern of assets and liabilities has also been prescribed.
• Exceptions to carrying other financial activity: RBI has now permitted CICs to invest in money market instruments, including mutual funds which make investments in money market instruments/debt instruments with a maturity of up to 1 year.
• Consolidation of Financial Statement (CFS): It has been directed that CICs shall prepare CFS as per provisions of Companies Act, 2013, so as to provide a clear view of the financials of the group as a whole. However, it is possible that entities that meet the definition of group as per extant regulations are not covered under consolidation due to exemptions granted as per statutory provisions/ applicable accounting standards. For such entities which are not included in the consolidation, disclosures shall be made in the indicative format.
• Change in nomenclature and Registration: Besides the above, the revised framework has also modified the nomenclature of Systemically Important CIC to “Core Investment Company” and exempts CICs to "Unregistered CICs". The exempt CICs are the CICs with an asset size of (a) less than INR 100 Crore; or (b) with an asset size of INR 100 Crore and above and not accessing public funds.

This Article has been Compiled by Charu Jhamtani (Associate)

You can direct your queries or comments to the author at charu@factumlegal.com

 

Disclaimer-

The contents of this article should not be construed as legal opinion. This article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. We expressly disclaim any financial or other responsibility arising due to any action taken by any person on the basis of this article.

 

Analysis on Foreign Portfolio Investor under NDI Rules, 2019

Introduction

The Finance Act, 2015 amended Section 6 (Capital Account Transaction), Section 46 (Power of Central Government to make rules) and section 47 (Power of RBI to make regulations) of the Foreign Exchange Management Act, 1999 (FEMA, 1999). These amendments have the effect of altering the powers of the Central Government and Reserve Bank of India (RBI).

In terms of  amended provisions of FEMA, the Central Government has made Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 ("NDI Rules") on October 17, 2019 superseding the erstwhile Foreign Exchange Management (Transfer of Issue of Security by a Person Resident outside India) Regulations, 2017 ("TISPRO") and the Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations, 2018, whereas RBI has notified Foreign Exchange Management (Debt Instruments) Regulations, 2019 superseding TISPRO, and the Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019, which provides for reporting requirements in relation to any investment made under the NDI Rules.

The foreign investments allowed to be received from different types of investors including Foreign Portfolio Investors registered with the SEBI under SEBI (FPI) Regulations, 2014

In this article we have encapsulated provisions dealing with investment by Foreign Portfolio Investors under the NDI rules.  

Acquisition of equity instruments/other securities/units by FPI

“FPI” or “Foreign Portfolio Investor” means a person registered in accordance with the provisions of the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2014.

Under Rule 10 read with Schedule II of NDI Rules permit FPIs to invest in listed entities in equity instruments as well as other identified securities. The provisions regulating the investment by FPI have been captured under Chapter IV of NDI Rules which inter-alia prescribed that FPI may:

1. Purchase equity instruments of an Indian company which is listed or to be listed on a recognised Stok exchange.
2. Purchase units of domestic mutual funds or Category III Alternative Investment Fund or offshore fund for which no objection is issued in accordance with the SEBI (Mutual Fund) Regulations, 1996, which in turn invest more than 50 percent in equity instruments on repatriation basis subject to the terms and conditions specified by the SEBI and the Reserve Bank.
3. Trade or invest in all exchange traded derivative contracts approved by SEBI from time to time subject to the limits specified by SEBI and in compliance of conditions prescribed in Schedule II of NDI Rules.
4. Purchase, hold, or sell Indian Depository Receipts (IDRs) of companies’ resident outside India and issued in the Indian capital market, in the manner and subject to the terms and conditions as prescribed in Schedule X of the NDI Rules.
5. Purchase equity instruments of an Indian company through public offer or private placement, subject to prescribed limit and in compliance of pricing conditions as prescribed under Schedule II.

Permitted Aggregate Holding by a FPIs

The pertinent change in NDI Rules, regulating investment by FPIs is that the default aggregate investment limits in an Indian company is the applicable sectoral cap, as laid out in Schedule I. Unlike the erstwhile the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017, where the aggregate limit of FPI was upto 24%, with the company being provided the option of enhancing the limits to the applicable sectoral cap.

Ø  Until March 31,2020 the total holdings of all FPIs put together (including any other direct and indirect foreign investments in the Indian Company permitted under the NDI Rules) in an Indian Company is not permitted to exceed 24% of the paid up equity capital on a fully diluted basis or paid up value of each series of debentures or preference shares or share warrants (except if the ceiling has been raised to sectoral cap or statutory ceiling by the board or shareholders of the company).This is in line with the framework that was prescribed under FEMA.

Ø   Under the NDI Rules, from April 01, 2020 the aggregate limit will automatically be deemed to be the sectoral cap as contained in the NDI Rules without the requirement to pass any board or shareholders resolutions. The aggregate limit can be decreased by the Indian company to a lower limit of 24%, 49% or 74% as deemed fit, with the approval of its board and shareholders (by way of a special resolution) before March 31,2020.Similarly, where an Indian company has decreased its aggregate limit as mentioned above ,it may increase such aggregate limit to 49% or 74% or the sectoral cap or statutory ceiling as deemed fit, with the approval of its board or shareholders(by way of a special resolution).However, once the aggregate limit has been increased the Indian company cannot reduce it to a lower threshold.

Purchase or sale of securities other than equity instruments by FPIs

FPI can now invest in:

1. Units of domestic mutual funds Category III Alternative Investment Funds offshore fund for which no objection is issued under the SEBI (Mutual Fund) Regulations, 1996 and which in turn invests more than 50% in equity instruments on repatriation basis. 
2. Units of real estate investment trusts and infrastructure investment trusts on repatriation basis subject to the terms and conditions specified by SEBI.

Transfer of equity instruments of an Indian company by FPI (Automatic route)

FPI may transfer equity instrument/s of Indian company or unit in compliance of conditions as prescribed by SEBI and those as specified in the schedules under NDI Rules. However, the government approval would be required in case:

•  Transfer of equity instruments of company engaged in a sector which requires the Government approval.
• Acquisition of equity instruments by FPI made under Schedule II of these rules has resulted in a breach of the applicable aggregate FPI limits or sectoral limits.

Closing Note:

• In case, two or more FPI’s including foreign Governments/their related entities are having common ownership, directly or indirectly, of more than fifty percent or common control, all such FPI’s shall be treated as forming part of an investor group. Control includes the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of shareholding or management rights or shareholders agreements or voting agreements or in any other manner.
• If FPI’s investment breach the prescribed limits as discussed above, FPI shall have an option to of divesting their holdings within 5 trading days from the date of settlement of the trades causing the breach, failing which the entire investment by FPI and its investor group would be considered as the FDI and they will not be allowed to make investment in concerned entity as a FPI.
• The FPI, through its designated custodian, shall bring the same to the notice of the     depositories as well as the concerned company for effecting necessary changes in their records, within -seven trading days from the date of settlement of the trades causing the breach .
• In case of breach of investment limits by an FPI, the divestment of holdings by the FPI and the reclassification of FPI investment as foreign direct investment shall be subject to further conditions, if any, specified by the Securities and Exchange Board of India and RBI, in this regard.

This Article has been Compiled by Deepika Sharma (Senior Associate)

 Disclaimer-

The contents of this article should not be construed as legal opinion. This article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. We expressly disclaim any financial or other responsibility arising due to any action taken by any person on the basis of this article.

 

ANALYSIS OF SUPREME COURT JUDGEMENT IN THE MATTER OF BABU LAL VARDHARJI GURJAR VS VEER GURJAR ALUMINIUM INDUSTRIES PVT. LTD & ANR.

Case Name	BABU LAL VARDHARJI GURJAR VS VEER GURJAR ALUMINIUM INDUSTRIES PVT. LTD & ANR. Case Citation – 6347 of 2019
Corporate Debtor	Veer Gurjar Aluminium Industries Pvt Ltd
Appellant	Babu Lal Vardharji Gurjar
Respondent	Veer Gurjar Aluminium Industries Pvt. Ltd & Anr.
Respondent No. 2	JM Financial Assets Reconstruction Company Pvt. Ltd.
Date of Judgement	14th August,2020

ISSUE OF THE CASE

Whether the application made by respondent under Section 7 of the Code is within limitation ?

FACTS OF THE CASE

On 22.12.2007, the lender banks viz., Corporation Bank, Indian Overseas Bank and Bank of India sanctioned and extended various loans, advances and facilities to the corporate debtor. The corporate debtor executed various security documents in favour of the lender banks in the years 2008 and 2009, including those of equitable mortgage against the facilities obtained. The Corporation Bank proceeded to rephrase/enhance the facilities to the corporate debtor from time to time and lastly on 27.08.2010 where for, various additional security documents were executed by the corporate debtor. The corporate debtor having defaulted in payment of the amount due against such loans, advances and facilities, its account with Corporation Bank was classified as Non Performing Asset on 08.07.2011 and that with Indian Overseas Bank was classified as NPA on 05.08.2011. Then, on 15.11.2011, demand notice under Section 13(2) of the SARFAESI Act, 2002 was issued by Indian Overseas Bank to the corporate debtor and its guarantors. These steps were followed up with recovery proceedings against the corporate debtor by the consortium of lenders and respondent No. 2 before the Debts Recovery Tribunal, Aurangabad under Section 19 of the Recovery of Debts Due to the Banks and Financial Institution Act, 1993.

Even when the aforesaid proceedings were pending before DRT, on or about 21.03.2018, the respondent No. 2 moved an application before the Adjudicating Authority under Section 7 of the Code.

DECISION BY NATIONAL COMPANY LAW TRIBUNAL (NCLT) ORDER DATED 09.08.2018

The Adjudicating Authority, dealt with the submissions of the parties and, while rejecting the objections of corporate debtor in relation to the frame of application and the correctness of loan accounts, the Hon’ble NCLT held that the applicant was entitled to initiate CIRP under Section 7 of the Code when there was a debt and there was default; and that being a statutory remedy available to the financial creditor, the corporate debtor cannot question its maintainability only for the applicant having adopted other proceedings under other enactments.

Accordingly, the Adjudicating Authority (NCLT) admitted the application for consideration; passed necessary order of moratorium; and appointed the interim resolution professional.

DECISION BY NATIONAL COMPANY LAW APPELLATE TRIBUNAL (NCLAT) ORDER DATED 14.05.2019

In the impugned order dated 14.05.2019, the Appellate Tribunal has observed that the Code having come into force on 01.12.2016, the application made in the year 2018 is within limitation. The Appellate Tribunal stated  that mortgage security having been provided by the corporate debtor, the limitation period of twelve years is available for the claim made by the financial creditor as per Article 61 (b) of the Limitation Act, 1963 and hence, the application is within limitation. The substance of the relevant factual and background aspects, as emanating from the contents of the application under Section 7 moved by the respondent No. 2.

The Appellate Tribunal has rejected the plea of bar of limitation essentially on two major considerations:

1.      That the right to apply under Section 7 of the Code accrued to the respondent financial creditor only on 01.12.2016 when the Code came into force; and

2.      That the period of limitation for recovery of possession of the Mortgaged property is twelve years.

 DECISION BY SUPREME COURT

The application made by the respondent No. 2 under Section 7 of the Code in the month of March 2018, seeking initiation of CIRP in respect of the corporate debtor with specific assertion of the date of default as 08.07.2011, is clearly barred by limitation for having been filed much later than the period of three years from the date of default as stated in the application.

Also the observations in this judgment are relevant only in regard to the issue determined that the application under Section 7 of the Code is barred by limitation and not beyond. In other words, nothing in this judgment shall have bearing on any other proceeding that shall be dealt with on its own merits and in accordance with law.

CONCLUSION

The Court held that in view of the above, this appeal is allowed to the extent indicated and with the observations foregoing. The impugned orders dated 14.05.2019 as passed by the National Company Law Appellate Tribunal, New Delhi in Company Appeal (AT) Insolvency No. 549 of 2018 and dated 09.08.2018 as passed by the National Company Law Tribunal, Mumbai Bench in CP(IB)-488/I&BP/MB/2018 are set aside; and the application made by the respondent No. 2 under Section 7 of the Code, seeking initiation of Corporate Insolvency Resolution Process in respect of respondent No. 1 is rejected for being barred by limitation. Consequently, all the proceedings undertaken in the said application under Section 7 of the Code, including appointment of IRP, stand annulled. No costs.

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This Article has been Compiled by Richa Singh 

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