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Lapse of Stay Orders and Judicial Delays: A Constitutional Conundrum

By Corporate Law, Others No Comments

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? 

Loan Restructuring Schemes for the Hospitality, Aviation, Travel and Tourism Nexus

By Others No Comments

The enormity of destruction caused by the COVID-19 pandemic appears minimal in comparison to the havoc wreaked by events like 9/11 and the ‘Great recession of 2008’. The COVID-led lockdown has disrupted supply chains, shut shop for many businesses and led to mass unemployment. To further aggravate matters, flight cancellations, vacant hotel rooms, and deserted restaurants, the pandemic has taken a toll on the hospitality industry. The dire state of hospitality can be attributed to its heavy reliance on the aviation, tourism and travel industry making recovery agonizingly difficult during such turbulent times. The industry is staring at plummeting revenues and gasping for survival with travel and tourism coming to a screeching halt on account of the COVID-led lockdown and locals hesitant to venture out of their homes.

In the government’s endeavor to save the ailing industry, it announced the reopening of the country giving hope for a gradual improvement. However, the ascent is subject to the industry’s malleability to embrace state-mandated guidelines – psychologically and monetarily. In a country where alternate accommodation like Guest Houses and unbranded budget hotels constitutes 95% of the hotel industry, implementation of these guidelines may pose a grave challenge. Moreover, luxury hotels with stronger intrinsic value and revenue flows may see a steep rise in maintenance costs and lesser customers willing to pay high accommodation costs in times of austere living.

On the other hand, the Finance Ministry’s economic package thwarted hopes of infusing liquidity into the ailing sector, thus making the existence and revival of hoteliers challenging across heritage, leisure, adventure, and niche verticals. The unfortunate interdependence of the industry on the health of the aviation, hospitality and tourism sectors across the world leaves hoteliers starved for relaxations from the government. However, in anticipation of a domino effect on loan defaults in the industry, the Finance Ministry in conjoined efforts with Regulators and the Reserve Bank of India (RBI), introduced numerous measures for the maintenance of equilibrium between the market forces of demand and supply during the pandemic.

With the widespread prevalence of the COVID-19 pandemic, they are increasingly recognizing that the rebuilding phase offers a unique opportunity to encourage action on the agenda of survival until the COVID-19 dust settles. The nature of the crisis has revealed basic vulnerabilities around the world, most importantly those surrounding borrowers from the hospitality, airline and tourism industry. In the same vein, the Finance Ministry directed Banks to roll out a loan resolution framework with the Loan Moratorium period ending on August 31st and the festive season around the corner. In doing so, the Supreme Court directed that charging interest on deferred EMI payments under the moratorium scheme during the COVID-19 pandemic would amount to paying interest on interest which is against “the basic canons of finance” and unfair to those who repaid loans as per schedule.

RBI’s move strikes a balance between safeguarding the economic value of viable businesses whilst protecting the interest of depositors. Particularly, the relief may include “rescheduling of payments, conversion of any interest accrued, or to be accrued, into another credit facility, or, granting of the moratorium, based on an assessment of income streams of the borrower, subject to a maximum of two years”; however the exact contours of the resolution plan have not been clearly laid out and remain undecided.

Further, the resolution plans to be implemented under the framework may include conversion of any interest accrued, or to be accrued, into another credit facility, or granting of moratorium and/ or rescheduling of repayments, based on an assessment of income streams of the borrower, up to two years. However, on the corporate side, substantial amounts of clean-up, resolution and deleveraging have already taken place in the past, so it is unlikely that the demand for restructuring may subsist. This move may provide a necessary cushion as businesses on the verge of a shutdown are likely to consider one-time credit rebuilding. This way, the rebuilding of real instances of non-performing credits is of great importance, as it unclogs the framework and makes room for survival and growth. However, a tangible position would unearth only when the moratorium ends.

Thus, it goes without saying that the slew of measures announced by the RBI and government to alleviate liquidity woes of financial institutions, may have a lesser impact in the short term, but a one-time credit rebuilding framework is an option many businesses may consider adopting to ensure that it stays competitive and progressive. It goes without saying that a resumption of economic activity is essential, but the vigil on the virus must remain and in doing so Indians are likely to witness decades of unprecedented transformation in near future.

EMI Moratorium: Analysing borrower’s creditworthiness amidst the pandemic

By Labour & Employment, Others No Comments

Financial institutions are focused on risk now, more than ever before. The virus-induced lockdown has raised “Liquidity” and Non-Performing Assets (“NPA”) issues popularizing these buzzwords in financial circles and beyond. Anticipating a domino effect on loan defaults amongst small to medium-sized businesses, the Finance Ministry in conjoined efforts with Regulators and the Reserve Bank of India (RBI), introduced numerous measures for the maintenance of equilibrium between the market forces of demand and supply during the pandemic.

With the widespread prevalence of the COVID-19 pandemic, they are increasingly recognizing that the rebuilding phase offers a unique opportunity to encourage action on the agenda of survival until the COVID-19 dust settles. The acute phase of COVID-19 has drawn central banks’ attention from a crisis that was earlier restricted to some states and regions, to a global economic crisis riddled with challenges. The nature of the crisis has revealed basic vulnerabilities around the world, most importantly those surrounding individual borrowers.

The Finance Ministry directed Banks to roll out loans resolution framework with the Loan Moratorium period ending on August 31st and the festive season around the corner. In doing that the Supreme Court directed that while Banks are free to restructure loans, they cannot penalize individual borrowers availing moratorium benefit. The apex court held that charging interest on deferred EMI payments under the moratorium scheme during the COVID-19 pandemic would amount to paying interest on interest which is against “the basic canons of finance” and unfair to those who repaid loans as per schedule.

RBI’s move to restructure personal loans accord this benefit to consumer credit, education loans, loans for creation, or housing loans pursuant to a central bank notification. Specifically, the relief may include “rescheduling of payments, conversion of any interest accrued, or to be accrued, into another credit facility, or, granting of a moratorium, based on an assessment of income streams of the borrower, subject to a maximum of two years”; however the exact contours of the resolution plan have not been clearly laid out and remain undecided.

The primary objective of this move at helping borrowers on the pretext of mass unemployment, pay cuts, and lay-offs in light of the world’s strictest lockdown, thereby paralyzing economic activity. So a 2-year moratorium that RBI has now permitted under such restructuring proves to be a blessing in disguise for people experiencing cash crunch during the pandemic.

Clearly, it will boost households facing a cash crunch — especially those who lost their jobs or small businesses who are on the verge of a shutdown. RBI has moved consistently and quickly since the start of the pandemic to calm markets, to provide liquidity, and, now, these steps should go some distance in giving relief to the distressed liquidity-starved household.

However, each household should be wary of using this facility. At the outset, a loan moratorium was aimed at helping those in distress and not meant to be used as an opportunity for the pre-existing defaulters of loan payments. At the other end of the spectrum, the moratorium extension is likely to provide a negative credit outlook for financial intermediaries in the shadow financing industry like Housing Finance Companies and Non-Banking Financial Companies.

Invariably, the deferment of EMIs will have an adverse impact on the cash flows of these financial institutions and test their resilience during depressionary forces emanating from the COVID-19 pandemic. Despite the slew of measures announced by the RBI and government to alleviate liquidity woes of financial institutions, these measures may have less impact in the short to medium term, but the operative word being “defer” of loan installments, and not a complete waiver or discount thereof should be of prime importance in the personal finance industry and be availed only if absolutely required.

A growing number of central banks and banking supervisors are starting to work together to progress a global approach and agenda. In doing so, the central banks need to develop a clear strategy on the way forward. A monetary policy needs to be forward-looking. Given the slowdown in the economy and that the transmission of rate cuts takes time, there is a need for further monetary policy easing. This will also be helpful as uncertainty remains over COVID-19 having a deflationary or inflationary impact on the Indian economy in the medium run.

While the temptation to adopt aggressive measures may be high, crossing the traditional boundaries between fiscal and monetary policies, but are feasible for central banks in advanced economies with high credibility stemming from a long track record of stability-oriented policies. Thus this strong medicine should only be taken with extreme care.

Equity in Times of Pandemic; Is it Wise to Keep Faith?

By Others No Comments

The pandemic has led private equity in India to step into the current crisis riding a decade-long growth wave in transaction volumes and valuations. The value of some investments and investor confidence has been fairly dampened since the outbreak of the virus which continues to persist yet now. 

The global financial crisis of 2008-09 for instance can be looked up, to provide a few insights into how PE funds might navigate the fallout from the pandemic. If we take history as a guide, many PE funds have been previously seen to cruise through the crisis staying on the sidelines, a little too long, which could lead to missing out on crucial investment opportunities. 

Although there could be a sharp fall in deal-making in the short-term, PE funds are expected to learn from the past as high returns often emerge in times like these and can offset the losses during the downturn. The returns over the next couple of years will depend on how fund managers react over the next 12 months. However, PE firms have massive amounts of unused funds that are readily available at their disposal coupled with money that has been raised but not yet invested. The subsequent expectation is that a large part of this money shall be expected to be earmarked for emerging markets, India being no exception. Private debt funds and special situation funds are more visible in the market and can help provide liquidity to businesses that are experiencing cash crunches, the much-required prerogative currently.

While several investors are holding back until the ramifications of the pandemic become clearer, a few distinct themes are emerging that could shape private deal activity as the new normal evolves which includes:

  • Deferment of deals: Deals are being deferred as investors are speculating the damage of the COVID-19 caused pandemic. While the dealer network is highly robust, deal flow is expected to be slow specifically in the next couple of quarters. The driving factor here to determine the consequences would be the availability of the dry powder with the equity funds.
  • Protecting existing portfolio: The primary goal of funds in the short term will likely be to look after portfolio companies. This would eventually take precedence over the search for new investment opportunities as some portfolio companies may need additional financing amid liquidity concerns owning to the government-enforced long shutdown in the wake of the spreading virus.
  • Difficulty in managing the valuation conflict between buyer and seller: Financial markets have been significantly disrupted across the globe. The pandemic has triggered a rout in the stock markets and market volatility has increased. Although PE investments are generally less volatile than public investments, there might be valuation challenges as sellers may be reluctant to part with assets given the precipitous fall in valuations. This could delay deal activity in certain cases.
  • Availability of leverage for buyout deals: Of late, a higher amount of leverage has been used in buy-out deals. The availability of debt financing from banks could be a challenge and may cause a slowdown in buyout deals. Given the significant amount of available funds, of which a large part is for buyouts alone, deal-making could see an uptick, especially in distressed asset situations.
  • Private debt funds and special situation funds expected to be more active: There is expected to be liquidity pressure on businesses owing to COVID-19 related disruption in demand. PE funds are expected to capitalize on this opportunity through innovative solutions such as debt restructuring and bridge financing.
  • Increase in private investment in public equity (PIPE) transactions: As valuations in public markets decline, PIPE transactions are expected to pick up as PE funds take positions in quality assets at significantly cheaper valuations.
  • Sector expertise will become more critical than ever: PE funds are expected to focus on sectoral themes with pharmaceuticals, technology, digital, and healthcare expected to drive interest whereas the revival of sectors such as financial services, real estate, and non-essential consumer goods and services may take some time. It will remain difficult to form an investment thesis for sectors such as aviation, travel, tourism, and hospitality.
  • Expected change in scope of due diligence: the current crisis highlights the importance of factoring in multiple scenarios and modeling unpredictable disruption in due diligence. Hence, the scope of due diligence will change significantly over the near term.

In light of these circumstances, PE funds will need to respond swiftly and strategically to the new business normal and drive transformation for companies. The pandemic has brought about an extraordinary combination of quality assets going cheap and investors being cash-rich. The funds that can find the right investment opportunities in this difficult time will not only emerge stronger but also generate significant returns in the coming years.

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.

Covid-19: Why Are Organisations Terrified about Reviving the Work Environment

By Others No Comments

The effect of COVID-19 flare-up depends on the cataclysm’s gravity, degree, and distribution, which remains unknown even today. The mass transition to WFH has numerous advantages and offers a path to being relevant during such quick-changing dynamics and as a shield from the contagion. 

During the lockdown, the IT industry transitioned to the WFH model relatively easily providing business continuity to clients without depreciation in service quality or productivity. This was possible due to the industry’s strict adherence to quality processes and the availability of communication bandwidth both from homes in cities and towns. With unhampered business functioning, other industries attempted to mirror the model, but not without disruptions and a dip in quality.  This endeavor across industry verticals is in line with the WHO directives too. 

On site versus work from home

The main concern for organizations is the effective administration of the workforce with the assistance of advanced apparatus, technology-empowered processes, and guaranteeing that everybody is doing their individual errands. Insurance of information and better correspondences have to be kept in sight as WFH turns into a drawn-out plan B. Organizations have to put resources into improving information security and framework. The mass integration of tech-powered business operations and cloud-based data storage facilities have eased the operations across industry verticals barring essential service workers and employees that have held the country together during such unprecedented times.

So where’s the glitch

The wrath of the pandemic has hurled the entire human species into their homes. The widely prevalent havoc wreaked by the pandemic has been a deterrent for many companies with an underlying fear that resuming offices and returning to the conventional method of functioning is an open invitation to infection. A single positive case may lead to contamination of the work environment, which spells disaster for the entire organization.

While companies deploying essential workers to carry out specific functions take measures to forestall the spread of the infection, it is pertinent to note that such measures do not guarantee protection from the virus. However, with the government unlocking states in a phased manner, companies are set to redefine the employment experience by striking an optimum balance between business continuity and community health and safety. 

From a long-term standpoint, WFH may serve as a supplement, rather than a substitute for conventional office environments. However, this common parlance has posed a new challenge with emerging cases of cyber-attacks, frauds, and crime that can seriously and negatively affect the already ailing business enterprise and could open the doors to more invasive forms of government prying in the future. 

Hence, there is a need to develop good cyber-security habits to reduce associated risks amidst the mass digitization of businesses. Moreover, proprietary confidential data and information pertaining to businesses are being accessed from unsecured laptops and desktops, thereby leading to increased exposure to phishing, email scams, and ransomware attacks by cybercriminals. 

Managers are in dire straits to reassess the legal, technical and personal dimensions of the cyber-security threats to their data, and proactively evaluate loss prevention processes.

The way forward

Despite high cyber-security risks, WFH may aid managers to reduce unprecedented losses incurred on account of the pandemic by saving on rental expenditures and other operational costs to keep the business afloat. Such mass adoption of the WFH method may bring momentary respite to numerous businesses. These are trying occasions for us all. Companies and their employees must build a culture that creates a conducive environment for the growth of both parties. 

As time goes by, a widespread pandemic event will assert more pressure on existing resources, infrastructure and technology, resulting in a significant depreciation of productivity and eventually that of products and services. As resources become constrained, firms must constantly re-prioritize delivery of products and services that are absolutely critical to meet customer needs, provide market stability and foster development. Thus a calculated deviation from the standard company policies is the need of the hour. 

Companies must expand on existing human resources, finance, legal, operations and business processes to accommodate certain critical exceptions, and clearly communicate the revised policies, criteria and processes to allow such waivers in an accelerated manner. All potential changes to existing policies should be carefully reviewed by risk management, compliance and legal teams prior to being finalized and should take into account what risks are appropriate to accept and any legal and jurisdictional nuances across geographies. 

As the world recoups from the pandemic, a redefinition of normalcy is well on its way.

Special Purpose Vehicles –A Modality For Development With Inherent Risks

By Others No Comments

Special Purpose Vehicles (SPV) a catchphrase during the financial crisis of 2008 has assumed center stage as companies and financial institutions scramble for monies in a contracted economy in the wake of the COVID-19 pandemic. Empirical and anecdotal evidence suggests that SPVs have served the development community and beneficiaries well from a historical standpoint. The key aspects of such SPVs, that led to their popularity, absorptive capacity, value for money, flexibility, bankruptcy proof, the ease with which multiparty funding can be handled, longevity, legitimacy, and other valuable characteristics. However, it remains to be examined is whether this scheme will stand the test of subsisting unprecedented times.

RBI’s Latest Announcement

Recently, the Reserve Bank of India (RBI) announced that SBICAP, a subsidiary of the State Bank of India (SBI), will set up an SPV and operationalized ₹ 30,000 crores for this scheme. This SPV shall serve the special purpose of purchasing the investment-grade commercial papers and non-convertible debentures of NBFCs and housing finance companies (HFC) until September 30, 2020, and is expected to recover all dues by December 31, 2020. The scheme is aimed at improving the liquidity condition of NBFCs and HFCs through an SPV, prevent any potential financial or systemic risks in the finance sector, which is closely intertwined with industries across verticals, and ultimately ensure stability in the economy.

However, the RBI lays out stringent requirements for beneficiaries under the scheme, some of which are as follows: a) the NBFCs/HFCs must be registered with RBI, b) the NBFCs/HFCs must have been profitable in at least one of the two preceding FY 2018 or FY 2019, c) fulfill the requirements related to Capital To Risk-Weighted Assets Ratio (“CRAR”), Capital Adequacy Ratio (“CAR”) and Non-Performing Assets (“NPA”), Special Mentioned Accounts (“SMA”), and d) the NBFCs and HFCs must be rated by an investment grading agency approved by the Securities and Exchange Board of India (“SEBI”).

A Solution with underlying risks

The shadow financing sector was already struggling with funds in light of the IL&FS crisis when COVID-19 hit, jeopardizing the survival of the sector at large. RBI’s notification attempts to address the liquidity position of NBFCs/HFCs through SPVs with the primary objective to avoid any potential systemic risks to the financial sector. At the outset, this scheme acts as an enabler for NBFCs and HFCs to get investment grade or a better rating for the bonds issued thereby augmenting the flow of funds from the shadow financing sector. Moreover, the scheme would be a one-stop arrangement between the SPV and the NBFCs without having to liquidate their current asset portfolio and merely transfer their financial risks. The said advantages bring the government closer to its objective to eliminate or mitigate any potential systemic risks in the financial sector.

However, these measures lack concerted and concrete action. Firstly, SPVs entail high costs for setting up such as cost of incorporation, registration, stamp duty at the time of transfer of the company, and continuous compliances of FASB Rules. In addition to high costs, the efficacy of the SPV until September 30, 2020, is likely to be vociferously criticized and questioned as the move is a 3-month short-term measure as opposed to the industry requirement of over 2 years. The sector is in dire straits for long-term funds so that they don’t run into an asset-liability mismatch; however, the present move may lead to a vicious cycle of extending loans. For instance, if somebody were to draw three months’ money, they will have to create another liability at the end of 90 days to able to repay this.

Secondly, the high thresholds and requirements set by the RBI for NBFCs and HFCs are likely to face criticism for the reason that many of numerous entities in dire need of financial support and liquidity will be left out of this scheme, thereby providing a lopsided-cushion to the sector. Thirdly, the number of NBFCs and HFCs availing of this scheme shall be contingent on the rate and amount they receive as part of this scheme, which will be a determining factor of whether the scheme is a true liquidity potion or just another half-baked solution. Fourthly, the complexity of SPVs – often in the form of layers upon layers of securitized assets – can make it near impossible to monitor and track the level of risk involved and who it lies with.

In theory, SPVs are bankruptcy remote. However, there exists a moral hazard, not for the banks, but for the end investors who know that they have no financial obligation and therefore little incentive to investigate and monitor the credit quality of the underlying assets. It could therefore be argued that neither party will have an incentive to scrutinize the SPV’s activities. This means that SPVs could be inefficient, both from a risk and from a regulatory perspective. On the other hand, if SPVs are completely separated from their sponsors, albeit with more intense scrutiny and regulation, the moral hazard from the point of view of the SPV investors would be removed. In practice, however, it is not a credible threat that the sponsor will leave an SPV to collapse during difficult times. From a reputational perspective, it is not in the sponsor’s interests to abandon the SPV affiliated with its name and it will often make more sense to provide the financial support it needs in times of difficulty.

What remains to be examined is whether, in view of the risks underlying SPVs, the use of these vehicles should be stopped altogether? The answer lies in the negation, as meticulous management of SPVs can bring it closer to its original motive of reducing financial risk. Firstly, investors must understand the structure and implications of their investments in SPVs, and so some standardization of documentation and disclosure requirements may be needed. Secondly, constant review and monitoring of the risk levels of SPVs in relation to the remainder of the sponsor’s portfolio would increase the transparency around SPVs and prevent weaker assets from being moved into them for sale to investors. Finally, in the case of a sponsor having to support an SPV, the risks of the SPV should be absorbed into those of the sponsor.

Despite the inherent risks, SPVs are a stride in the right direction enabling large NBFCs and HFCs to obtain finances, transfer risks and perform other investment activities to maintain adequate liquidity levels, eliminate or mitigate systemic risks, augment the lending resources of NBFCs and HFCs, although for a short duration of three months. In order to mitigate the gargantuan effects of the pandemic-induced depressionary forces on the shadow financing sector, the government must introduce a dark horse to soothe its long term woes and not a mere quick fix.

Transformation in the hospitality sector

By Corporate Law, Others No Comments

The magnitude of devastation attributed to events like 9/11 and the ‘Great recession of 2008’ seem bleak in comparison to the havoc wreaked by the COVID19 pandemic. The pandemic-induced lockdown has disrupted supply chains, closedown of businesses and mass unemployment. But the government’s decision to reopen the country in a phased manner brings a breath of fresh air and hope for a gradual but steady ascent. However, the ascent is contingent upon the hospitality industry’s adaptability to the virus-induced irreversible transformational effect at large.

With canceled flights, empty hotel rooms, and deserted restaurants, this pandemic has taken a toll on the hospitality industry. The industry’s dependence on the airline, tourism and travel industry makes recovery agonizingly difficult during these unprecedented times. However, as the industry strives to get back up on its feet, stringent rules applicable to hotels in the MMR region, including Mumbai, Pune and Nashik must be followed. Therefore, the hospitality industry is in metamorphosis as they gear up for the post-COVID era.

At the outset, the entire guest experience from check-in until check-out is likely to be redefined to cater to the current requirements of social distancing and hygiene. Zero-maintenance buildings, contactless interactions, and technology-based sanitization will emerge as the “new normal” for hotels and restaurants at large. Specifically, hotels outside containment zones will be allowed to operate at 33% capacity subject to adherence of social distancing and hygiene guidelines. The rationale behind this is not only to avoid overcrowding but also to convert the remaining 67% capacity into a quarantine facility, as and when required by the government. Reduced operational capacity and increasing costs of running a hotel or restaurant will compel the industry to look for unconventional avenues to keep business afloat during a depressionary phase.

Moreover, several other guidelines ensuring hygiene and social distancing such as mandatory thermal screening, protective glass at reception tables, sanitizers to all hotel staff and guests, and contactless digital payments, etc. will change the entire guest servicing experience. This goes without saying that only asymptomatic guests will be allowed entry into hotels. As an additional measure, hotels are required to keep each room empty for a minimum of 24 hours post guest check-out and sanitize the room. Many of the facilities, like bars, buffet, spas and swimming pools, will have to stay shut for now and even though restaurants can open, they will only serve hotel guests for now. The State-mandated guidelines will propel the hospitality industry to provide a safe, contact-less experience from the pick up at the airport to the check-in, entire stay and until check-out.

State-mandated guidelines although necessary for the health and safety of individuals, it is likely to have catastrophic consequences for alternate accommodation such as Bed & Breakfast, Guest Houses and unbranded budget hotels which constitute 95% of the hotel industry. On the other hand, implementation of these guidelines is easier for chain and luxury hotels with deep pockets, however high maintenance costs coupled with fewer customers may pose a challenge. In light of this, the low-priced sector in the country can ride on India’s large domestic tourism to kick start the industry. Also, the alternate accommodation industry offers potential entrepreneurial opportunities to small-scale business owners. Seeking out entrepreneurial opportunities is especially important as revival projections do not look promising as of date.

Corporate travel will perhaps revive the chain hotels though the lockdown has shown that corporate travel can be limited with the emergence of the work-from-home concept. As per FHRAI, hotels are seeing about 15-20 percent occupancy at present. For restaurants, a limited number of working hours coupled with restrictions on the sale of alcohol makes business unviable, thereby hurling several small restaurants, bars and hotels towards an empty treasury. Moreso, inbound traffic is bound to be slow due to travel restrictions and recessionary conditions limiting disposable income. Clearly, the prolonged impact of the COVID-19 crisis, even after the lockdown has been relaxed, is likely to have a long-term impact on the sector on account of burdensome guidelines and recessionary conditions limiting the disposable incomes of customers.

Driving up sales requires a culmination of strategies including – continuous and effective marketing strategies that communicate with loyal guests through digital and social media during and post the lockdown. In doing so, hotels and restaurants can showcase their contributions and safety measures in wake of the pandemic for their customers. Secondly, it is imperative for hotels and restaurants to maintain adequate liquidity for working capital. This can be achieved through a combination of renegotiation and extension of payment cycles with vendors, adopt RBI’s 3-month moratorium period for existing interest and principal payments to banks, and enforce rigid cost-control measures while supporting the salaries of its staff members. Consequently, a higher budget will be allocated to technology; minimum human interaction is maintained while providing a safe, hygienic and comfortable stay.

The Finance Ministry’s economic package disappointed the hospitality industry, which came to a screeching halt on account of the COVID-19 outbreak. Unfortunately, the survival of this industry is interlaced with the situation of the aviation, hospitality and tourism sectors, thereby making survival and recovery of hoteliers challenging across leisure, heritage, adventure and niche verticals. The industry is starved for relaxation from the government, but more importantly for customers to feel at ease to visit hotels and restaurants once again. It goes without saying that a resumption of economic activity is essential, but the vigil on the virus must remain and in doing so Indians are likely to witness decades of unprecedented transformation in near future.

National Education Policy 2020: Challenges And Criticism

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The National Education Policy 2020 may provide a runway for the education sector to take off despite challenges posed on account of the pandemic. The announcement of the NEP attracted criticism from industry experts, but it may place India on the global map for a sought-after educational haven of the world. The National Education Policy 2020 replaces the old education policy which was framed in 1986 and ushering in an era of new educational reforms. This is the first policy that seeks to unshackle students from the tyranny of administrative constraints with multiple-choice, multidisciplinary learning, and multiple chances. However, the policy has been scrutinized and dissected by industry experts and thus have witnessed conflicting views.

The policy aims to create a robust digital infrastructure in the education sector that ensures uninterrupted learning even during unprecedented circumstances. The National Education Technology Forum (NETF) will be established for ensuring that the technology is integrated adequately and efficiently in the education process and ensuring the enhancement of the access of education to all sections of the society even in these tumultuous times. Various contours of this policy aim to radically improve the Gross Enrolment Ratio in higher education and to achieve the objective of 100% youth literacy. Moreover, the said policy has also been predicted to reduce the social and economic gap between students, which has magnified in wake of the pandemic.

A system that promotes meritocracy, equal opportunity and equity is good, but there lies a gap between theory and practice. In addition to this, the NEP elucidates the need for homeschooling and multi-language learning whereby until the 5th grade and in exceptional circumstances, no later than 8th grade, the model of education shall be in the mother tongue/local language of the student. Despite the all-encompassing façade of the new policy, its success shall be put through a skeptical lens with rising concerns for the students during higher education and in their professional journeys. It is particularly problematic in light of the right of the people to move from one state to another since the inter-state movement shall result in the change of the local language and the mode of education.

The policy has also been criticized due to the legal complexities surrounding the applicability of two operative policies namely The Right to Education Act, 2009 and the New Education Policy, 2020. Certain provisions such as the age of starting schooling will need to be deliberated upon, in order to resolve any conundrum between the statute and the recently introduced policy in the longer run.

Against this backdrop, it is pertinent to note that past attempts at parliamentary legislation under the erstwhile regulatory set up have not been successful. The failure can be attributed to the role of regulators and the intended legislative changes being out of alignment, as in the case of the Foreign Educational Institutions (Regulation of Entry and Operations) Bill, 2010, which lapsed; and the proposed Higher Education Commission of India (Repeal of University Grants Commission Act) Act, 2018 which remained did not reach the Parliament.

The contours of NEP is expected to revise the regulatory avatar of the Higher Education Commission of India (“HECI”) being set up with a wide role in Indian higher education. The HECI is likely to have four verticals under its umbrella, including a) National Higher Education Regulatory Council, intended to be a single point regulator for the higher education sector; b) National Accreditation Council, which will deal with the accreditation of institutions; c) Higher Education Grants Council, which will be tasked with carrying out funding and financing of higher education; and d) General Education Council, the final vertical, is expected to have a more academic based-role, as it will frame expected learning outcomes for higher education programs. Foreign universities coming into the country will also fall under the purview of this framework. While the Universities Grants Commission and the All India Council for Technical Education have played a major role in this direction until now, questions pertaining to the role of the UGC and AICTE remain unanswered under the new policy.

It is evident that NEP 2020 provides a fresh canvas to paint on and opens up avenues for home-schooling and foreign universities alike, in India. For the new policy to succeed a combination of a staunch intent to move out of comfortable doldrums and facilitate increased involvement of foreign universities and increased literacy levels is a must. While this objective is expected to see a significant regulatory overhaul for its successful implementation, it would lay a successful path ahead for institutions as well as the student community and place India on the map of an educational haven.

Repayment Of AGR Dues: A Ticking Bomb

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The COVID-19 pandemic has demonstrated the importance that telecommunications infrastructure plays in keeping businesses, societies and governments, connected and functional. However, telecom companies have been laden in debt in recent years, and their network resiliency has been tested despite challenges posed by the current pandemic, propelling them further into the dark hole of debt.

Amongst the slew of challenges, the telecommunications sector was already grappling with the issue of payment of Adjusted Gross Revenue (AGR) when the pandemic hit the world. Recently, the Supreme Court reserved its order for deciding the deadline for the payment of Adjusted Gross Revenue (“AGR”) related dues of the telecom companies like Idea, Vodafone, Bharti Airtel payable to the government.  In particular, Vodafone Idea owes a mammoth Rs 58,254 crore out of which it has only been able to pay Rs 6854 crore, while Bharti Airtel is relatively in a better position than the former.

With respect to the issue of the appropriate timeline for the repayment of the AGR dues, the court refuted the suggestions by telecom companies of 15 to 20 years for repayment of their dues, on the grounds that 15-20 years was an unreasonably excessive amount of time considering the fact that telecom players have still been financially stable even during these tumultuous times. In fact, it is believed that the telecom sector to a large extent has not been adversely affected and has been witnessing profits even during these times due to increased data usage resulting from work from home trends. This is particularly pertinent in the backdrop of the catastrophic financial impact emanating from the COVID-19 pandemic.

However, in consideration of the larger picture, huge repayment amounts and intense competition within the telecom sector can be detrimental for the survival of Vodafone Idea. If telecom companies are required to pay the AGR in full or without any deferment, it is bound to take a severe toll on the telecom’s financial wellbeing. In the event of inadequate revenues and cash for payment of license fees, telecom companies may be forced to consider increasing debt to meet demand. However, given the current situation, lenders willing to extend financial assistance will be limited and the cost of borrowing may be higher as opposed to the pre-COVID era, creating a vicious cycle.

During these critical financial times, no bank would be ready to grant guarantees or loans for such a magnanimous amount, which essentially increases the plight of Vodafone Idea because of the fact that even to borrow loans from the banks, they would have to pay a significant amount of money upfront which could possibly push them to the brink of exiting the market. The court’s concern was majorly attributable to the uncertainty associated with granting such an extended period and the possibility that Vodafone Idea might become insolvent in any case.

The rationale of the Supreme Court in relation to profits may be deemed accurate in part; however, there is no denying the fact that ghosts from the past still haunt the telecommunication sector in India, such as massive AGR repayment dues. Therefore, the changing customer preferences of higher data usage may fill up the Vodafone’s bags sooner than otherwise, and enable it to pay back to the government in light of the judgment delivered last year. However, the overhang of AGR dues is likely to hurt Vodafone Idea, pushing it to the brink of insolvency, which may impact the competitiveness of the telecom market and ultimately leave monopolistic prowess in the hands of Reliance-Jio.. Therefore, while the Supreme Court makes a decision on the adequate timeline for the repayment of AGR dues, spectators can only hope that repercussions of a potential exit by the major market players can be extraordinary, like the present times. So it is imperative that the competition watchdog and government collectively provide regulatory relaxations to the telecom players within a reasonable time frame to mitigate deleterious consequences on the competitive dynamics of the industry!

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