Corporate Law

Financial institutions seeking govt help post SC’s loan moratorium judgement

By Corporate Law No Comments

The resilience of Indian financial institutions including banks and NBFCs have been tested hurling many, if not all, on the edge. With no end in sight to the COVID-19 pandemic, the Supreme Court pronounced its judgment in the loan moratorium case holding every borrower, irrespective of the outstanding loan, as eligible for the compound interest waiver for the March-April period.
Previously, the Reserve Bank of India (RBI) had permitted deferred repayment to help borrowers sail through the adverse impact of the COVID-19 pandemic that left masses unemployed in great numbers. In that vein, the government had agreed to bear the burden of compound interest waiver for retail and small business loans up to 2 crores and as a result, waived interest payment during the moratorium period starting from March until August.
Simply put, a variety of loan borrowers including but not limited to, MSME and retails loans shall be exempt from payment of the compound interest or the interest-on-interest that banks were accruing over the six months of the moratorium, which was a heated matter of contest at the time of announcement of the moratorium. Additionally, under this scheme, borrowers that had continued repaying their loans as per schedule shall also benefit from it. For such borrowers, it shall be assumed that they had availed the moratorium and the compound interest that would have accrued will be adjusted against their outstanding loans.

While this move was jubilantly welcomed by the borrower community, the Indian Banks’ Association (IBA) scurried to the government seeking reimbursement of the compound interest that has to be returned to borrowers the absence of which would severely dent the profitability and sustainability of banks and non-banking institutions. The probable downside to bearing the burden resulting from waiver of compound interest would be that financial institutions may start passing down the financial impact to the depositors thereby going against the waiver scheme in letter and spirit.
Interestingly, banking and non-banking financial companies are yet to receive their share of reimbursements in the first round of waivers. This first round of waivers has been anticipated to cost the government approximately Rs. 6,500 crores, however, the data on the quantum of reimbursement requests received remains unknown as of date.
The recent pronouncement, though similar to the last round of waivers announced in October, requires additional relief of around Rs. 7,000 – 7,500 crores to be provided to borrowers estimating the overall hit to the financial sector for the waiver at around Rs. 14,500 crores. Invariably, an extension of the waiver scheme with higher financial limits to over 27 COVID-19 impacted sectors including restaurant and hotel sectors is a stride taken in the right direction. In addition to this, this order throws light on the asset classification issue for lenders as the Supreme court ruled out any further moratorium. Even if there was a stay on asset classification, banking institutions are preparing themselves for the impending risks by classifying borrowers’ profiles based on their repayment behavior and have identified loans that would have slipped to non-performing if not for the SC September order.

In view of the above, it is clear that if the government refunds monies to the banks, there would be no impact on the banks but affected borrowers would receive significant relief. It goes without saying that a total waiver of interest during the moratorium period would have a far-reaching economic consequence on the Indian economy. Such a payback of interest to depositors constitutes one of the most essential banking activities and is also a huge responsibility owed by the financial institutions to the Indian masses who survive on the interest from their deposits. 

The pre-pack paradigm: A saving grace for MSMEs?

By Corporate Law No Comments

The GST regime led to some initial teething troubles and subsequently things were settling down for the Micro, Small and Medium Enterprises (MSMEs). But the country-wide lockdown has again left the MSME sector scrambling for finances to stay afloat.

To battle, the economic depression, the Reserve Bank of India (RBI) injected liquidity and extended credit lines by way of a special relief package, including a moratorium on loans with a view to protecting businesses from drowning in a quagmire of unquantifiable uncertainty, debt and litigation. However, several banks and NBFCs went against the spirit of RBI’s relief by not passing on the loan moratorium benefit to borrowers, thereby causing tremendous economic stress. With the moratorium clearly being a half-baked solution, additional measures were required to help distressed MSMEs – that employ a sizeable population and contribute over 30% to India’s GDP.

In view of the existing recovery gap, the government promulgated an ordinance allowing the use of pre-packs as an insolvency resolution mechanism for MSMEs with defaults up to Rs 1 crore, under the Insolvency and Bankruptcy Code, 2016 (IB Code). This move comes soon after the end of a one-year suspension of insolvency initiation imposed by the government on the pretext of the Covid-19 pandemic, wherein the minimum default threshold for insolvency proceedings was increased from Rs 1 lakh to Rs 1 crore. With the increase in threshold to 1 crore, numerous operational creditors especially MSMEs were deprived of remedies under the Code during the last year. Therefore, it appears that the Ordinance has been meticulously formulated to soothe distressed MSMEs while placing the pause button on frivolous litigation emanating from losses that occurred during the pandemic. 

The pre-packaged insolvency framework across jurisdictions is known to plug this wide recovery gap. In fact, pre-pack resolution plans are likely to facilitate adherence to the timelines prescribed under the IB Code. MSMEs have suffered the most during the pandemic and placing a strict timeline of 120 days by virtue of the pre-pack model is likely to support ailing MSMEs. As a result, the Ordinance is likely to provide a cost-effective and faster resolution process for MSMEs under the debtor in possession model, unlike the normal CIRP where it is the Resolution Professional (RP) in possession. 

Simply put, under the pre-pack insolvency framework for MSMEs, the debtor shall continue to control and run the company till resolution takes place, whereas, in the normal CIRP, the RP waltz’s in and takes over the debtor company on the day of admission itself. This model shall provide tremendous flexibility and a free hand to existing promoters of MSMEs as well. Further, the pre-pack model will help distressed companies-Corporate Debtors to enter into consensual restructuring with lenders and address the liabilities of the Company. In addition to this, several procedural requirements on issues, such as claims of creditors may be simplified to make the entire process less rigorous under the MSME framework.

With the ever-evolving nature of the IB Code and insolvency professionals still adapting to the varying levels of power entrusted in them, it will be interesting to see how the debtor companies shall manage to address their liabilities in consonance with this Ordinance. Under the debtor-in-possession model, there lies the further scope for strengthening both the financial and operational position of MSMEs, importantly under prevailing Covid crises. Therefore, in view of the changing dynamics, it is pertinent for debtor companies to have to be aware of their own self-worth before undergoing the pre-pack insolvency route to truly salvage the status of such debtor company and revive the business again without resorting to desperate acts of litigation. 

Single Securities Code: Combination of financial laws

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Multiple pieces of law governing the banking industry have created more uncertainty than legislators could have imagined. The Minister Of finance created a Single Securities Code to address this issue. SEBI Act 1992, Depositories Act 1996, Securities Contracts (Regulation) Act 1956, and Government Securities Act 2006 were presented as a complete framework for the four most essential legislation relating to the financial industry.

Whereas SEBI, as the market regulator, is responsible for enforcing these laws, courts have been forced to interpret the impact of these laws on one another in the past, making things more confusing. Also, the implementation of several legislations for each facet of the capital market often leads to duplication and conflict as was also visible in dematerialized shares; wherein experts had to refer to various acts to ensure regulatory compliance.

Indeed, a common code would enhance the operational efficiencies in terms of bringing down the turnaround time in matters of regulatory approvals. It may even offer the investor community at large and market intermediaries improved clarity in terms of the legalities of certain matters as, firstly, it will avoid a conflicting scenario. Moreover, it will improve administrative efficiency, making it easier to regulate trading and reducing the need for SEBI to stretch its claws across securities and commodities markets.

Additionally, over time, it is past time for harsh laws to be repealed and replaced with a contemporary framework that results in a slim code. That is quite similar to the present environment. Thereby, the unification of four laws into one would not only make the laws more cohesive but also suitable for the present times as some were introduced as early as 1956. This would also allow the policymakers to address all the current ambiguities within the regulatory framework and introduce provisions that may be presently missing. 

A single rule would also provide tremendous operational efficiency to the regulator, who is currently overburdened with the responsibility of regulating many types of assets, including equity, commodities, currency, interest rate, and stock exchanges. That gives a mercantilism platform for government and private sector bonds as well. Moreover, unification of the securities market code would mean that Government Securities augment the credibility of the government’s borrowings and the foreign capital flow in the country. Therefore, a comprehensive code if enforced will make compliances transparent, efficient, and enforcement of regulations simpler, thereby, reduce litigation. It would also enable the revamping of the Securities Contract Regulation Act streamlining multiple laws, guidelines, ordinances, and regulations.

Nevertheless, SEBI acts as a watchdog to observe key aspects of the capital market transactions along with an enormous variety of investment vehicles like foreign investors and mutual funds. There is the likelihood that the consolidation of the legislations into a renewed Code, could elevate the position of SEBI from a watchdog to that of a Super Regulator.  This is significant considering that the Supreme Court in the matter of SEBI vs IRDAI battle over unit-linked insurance plans, issued a clarion decision back in 2010 towards a revamp of financial laws. Probably hinting at the formation of a super-regulator by the Central Government. More recently, regulatory overlaps appear to have arisen between SEBI and NFRA in penalizing quality lapses by auditors and audit corporations. 

The management and regulation of government securities presently lie with the Reserve Bank of India whereas trading of Government Securities along with other financial instruments on the stock exchanges is regulated by SEBI. Thereby, including the Government Securities Act under the same umbrella as the SEBI Act and Securities Contracts (Regulation) Act, 1956. Which is the regulative foothold of SEBI, poses potential overlap of powers between RBI and SEBI once again. However, while drafting a unified Code the clarification of regulatory jurisdiction of these agencies could be addressed and conquered.

 As a result, there are several overlapping laws and interpretations of many acts that require tweaking and modifications, which could be readily accomplished by enacting a Consolidated Code. That could also assist in the creation of contemporary financial legislation. In addition, it would provide ease of operations for businesses and enhance the confidence of investors leading to an overall flourishment of the securities market as well.

The imposition of tax on REIT/INVIT under The Finance Act, 2020: A Critical Evaluation

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Real Estate Investment Trusts and Infrastructure Investment Trusts are rapidly growing investment vehicles that allow developers to monetize revenue-generating real estate and infrastructure assets while also allowing unitholders to participate without owning the assets. The Indian real estate sector has long campaigned for the creation of “Real Estate Investment Trusts (hereinafter REITs)” and “Infrastructure Investment Trusts (IITs)” (hence InvITs). However these industry launches were originally permitted a few years ago, their popularity has waned because of the ambiguity surrounding the tax legality of all pass-through transfers. REIT may be defined as a sort of mutual fund that enables investors to invest in real estate.

A real estate investment trust (REIT) is a firm that receives money from interested investors and invests it in real estate projects. InvITs, on the other hand, vary from REITs in that the majority of willing investors often participate in capital investments with a long gestation period. They are collectively known as “Business Trusts,” and they have enormous potential to aid the government in accomplishing one of the country’s large infrastructure expansion goals while also encouraging the country’s commercial real estate market to improve.

Dividends (received by unitholders of REITs and InvITs) were not subject to tax prior to the approval of the Finance Bill tabled in Lok Sabha. The Finance Minister, Ms. Nirmala Sitharaman, released the Union Budget for the years 2020-2021 and requested several changes. For the fiscal year 2021, the Bill tabled in the Lok Sabha comprised many budgetary and taxation-related suggestions to change the Income-tax Act, 1961 (“Income-tax Act”).

Following the passage of the bill, the government decided to tax profits received by unitholders in REITs and InvITs, jeopardizing the developers’ and road-to-port the builders’ intentions to collect all money from such instruments. It may as well had been a tax policy enforced, but the dividend distribution tax was eliminated in Budget 2020-21, putting the burden of proof on the holders. Although tax-free SPVs and trusts will remain, unitholders of InvITs and REITs will no longer be exempt. They will also be subjected to be taxed at the applicable income tax rate for the dividend income under the finance act 2020.

Upon the bill’s ratification, there was some unanimity on the fairness of the taxation policy imposed on dividend unitholders, and some remained unaffected by the adjustment in the taxation policy since it was not a major problem and was not unreasonable given that the government had already decreased the corporate tax rate. The aim behind such imposition seems to be convincing as it was to apply one advantage – either exempt the dividends or offer a lower corporate tax rate to the SPVs. The imposition of tax responsibility on REITs and InvITs, like two sides of a coin, has its own set of benefits and downsides. The idea in the Union Budget to tax the profits obtained in the hands of unitholders/investors was developed after studying the chances of imposing the tax and taking into account the views addressed by real estate industry authorities.

 It would have a detrimental effect on the potential of InvITs and REITs, as a budget choice would go against the government’s immediate efforts. This was done to entice InvITs and REITs to give some tax certainty to long-term infrastructure developers. The introduction of the tax, on the other hand, contributes to the uncertainty among international/foreign investors who are skeptical of India’s tax regime’s stability and will be irreversibly hurt by the tax regime’s unpredictability. The government’s proposed/passed reforms, as well as the application of a tax on dividends earned by REIT and InvIT unitholders, seems to have a significant influence on the business trust’s future potential in one way or another. Nevertheless, the appeal of these structures remains unresolved following a comparative review of the revisions.

Intellectual Property Rights VS Open Access Initiatives

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In the wake of the global epidemic, the conflict between open access and traditional IP rights is becoming a significant problem. The essence of IPR and open access is that they are opposed to one another, to the point that approving one is destructive to the other. Let’s break down and find a balance between them.

IPR registration primarily consists of safeguarding one’s intellectual work for innovations and creative works, indicating its origin, and providing the owner unlimited control on that particular product for a certain length of time. Whereas the fundamental goal of most open-access efforts is to help people and organizations overcome barriers. And to aid individuals and organizations in overcoming legal barriers, sharing and developing knowledge, and addressing global concerns.

 The effort encourages open access sharing and gives information on how to distribute information while avoiding prejudice against any individual or group of individuals. It would also stimulate fresher ideas and solutions to society’s broader issues, as well as provide a fair playing field for all entrepreneurs and people to compete on an equal footing with giant corporations with more resources. As a result, these ideas are intended to both promote and enable access to individuals who may not otherwise be able to afford it.

The basics of open access, as can be shown, contravene one of the most fundamental concepts of intellectual property rights, which is to safeguard intellectual property. The rationale of the parties wanting legal protection for their IP is mostly commercial profit. The patent helps provide a framework to share protected work without letting go of any commercial benefits like product sales and licensing royalties. For instance, a person can patent his scientific tool and then sell the same to a huge corporation.

As an outcome, the firm may create it in big quantities at a lesser cost, lowering the cost to the customer. For all parties concerned, this is a triple-win situation. The patent owner makes money from the invention, the business sells the item to the consumer, and the customer gets a cheaper product. Copyrights are also for anyone who wants to safeguard their work, such as literary works or movies, while simultaneously benefiting from IP protection. A large portion of this labor is shown in front of the public to get advantages. Without copyright protection, the author’s work might be duplicated or exploited without the originator receiving any recompense.

Furthermore, a trademark serves as a means of distinguishing one company’s goods or services from those of another. It also allows an owner to restrict other parties from using his or her trademark. A trademark’s main purpose is to provide information about a product’s origin and excellence to help consumers make better purchasing decisions. It also gives a single owner monopolistic power because a large number of registered marks means fewer marks are accessible for others to use in the public domain.

As a result, in addition to symbolism, a trademark may be extremely valuable to a firm, causing some to incorporate it in their value. Trademarks are perpetually protected as long as they are in use and the owner can defend them. It protects companies from impersonators who want to profit by creating uncertainty in the marketplace by attempting to imitate an already recognized brand.

Striking a balance between traditional intellectual property rights and open access projects may be difficult, because artists may contemplate the consequences of doing something for the greater good, but they are also likely to consider how profitable their invention may be. However, recently this convergence has been seen in the Open COVID Pledge where the world is coming together to fight the pandemic. 

The goal of the committee is to urge organizations all around the globe to share their intellectual property so that we can all combat COVID together. This vow will eventually assist in the defeat of COVID-19 and will benefit humanity as a whole. Participating in this promise may also benefit businesses by generating goodwill and resulting in future commercial benefits.


The New Legislation of Personal Guarantor’s Insolvency under IBC

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IBC 2016 was created to replace the old framework for insolvency and bankruptcy with single legislation. With the adoption of the IBC, the winding-up procedure was brought under the supervision of the National Company Law Tribunal, guaranteeing prompt and speedy action during the early phases of a firm’s financial default. The IBC’s primary goal is to help distressed corporate debtors.


As defined by Section 5(22) of the Code, a personal guarantor is an individual who is the surety under a contract of guarantee to the corporate debtor. While the provisions of the IBC pertaining to the insolvency resolution process of corporate debtors were implemented by the Central Government in 2016, the provisions of the IBC pertaining to the insolvency resolution process of corporate debtors were not. The provisions pertaining to Personal Guarantors to Corporate Debtors’ bankruptcy resolution procedure were not.

Prior to the Code’s creation, the Presidency Towns Insolvency Act of 1909 and the Provincial Insolvency Act of 1920 covered insolvency and bankruptcy for all persons, including personal guarantors.


The IBC shall apply to the personal guarantor of the corporate debtor as of 1.12.2019, according to a notice dated 15.11.2019. Section III of the IBC will only apply to personal guarantors, according to this notice. The Supreme Court in landmark judgment held that lenders can now initiate insolvency proceedings against promoters, managing directors, and chairpersons who issued personal guarantees on corporate loans if the borrower defaults.

Prior to the Notification concerning Section 60 of the Code, the Debt Recovery Tribunal had jurisdiction over insolvency and bankruptcy procedures against personal guarantors, whereas procedures against corporate debtors for the same default were either underway or became pending before an NCLT. 

This had the opposite effect, delaying the legal procedure and producing inaccuracies in estimating the amount to be recovered from the guarantors. To resolve this issue, Sections 60(2) and 60(3) of the Code were inserted, mandating that bankruptcy procedures against personal guarantors and corporate debtors be conducted by the same court, namely the NCLT.


  1. Consolidation of proceedings safeguards the debtors’ and guarantors’ interests by ensuring that the claim amounts issued to creditors do not overlap.
  2. For creditors, it allows for simultaneous actions before the same court, removing the burden of having to go to two separate forums to recover the same amount.
  3. The new legislation is likely to significantly reduce delays in the collection of creditors’ dues, as the Code mandates a time-bound approach.
  4. In addition to the SARFAESI Act, debt recovery suits, and other civil remedies, creditors now have another option for recovering their loans, resulting in a concentration of power in their hands.
  5. There appears to be no clear provision in Part III of the IBC, 2016 that allows an aggrieved personal guarantor to challenge the adjudicating authority’s decision.
  6. A pro-creditor insolvency framework presently applies to personal guarantors. Liabilities do not exclude guarantors. As a result, organizations must exercise prudence and prudence before issuing assurances in order to protect themselves from unanticipated events.


In Lalit Kumar Jain vs. Union of India, the Hon’ble Supreme Court confirmed the legality of the 2019 notice expanding the IBC rules to personal guarantors. The Court also concluded that approving a Corporate Debtor’s resolution plan did not free a Personal Guarantor of their responsibility to repay the Corporate Debtor’s debt owed to an independent contractor.

A distinctive aspect of loans supplied to MSMEs is that it is frequently backed by personal guarantees supplied by promoters (which account for around 29 percent of GDP). Promoters will be encouraged to employ the pre-packaged insolvency resolution procedure for MSMEs to get creditor-friendly outcomes and strengthen credit discipline across the loan market as a result of the decision.


Despite being a good legislative attempt at efficiency, asset valuation maximization, and resolution process optimization, the new legislation fails to address the realities of the bankruptcy process. For instance, an ordinance dated 05.06.2020 halted the implementation of Sections 7, 9, and 10 of the IBC, 2016, which were intended to safeguard corporations against new insolvency actions, citing the COVID-19 epidemic as the rationale. 

However, relevant provisions of Part III of the IBC, 2016 dealing with individual/personal insolvency, including personal guarantors to corporate debtors, are not suspended in the same way, even though it is reasonable to assume that the economic slowdown caused by COVID-19 will affect both corporates and individual guarantors equally. This has led to the creditors having the option, even during a COVID-19 pandemic, to take action against personal guarantors but not against corporate debtors.

The need for paving a concrete path for SPACs

By Corporate Law, Banking No Comments

Due to the financial shortages that businesses are experiencing as a result of the epidemic, Special Purpose Acquisition Firms, or more accurately, blank cheque companies, might be a haven during these unusual circumstances, highlighting the need for regulation.

SPACs provide firms with a unique manner of public inclination and distinctive advantages over the traditional IPO measure. They provide greater market certainty in valuing equities, lower exchange charges, adaptable arrangements, greater access to the display, more solid brand worth, and market confidence in a substantially shorter period of time.

The limited market instability produced by the general shutdown is partly to blame for the surprise surge in energy prices. Despite the fact that several firms all around the world had postponed their IPOs due to the pandemic, SPACs have been approved to provide them with an exit strategy by supporting them in obtaining financing even during times of extreme volatility.

Indian corporations have been requesting approval for direct posting on foreign stock exchanges for quite some time, but India lacks a defined mechanism on the subject. In the meanwhile, many organizations have sought alternatives, and SPACs have emerged as a viable option. SEBI has recently formed a specialized advisory committee to look at the viability of SPACs in India.

It has prompted the board to produce a report on enabling SPACs alongside controlling norms to reduce the chances under existing legislation. Its recommendations for administrative income assortments through capital additions charges are also being looked upon.

SPACs frequently choose the newest, most distinctive, and futuristic enterprises in the technological and market arena as acquisition targets, allowing the major investor to be addressed directly, ensuring pricing certainty rather than market value volatility. Another advantage of starting a new firm in the early stages is that the costs associated with records and exposure are low, if not eliminated.

Abroad posting permits Indian new companies to get to bigger and more enhanced pools of capital and raise assets at lower costs, diminishing their expense of capital and making them more cutthroat. Abroad business sectors may help new companies accomplish more rewarding valuations as these business sectors have a more profound financial backer biological system that comprehends the dangers implied in a beginning up.

In particular, new firms seek high values based on expectations rather than beneficial history, making them unsuitable or unattractive candidates for an IPO on Indian stock exchanges. In any event, Nasdaq provides access to a larger and more current financial supporter base, as well as the ability to search for values.

Given how this interaction is performed, i.e., the SPAC support discovers the financial donors rather than target undertaking a wide book-building activity, it is reliant on forecasts. As a result, company entrepreneurs should reconsider a Nasdaq listing via SPAC.

The new USD 8 billion arrangement between India’s ReNew Power and Nasdaq listed SPAC RMG Acquisition Corporation II, for which Khaitan and Co went about as the Indian legitimate guidance to RMG II, is among the biggest ever postings including an Indian organization in the US through this course. Also, if the developing buzz around SPACs is any sign, this arrangement might just be trailed by a lot more sooner rather than later.

Investing in SPAC is not without risk, both for the backers and for the retail financial supporters. If the SPAC posts continue at their current rate, the required number of target companies by the end of 2021 might number in the thousands. In any case, there will surely be a limited number of worthwhile targets.

If the supporters are unable to identify a goal or if the investors refuse to approve the agreement, the supporters are left with no options. Furthermore, in the United States, retail financial supporters are allowed to cancel their offers and guarantee reductions even before they are purchased. In any event, such an option is unlikely to be available to Indian investors for a variety of reasons.

In the United States, posting through SPACs has become the norm. India, too, may join this current trend if it has a strong SPAC system. In the Indian economy, new enterprises have a huge duty to complete. A robust SPAC system will aid India in creating a stable startup environment. It will help the market conclusions and give new channels to capital development. That would lead to increased foreign inflows to help India in its journey towards expanding its economy.


How does the Adjudicating Authority approve the Resolution Plan?

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A resolution plan is a proposal that aims to provide a resolution to the problem of the corporate debtor’s insolvency and its consequent inability to pay off debts. It needs to be approved by the committee of creditors (“COC”), and comply with mandatory requirements prescribed in IBC. The Code (Insolvency and Bankruptcy Code, 2016) attempts to solve corporate debtors’ difficulties by putting them through a corporate insolvency resolution procedure (CIRP) and transferring them as going concerned to Resolution Applicants prepared to take over their management and assets and pay their obligations. The CIRP is seen as a more beneficial alternative to liquidation, as a going concern is likely to fetch a higher value for the creditors than a simpliciter sale of its assets.

The market will determine the remedy. Interested resolution applicants can join the CIRP and submit “resolution plans,” which are mechanisms for taking over a corporate debtor, settling its creditors’ debts, and reviving and turning it around. The Adjudicating Authority/National Company Law Tribunal (“NCLT”) then reviews and approves the authorized plan, bringing the CIRP to a close.

While analyzing an authorized plan, the NCLT has limited powers and cannot intervene in a commercial decision made by the Committee of Creditors. When it comes to the Resolution plan’s approval, an adjudicating body must make a judgment in accordance with Section 31 of the Code. It must go through the reasons to accept or reject one or more suggestions or objections, and it has the option of expressing its own judgment. As a matter of fact, now, the Committee of Creditors ought to record their reason when approving or rejecting one or another Resolution plans.

The Supreme Court has declared in Antanium Holdings Pte. Ltd. Vs. M/s. Sujana Universal Industries Limited, that the adjudicating authority is to record analytical subjective satisfaction which is a precondition before according approval to the Resolution Plan. In other words, the ‘Approval’ of ‘Resolution Plan’ is to be judged with the utmost care, caution, circumspection, and diligence. The threadbare examination of the scheme is to be studied astutely before arriving at a subjective satisfaction by the ‘Adjudicating Authority’.

The expression “subjective satisfaction” means the satisfaction of a reasonable man and it can be arrived at based on some material that satisfies a rational mind. It’s worth noting that a Resolution applicant can’t appeal the judgment of the Committee of Creditors (COC). Given the legislative constraints of Section 30 of the Code, it is the COC that will approve or disapprove a resolution plan. An ‘Adjudicating Authority’ functions in a ‘Quasi-Judicial’ capacity and has the power to set the ‘Resolution Plan.’

Lapse of Stay Orders and Judicial Delays: A Constitutional Conundrum

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The constitutional predicament of the Supreme Court’s direction in the case of Asian Resurfacing of Road Agency v. Central Bureau of Investigation (“Asian Resurfacing”) assumes significance because of the controversial dictum regarding stay orders. The direction in its essence is that any order that stays civil or criminal proceedings will now lapse every six months, unless it is clarified by an exception of a speaking order. The major grievance is that every order which is passed by the High Courts while exercising its jurisdiction under Article 227 of the Constitution and Section 482 of the Criminal Procedure Code, is virtually annulled with the passage of time. 

The decision comes into existence due to the indefinite delays that occur because of stay orders granted by the High Courts, which leads to judicial delays and denies the fundamental right to speedy justice. The Apex Court has observed that proceedings are adjourned sine die i.e. without a future date being fixed or arranged, on account of stay. Even after the stay is vacated, intimation is not received, and proceedings are not taken up. 

The concern is that during criminal trials, a stay order delays the efficacy of the Rule of Law and the justice system. The power to grant indefinite stays demands accountability and therefore the trial court should react by fixing a date for the trial to commence immediately after the expiry of the stay. Trial proceedings will, by default, begin after the period of stay is over. In the case where a stay order has been granted on an extension, it must show that the case was of such exceptional nature that continuing the stay was more important than having the trial finalized.

The High Court may exercise powers to issue writs for infractions of all legal rights, and also has the power of superintendence over all “subordinate courts,” a power absent in the Supreme Court as it was never intended to supervise subordinate courts or the High Courts.  In the case of Tirupati Balaji Developers (P) Ltd v. the State of Bihar, the Supreme Court recognized that despite having appellate powers, the current directive ordered by the Supreme Court takes a precarious position since the High Court cannot be limited in its exercise of power by any restrictions placed on it by the Supreme Court unless the Supreme Court interprets a statute or the Constitution and prescribes it as a matter of law, which is not the case in the directions issued for Asian Resurfacing. 

There are two perspectives to this: firstly, the directive does not annul “every order” of the High Court merely with the passage of time. It only causes those orders that “stay the trial proceedings of courts below” to lapse with the passage of time, wherein even those orders can be extended as per the High Court’s own discretion on a case-to-case basis. If this is considered supervisory or unconstitutional, then Appellate Courts will be left with the little prerogative to safeguard the basic rules of fair procedure. Secondly, the directive itself is not applicable to the interim order granted by the Supreme Court as reiterated in the case of Fazalullah Khan v. M. Akbar Contractor. 

It is clear that the demand for justice to be disbursed and a trial to be completed in 6 months is a necessity given the incessant judicial delays and indefinite freezes on criminal cases. Staying trial proceedings for 6 months must be made a thing of the past and should not be stayed for 6 months or more, save in exceptional circumstances. Allowing trial proceedings to stay for longer than 6 months encourages parties to abuse the process of law and move an appellate court merely to stall a trial that has an inevitable conclusion. Legal procedures, the appointment of judges, and judicial vacancies all contribute equally to judicial delay, the rot has spread far and wide in creating systemic delays in the entire judicial procedure. Although courts will be bound to welcome the judgment in letter and spirit, some pressing questions remain unanswered. It is unclear why the Supreme Court provided “directions” to the High Courts now when it has been cautious in issuing such directions in the past? Further, if the primary motive was curbing the judicial delays and ushering a change in the way the judicial system works, why is the Supreme Court not bound by its own directive? 

India strengthening insider trading laws at last

By Corporate Law, Others No Comments

There is no other kind of trading in India but the insider variety,” remarked a former president of the Bombay Stock Exchange (BSE) in 1992, whereas Arthur Levitt, Chairman of the US Securities Exchange Commission (SEC), viewed it as one with no place in any law-abiding economy. Between these ends of the spectrum lies the debate on insider trading. Although India was not late in recognizing the detrimental impact of insider trading on the rights of shareholders, corporate governance and financial markets, the legal regime, including the enforcement mechanism relating to its prevention, remains in a nascent stage. The Securities and Exchange Board of India (SEBI), Prohibition of Insider Trading Regulations, 2015 (PIT Regulations) prohibit insider trading while in possession of Unpublished Price Sensitive Information (UPSI) subject to certain exceptions. Rule four of the PIT Regulations contains provisions apropos trading when in possession of UPSI. Trades carried out by a person who has UPSI would be presumed to have been motivated by the knowledge and awareness of such information and they shall be held guilty of insider trading. Simply put, any abuse of position or power by insiders for personal benefits, monetary or otherwise, is a fraud committed on public shareholders, who expect unbiased management of the company’s operations in their interest. The 2020 amendments to the PIT Regulations aim at bolstering the level of compliance and mitigating the defects plaguing them. Prior to the amendment, there was considerable confusion with respect to the handling of UPSI by intermediaries. Notwithstanding the FAQs released by the SEBI to address the same, specific details regarding the maintenance of the digital database by such entities continued to remain shrouded in uncertainty. Further, the list of transactions under Schedule B of the Regulations, exempting them from trading window restrictions, was not amenable to additions. This prohibited reasonable expansion of the same to include transactions of a like nature. Lastly, there was also the issue of lack of adherence to the code of conduct under the PIT Regulations.

Recent amendments to insider trading: Through a previous amendment that came into effect on April 1, 2019, the SEBI had mandated every listed entity, intermediary and fiduciary to maintain a structured digital database, which would have the name and PAN details of a person with whom the UPSI was shared. This was done to ensure that there was a trail of information whenever the SEBI needed to investigate the sharing of UPSI. Now, through an amendment in July, the SEBI has mandated that the nature of the UPSI and the details of the person sharing it must also be recorded in the database. Moreover, maintaining such a database has to be done internally and cannot be outsourced. The database should store data for the previous eight years at any given time.

The second most notable amendment is that the trading window restrictions would no more apply to “offer for sale” (OFS) and “Rights Entitlement” (RE). Schedule B of the PIT Regulations mandates that there should be a closure of the trading window for designated people and their relatives as it can be reasonably expected that they possess UPSI. However, through another notification in July, the SEBI allowed the selling of promoters’ holding by way of OFS and exercising RE during the period of closure of the trading window.

The SEBI also specified that listed entities, intermediaries and fiduciaries are now mandated to promptly and voluntarily report any Code of Conduct violation under the PIT Regulations in the prescribed format to the bourses and any amount recovered from the defaulter shall be deposited in the Investor Protection and Education Fund.

Analysis and impact: The primary benefit of the amendment that mandated a structured digital database is reduced information asymmetry while the SEBI investigates matters of insider trading. In cases relating to it, distinguishing the insider who conveyed the UPSI, in any case, turns out to be progressively significant for narrowing down expected guilty parties and to follow the data trail. This was one of the pertinent issues in the ongoing “WhatsApp spill” case wherein after extensive investigations, the SEBI had punished certain people for spilling data identified to be price-sensitive. However, since WhatsApp messages are typically ensured through end-to-end encryption, the SEBI could not efficiently recognize the entities involved in the trade, thus setting an alarmingly low standard of proof in such cases. It is hoped that the new, organized and structured digital database may help and forestall such cases. The second amendment that cuts a special exception to the trading window is in the light of the ongoing endeavors by the SEBI to facilitate easy routes of raising capital. This is much needed and will give more chances to listed entities to raise fast capital. Lastly, the mandatory announcing of infringement of the code of conduct would make a more strong system of compliance.

 Regulatory solutions: With each of these amendments, while the SEBI has chalked out additional responsibilities for intermediaries and fiduciaries, as well as streamlined its regulatory powers with bourses, the overall impact on the market hygiene remains to be seen. While there seem to be concerned regarding the degree and extent of control that may be exercised by stock exchanges over unlisted entities, the same will depend on the successful implementation of the PIT Amendment and issuance of further clarifications and circulars by SEBI.

The requirement of maintaining an enhanced digital database is in line with the SEBI’s probe and surveillance procedure. However, it may lead to particular operational challenges and issues for the listed firm, intermediary or fiduciary, because in addition to maintaining more data for a more extended period, the entity is no longer permitted to outsource the task of keeping the database.

Market conduct regulation is poised at a critical threshold in India, where a combination of nuanced laws and efficient enforcement can indeed be transformative. When understood in their true spirit, these amendments are capable of engendering a behavioral shift across corporates, their Board and other key stakeholders, in terms of how we balance commercial interests with accountability for information access. As the market practice evolves on this, one can only hope that we can achieve that fine yet firm balance, amply aided by even-handed regulatory practices and judicial momentum.

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