India’s Corporate Law Reform in Progress: The Corporate Laws (Amendment) Bill, 2026 and FDI Policy Updates

India’s corporate and investment regulatory framework is evolving with a focus on ease of doing business. The introduction of the Corporate Laws (Amendment) Bill, 2026 in the Lok Sabha proposes to simplify and modernize key provisions under the Companies Act, 2013 and the Limited Liability Partnership Act, 2008. At the same time, Press Note 2 (2026) to the FDI Policy, issued by the Department for Promotion of Industry and Internal Trade (DPIIT), revisits India’s approach to foreign investments from land-border sharing countries.

While the corporate law amendments proposed focus on reducing compliance burdens and improving flexibility for businesses, Press Note 2 brings much-needed clarity to the FDI regime, particularly by defining “beneficial ownership” and setting clearer rules around control and approvals. In doing so, it seeks to resolve ambiguities and gaps that had created practical challenges under the earlier framework.

A. Corporate Laws (Amendment) Bill, 2026

On March 23, 2026, the Union Government introduced the Corporate Laws (Amendment) Bill, 2026 (“Bill”), in the Lok Sabha, proposing significant changes to the Companies Act, 2013 (“Companies Act”), and the Limited Liability Partnership Act, 2008 (“LLP Act”). Notably, the reforms build upon recommendations of the Company Law Committee (CLC) and the High-Level Committee on Non-Financial Regulatory Reforms, underscoring a broader policy shift toward trust-based governance and simplified compliance frameworks.

Proposed Amendments to the Limited Liability Partnership Act, 2008

The proposed amendments to the LLP Act reflect a clear inclusion of International Financial Services Centre (‘IFSC’) related structuring, likely aimed at aligning it with evolving financial sector regulations and global investment practices. At the same time, several provisions are framework-based and reliant on subordinate legislation, which will play a key role in shaping their practical implementation, if and when brought into force. The key amendments proposed at a glance are set out below:

Alignment with the IFSC Framework:

A major development is the introduction of a “Specified IFSC LLP” category. The amendments propose:

  • Inclusion of definitions with respect to Specified IFSC LLP.
  • Foreign currency capital contributions, accounting and bookkeeping for such LLPs.
  • Other regulatory provisions for incorporation, listing and operation of such LLPs.

These changes aim to align LLPs operating in IFSCs with global financial practices and the regulatory framework of the International Financial Services Centres Authority Act, 2019.

Incorporation Process Changes:

The amendments simplify incorporation by allowing subscriber-level self-declaration, with professional certification required only where such professionals are engaged by the LLP in the formation / incorporation process.

Adjudication:
  • LLPs and partners may apply for suo motu adjudication of penalties under the proposed introduction of Section 76A.
  • Section 68B is proposed to be introduced which permits appeal against Registrar’s decision regarding the application for Name and / or Registered Office of the LLP by any person aggrieved by such order. The effectiveness of this provision will depend on the rules specifying the officer, the period for filing, and the standard of review.
Valuation Framework:

The amendments propose to enable mutatis mutandis applicability of the registered valuer framework under Section 247 of the Companies Act, 2013 to valuations required in respect of partners’ contributions in an LLP, or of any property, assets or net worth of an LLP, ensuring uniformity across different body corporates by bringing LLP valuations under the same professional discipline as company valuations.

Conversion of Trusts into LLPs:

Another notable proposed amendment is the inclusion of a new framework to enable conversion of specified trusts into LLPs, supported by a detailed schedule covering:

  • Eligibility and consent requirements
  • Vesting of assets and liabilities
  • Continuity of proceedings and contracts

This amendment will also facilitate the conversion of Alternative Investment Funds formed as trusts into LLPs.

“Specified Trusts” would mean trusts that meet both of the following conditions: (i) it should be a trust established under the Indian Trusts Act, 1882 or a Central or State Act; and (ii) the trust must be registered either with SEBI or IFSCA. Accordingly, it can be inferred that private family trusts, charitable trusts, or other trusts (not registered with SEBI or IFSCA) are excluded from the definition of specified trusts and, hence, cannot be converted into an LLP.

Proposed Amendments to the Companies Act, 2013

The Bill marks yet another step in India’s ongoing effort to recalibrate its corporate regulatory framework, building on a series of amendments introduced over the years to refine the Companies Act, 2013. It seeks to rationalize compliance requirements, decriminalize minor offences, recognize new concepts, and facilitate ease of doing business, reflecting the government’s continued push toward a more business-friendly and streamlined legal environment.

The Bill introduces several measures aimed at simplifying compliance burdens and modernizing corporate processes. Some key changes proposed under the Bill, that will lessen the burden and pave the way for ease of regulatory compliance are summarized in the below table:

SectionExisting ProvisionProposed Key Change
2(85)

Small Company threshold:

Paid-up share capital up to ₹10 crore; turnover (for immediately preceding financial year) up to ₹100 crore.

Thresholds enhanced:

Paid-up share capital up to ₹20 crore; turnover (for the immediately preceding financial year) up to ₹200 crore.

42 & 62Private placement and further issue of share capital linked to ESOP.Expanded to include other schemes linked to share capital value (Restricted Stock Units, Stock Appreciation Rights)
68

– Limit of buyback capped at 25%

– Only 1 buy-back per year

– Declaration of solvency to be verified by affidavit.

 

– Central Government shall prescribe different buy-back percentages for certain classes of companies.

– Prescribed companies may make 2 buybacks per year with minimum 6-month gap  (likely to include debt-free companies)

– No affidavit required.

 

77Registration of Charge to be completed within 60 days of creation.

For a prescribed class of companies, the registration period is extended to 120 days.

 

96A physical AGM is required every year.Company can hold an AGM through audiovisual means, with at least 1 physical meeting every 3 years.
101Extraordinary general meetings (EGMs) require 21 days’ notice.EGMs conducted wholly through video conferencing or audiovisual means may be called by 7 days’ notice.
135

– CSR applicable if net profit ≥ ₹5 crore

– CSR Committee required if CSR spend ≥ ₹50 lakh.

– Unspent amounts are to be transferred within 30 days.

– Net profit threshold raised to ₹10 crore.

– CSR Committee not required if amount to be spent is ≤ ₹1 crore.

– Timeline for transfer of unspent amounts extended to 90 days.

1732 Board meetings every calendar year for small, dormant, and one-person companies.Reduced to 1 meeting every calendar year.
184Disclosure of interest of directors is to be disclosed every year.Disclosure of interest of directors is required only upon a change in interest.
248

Grounds for strike-off by RoC:

– Company not carrying on business/operations for 2 financial years; no returns filed.

– Filing an application with false information: fine up to ₹1 lakh.

Additional grounds were added for striking off (which were earlier the grounds for applying for the status of dormant company):

–  No significant accounting transaction in preceding 2 years and current FY; financial statements/annual returns not filed for 2 consecutive years preceding previous FY;

– Offence of fraudulent strike-off application decriminalised to ₹50,000 penalty.

230 and 232Scheme of arrangement involving multiple states requires adjudication by multiple NCLT benches.

– Single NCLT (jurisdiction of transferee/resulting company) to dispose off the entire scheme;

– No need for multiple bench proceedings;

– Demerger schemes will not require an Official Liquidator report.

233

Fast-track mergers:

– Approval of 90% majority of creditors in value

– Approval of majority members representing 75% in value

– The Regional Director (RD) may approach NCLT if the scheme is not in the public interest.

Changes to the fast-track merger process:

– Creditor approval reduced to 75% in value (from 90%)

– Member approval: Majority in number representing 75% in value (twin test)

– RD to approach only the NCLT having jurisdiction over transferee/resulting company

– Central Government to prescribe procedure by rules.

 

Decriminalization of certain offences/defaults:

One of the central and key proposals of the Bill is the decriminalisation of various procedural defaults under the Companies Act by replacing criminal enforcement provisions with a penalty-based adjudication regime. Under the previous framework, even minor compliance lapses could lead to prosecution before competent forums.

Defaults related to accounts, audits, director duties, vacation of office, and contravention of prospectus rules, which earlier carried criminal fines, now attract fixed civil penalties ranging from Rs. 50,000 to Rs. 2,500,000 depending on the type of offence and whether the company is listed or unlisted.

On compounding and fraud, the Regional Director’s limit to compound offences is proposed to rise from ₹50 lakh to ₹1 crore, and the fraud threshold for mandatory six-month imprisonment is proposed for a significant ₹10 lakh to ₹25 lakh. Such enhancement of monetary thresholds of fines for compounding of offences is proposed so as to reduce the burden on the National Company Law Tribunal.

Other key changes proposed:

The Bill also aims at strengthening oversight in critical areas such as auditing and financial reporting by introducing Sections 132A–132K of the Companies Act, 2013 to explicitly give powers to the National Financial Reporting Authority (NFRA).

Board powers are also proposed to be curtailed by limiting the tenure of additional directors to a maximum of three months or until the next general meeting. The director eligibility criteria are proposed to be expanded to include disqualifications for recent professional relationships with the company/group and the introduction of “fit and proper” criteria, collectively moving toward a more robust, transparent, and accountability-driven governance structure.

The Bill also proposes simplification of procedures relating to voluntary strike-off of companies to facilitate quicker and simpler closure or voluntary exit for companies and simplification and rationalization of the procedures relating to mergers and amalgamations, including fast-track mergers.

B. Press Note 2 (2026) of FDI Policy: A More Defined Regime for FDI from Land-Border Countries

India’s approach to foreign direct investment from countries sharing land borders has witnessed a significant shift with the issuance of Press Note 2 (2026) on 15 March 2026 (“PN2”). While the erstwhile framework introduced under Press Note 3 (2020) (“PN3”) continues in substance, the 2026 update brings much-needed clarity and enforceability to the regime.

PN3 was introduced in the backdrop of the COVID-19 pandemic, with the stated objective of preventing opportunistic acquisitions of Indian companies. It mandated that any investment from an entity incorporated in, or a citizen of, a country sharing a land border with India, or where the beneficial owner of such investment was situated in or was a citizen of such a country, would require Government approval. While the intent was clear, the framework left a critical gap: the concept of “beneficial ownership” was not defined. This created interpretational uncertainty, particularly in cases involving layered offshore structures, because there was no clarity on whether the concept of beneficial ownership was to be considered from the Companies Act, 2013, under the Companies (Significant Beneficial Owners) Rules 2018 or under the Prevention of Money Laundering Act, 2002 (PMLA), under the Prevention of Money-laundering (Maintenance of Records) Rules, 2005 (together referred to as “PMLA”).

PN2 addresses this gap directly by linking “beneficial ownership” to the definition under the PMLA. By importing a well-established anti-money laundering standard, the Government has effectively moved from a broad, principle-based restriction to a rule-based test. Beneficial ownership is now determined with reference to objective thresholds and control parameters, including shareholding levels and the ability to influence management or policy decisions. As a result, the inquiry is no longer limited to the immediate investing entity; it extends to identifying the ultimate beneficial owners (natural persons) who own or control the investment, directly or indirectly.

PN2 also expands the concept of control. It recognises that ownership alone may not capture the true locus of influence and therefore brings within its scope situations where investors exercise control through contractual rights or other arrangements. The reference to “ultimate effective control” over the investee entity signals a clear intent to look beyond formal shareholding and examine the substance of rights and relationships. This has direct implications for common deal constructs such as shareholder agreements, veto rights, and governance arrangements, which may now be relevant in determining whether the Government route is triggered.

Another important clarification relates to transfers of ownership. While PN3 required Government approval for transfers resulting in restricted beneficial ownership, PN2 makes it explicit that such approval must be obtained prior to the transfer. This removes any scope for post-facto regularisation and places the onus on parties to assess regulatory triggers at the structuring stage itself. In practice, this is likely to affect secondary transactions, internal reorganisations, and exit mechanisms, all of which will now require closer regulatory scrutiny.

A notable addition under PN2 is the introduction of a reporting requirement even in cases where prior Government approval is not required. Investments that have any direct or indirect ownership linkage to a land-border country are now subject to reporting in accordance with procedures prescribed by DPIIT. This reflects a shift towards continuous regulatory oversight, where the Government retains visibility over investments beyond those that formally trigger approval thresholds.

Taken together, these changes indicate a clear evolution in India’s FDI policy. The emphasis is no longer merely on restricting certain categories of investors at the entry stage but on making an analysis of beneficial ownership and control through other means and ensuring that ownership and control can be effectively traced and monitored throughout the life of the investment.

Concluding Thoughts

The Corporate Laws (Amendment) Bill, 2026 reflects a calibrated regulatory approach – liberalisation for procedural non-compliance, coupled with stricter oversight in substantive areas such as auditing and financial reporting. For businesses, the reforms promise reduced compliance friction and improved operational flexibility. For regulators, they provide enhanced tools to ensure accountability in critical areas. If enacted, the amendments are likely to improve investor confidence, streamline compliance frameworks, and strengthen India’s position as a globally competitive corporate jurisdiction.

Press Note 2 (2026) of the FDI Policy does not mark a departure from Press Note 3 (2020). Instead, it refines and strengthens that framework by providing definitional clarity, tightening approval requirements, and introducing ongoing reporting obligations. In practical terms, all parties to a transaction and transaction counsel will need to adopt a more rigorous approach to ownership mapping and control analysis. The regulatory focus has clearly shifted to substance, and compliance will depend on a careful assessment of both ownership and control at every level of the investment chain. The corresponding amendments to the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 are awaited, which will be critical in translating these policy changes into operational clarity and guiding their practical implementation.

Viewed together, these developments reflect a pragmatic shift in India’s regulatory approach. The combined effect of these changes / proposed changes would be a more predictable and business-friendly environment where regulation is clearer and easier to navigate.

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The Corporate Laws (Amendment) Bill, 2026 reflects a calibrated regulatory approach – liberalisation for procedural non-compliance, coupled with stricter oversight in substantive areas such as auditing and financial reporting. For businesses, the reforms promise reduced compliance friction and improved operational flexibility. For regulators, they provide enhanced tools to ensure accountability in critical areas.

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Breaking Down Break Fees: Why They Matter in M&A Deals

Behind every major M&A transaction lies the possibility of the risk of non-closure. Break fees and reverse break fees often serve as the financial guardrails that protect parties when transactions don’t go as planned. A recent high-profile example was the attempted Zee-Sony merger in India, which reportedly included a break-up fee of around USD 90-100 million.[1] When the merger fell through in the year 2024, both sides initially demanded the termination fee from each other, underscoring the growing prominence of break fees in Indian deals.

-Historically, Indian M&A transactions rarely featured break fees clauses in the transaction documents, but this is gradually changing. The COVID-19 era in particular saw a call for using break fees more often to hedge deal uncertainty. This note explores the concept of break fees and reverse break fee, their significance in M&A transactions, certain case studies involving break fees and reverse break fees, and their growing usage in the Indian market.

What are Break Fees and Reverse Break Fees?

Break Fee (Termination Fee):

A break fee is a pre-agreed sum that the seller or target company pays to the buyer if the transaction does not consummate due to specific events not performed by the seller. In other words, if the target/seller(s) backs out or triggers certain deal-breaking conditions (for example, breaching exclusivity obligations or not completing conditions precedent to closing, etc.), it owes the buyer a pre-fixed compensation amount. This break fee compensates the aggrieved buyer for the amount of time, costs (due diligence, legal fees etc.) and lost opportunity costs caused by the deal failure/stoppage. Typically, break fees range from about 1% to 3% of the deal value in mature markets, though it may vary. The amount is usually calculated to reflect a genuine pre-estimate of the buyer’s loss, without it being so high as to be considered punitive in nature.

Reverse Break Fee:

Conversely, a reverse break fee is a sum that the buyer agrees to pay the target if the buyer cannot complete the deal due to certain reasons, including, but not limited to, the buyer’s failure to secure financing for the acquisition, failure to complete the transaction by the agreed long stop date, and other such breaches by the buyer that lead to termination. Reverse break fees gained popularity through private equity deals, wherein buyers wanted the flexibility to walk away by paying a stipulated amount. They usually tend to be higher than break fees (often averaging around 4% of the deal value) since a failed deal can harm the targets’ business and the value (i.e., the target may lose time, reputation and other potential buyers). In essence, reverse break fees shift certain risks of non-completion onto the buyer, providing the target/seller(s), the comfort of penal compensation if the buyer does not consummate the transaction.

Both the constructs are voluntary, contractual deal protection mechanisms designed to encourage parties to go through with the agreement. Notably, Indian law and regulations do not specifically define these terms, and are contractual constructs influenced by global M&A practice.

Significance of Break Fees and Reverse Break Fees

Break fees and reverse break fees serve several important purposes in M&A transactions, especially in enhancing deal certainty and protecting parties from risks:

  • Encouraging Commitment: The prospect of having to pay a fee/penalty for walking away keeps both parties committed to honouring the deal. In an M&A, no party wants to be seen as backing out lightly. The break fee thus acts as a deterrent against impulsive termination, where a party cannot simply walk out without financial consequences. This pressure helps ensure that both sides remain invested in satisfying conditions and closing the transaction.
  • Compensating Efforts and Expenses: M&A deals involve extensive costs such as due diligence, legal fees, management time, opportunity costs, etc. If one side’s actions cause the deal to fail, a break fee provides the aggrieved party a framework to claim some of those costs. Essentially, it is a form of liquidated damages for breach/non-consummation of the deal.
  • Increasing Deal Certainty: Break fees and reverse break fees can materially improve the likelihood of a deal closing. Studies of U.S. transactions have found that inclusion of a reasonable termination fee correlates with higher completion rates.[2] One research survey noted that out of 300 public company M&A deals over 2005–2010, 291 included break fee clauses, and deals with no (or very low) break fees had a significantly higher probability of failing.[3] The commitment mechanism thus gives the initial bidder greater confidence that the deal will go through, or at least that they will be compensated to some extent if it does not.
  • Signalling Serious Intent: For sellers, especially, agreeing to a reverse break fee from the buyer can be a way to gauge the buyer’s seriousness and financial strength. For example, if a buyer is willing to put 3% of the deal value on the line, it signals confidence that they can close the deal. Similarly, a seller who agrees to a break fee signals they truly believe in the deal and are not simply using the offer to shop around, since they’ll pay a penalty if they stray. This mutual confidence can help both parties invest further in the process.

Some Case Studies in the Indian Context

Although break fees/reverse break fees were relatively uncommon in Indian M&A until recent years, several notable Indian deals have featured these clauses. Below are examples of how break fees or reverse break fees have been used (or contested) in Indian transactions, along with relevant legal case context:

  • Apollo Tyres – Cooper Tire (2013): This M&A deal revolved around India’s Apollo Tyres, who agreed to acquire U.S.-based Cooper Tire & Rubber for $2.5 billion. The merger agreement included both a break fee and a reverse break fee, where Apollo would pay a $112.5 million reverse break fee if it failed to close, while Cooper would pay a $50 million fee if it walked away for other reasons. Ultimately, the deal fell apart amid multiple disputes: Apollo struggled with financing and sought to renegotiate price, and Cooper faced labour problems and opposition in its Chinese subsidiary. The collapse led to litigation in the Delaware Chancery Court. Notably, the court did not force Apollo to pay the $112.5 million, instead, it found that Cooper had itself breached certain obligations (like resolving labour issues) and therefore Cooper was not entitled to the reverse break fee. This case highlights that enforcement of break fees depends on the precise facts and contract terms and that courts will examine which party’s breach actually caused the failure.
  • Zee Entertainment – Sony Merger (2022–24): A recent domestic example involving two Indian listed companies. Zee Entertainment Enterprises and Sony’s India unit signed a merger deal in 2022 to create a $10 billion media giant. The merger agreement reportedly included a break-up fee of approximately INR 750–800 crore, payable by Zee if the deal didn’t consummate. In early 2023, Sony decided to withdraw from the merger, citing closing conditions not being met despite 2 years of negotiations. Sony initiated arbitration in Singapore, seeking the USD 90 million termination fee from Zee. Zee countered that Sony’s withdrawal was wrongful and that Sony should instead pay the fee, especially since Zee had incurred around INR 400 crore in merger-related expenses. This led to disputes in Indian courts and an arbitral forum. Finally, in August 2024 the parties reached a settlement where both sides agreed to drop their claims for the USD 90 million termination fee and mutually release each other from obligations. The merger was later called off. This case shows that while a break fee clause existed, its enforcement became complicated by mutual accusations of breach. It reinforces that Indian parties do incorporate large break fees in deals, but collecting such fees may involve protracted legal battles or settlements if the deal termination itself is contentious.
  • TAQA – Jaypee Power (2014): In an inbound investment deal, a consortium led by Abu Dhabi’s National Energy Co. PJSC (TAQA) agreed to acquire two hydropower plants from Jaypee Group in India for INR 9,689 crore. The deal included a reverse break fee of about INR 54 crore, meaning TAQA would pay this fee to Jaypee if the transaction fell through. In mid-2014, TAQA decided to withdraw from the acquisition, reportedly due to a change in investment strategy amid shifting market conditions. This invoked the reverse break fee obligation. This example, which is perhaps one of the early reverse break fees actually invoked in India, underlines that foreign buyers investing in India have agreed to such clauses to give comfort to Indian sellers.

Usage of Break Fee and Reverse Break Fee: Indian Context

The enforceability of break fees falls under India’s general law on liquidated damages and penalties in contracts. Section 74 of the Indian Contract Act, 1872 governs stipulated damages, which holds that if a contract specifies a sum payable on breach, the aggrieved party is entitled to reasonable compensation not exceeding that sum. Indian courts have interpreted this to mean a pre-agreed amount is enforceable if it is a genuine pre-estimate of loss, but not if it is an unconscionable penalty.

Additionally, Section 55 of the Indian Contract Act, 1872 addresses the effect of a party’s failure to perform their obligations on time. If time is of the essence of the contract and a promisor fails to perform within the stipulated time, the promisee may treat the contract as voidable, meaning the non-breaching party can rescind the contract and claim damages.

Accordingly, an exorbitant break fee (disproportionate to the deal size or actual costs) might be deemed a penalty and thus partly or wholly unenforceable in India. But a reasonable fee that can be justified as a fair estimate of due diligence costs or lost opportunities should be recoverable. Parties must be prepared to demonstrate that their agreed fee is a genuine recompense for the kind of losses they would suffer on a broken deal, which is why careful drafting and documentation of the rationale for the fee is advisable. Further, considerations under the extant foreign exchange laws of India in case the break fees or the reverse break fees are to be paid by resident Indian entities/persons to non-resident entities/persons as the same may require prior approval from the Reserve Bank of India.

A common technique to bolster the credibility of a break fee or reverse break fee is to set aside the amount in an escrow at the time of signing. If the deal falls through due to the buyer’s or the seller’s fault, the escrow funds can be released to the relevant counterparty immediately. This tackles the enforcement issue wherein the seller does not have to chase a breaching buyer through court for payment, since the money is already pre-secured.

Powerful Tools In Indian M&A

Break fees and reverse break fees are emerging as useful tools in Indian M&A, borrowing from global deal practice to address the age-old problem of transaction uncertainty. They provide a measure of protection for buyers and sellers who invest in a deal’s success. In India’s context, these clauses are contractually permitted and indeed increasingly seen in high-value transactions. Where properly used, break fees can increase deal certainty and even enhance credibility between parties. With judicious use, these clauses can facilitate smoother deals and provide remedies when things go wro

References: 

[1] ‘Zee, Sony Settle Dispute Aborted $10 Billion Merger’, Reeba Zacharia, Times of India, August 28, 2024 (Available at: https://timesofindia.indiatimes.com/business/india-business/zee-sony-settle-dispute-over-aborted-10bn-merger/articleshow/112850506.cms)

[2] ‘Negotiating Break Fees: The Conundrum Surrounding Regulation in India’ Kaif Anwar, The Contemporary Law Forum, 11 April, 2024, (available at: https://tclf.in/2024/04/12/negotiating-break-fees-the-conundrum-surrounding-regulation-in-india/#:~:text=Research%20has%20shown%20that%20break,the%20agreement%20and%20it%20should)

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Break fees and reverse break fees are emerging as useful tools in Indian M&A, borrowing from global deal practice to address the age old problem of transaction uncertainty. They provide a measure of protection for buyers and sellers who invest in a deal’s success. In India’s context, these clauses are contractually permitted and indeed increasingly seen in high value transactions.

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Understanding CCI’s Leniency Plus Regime for Cartel Disclosures

The Competition Commission of India (“CCI”) notified the CCI (Lesser Penalty) Regulations, 2024[i] (“LP Regulations”) on February 20, 2024.  The LP Regulations arrived shortly after the Ministry of Corporate Affairs (“MCA”) notified the Leniency Plus regime paving the way for the CCI to roll out a new cartel-detecting tool. The Competition (Amendment) Act, 2023, provided for the introduction of a ‘Lesser Penalty’ or LP regime through delegated legislation.[ii] A draft of the LP Regulations was released for public consultation by the CCI in October 2023.[iii] This article aims to analyse the changes brought forward by the LP Regulations and its potential impact on the anti-trust regime in India.

The Competition (Amendment) Act, 2023 amended Section 46 of the Competition Act, 2002 (“Act”). The amended provisions cover any producer, seller, distributor, trader, or service provider (“Entities”) included in a cartel which has violated Section 3 of the Act. Section 3 of the Act prohibits Entities from partaking in anti-competitive agreements. The amended provision permitted such Entities to make true and honest disclosures regarding the violations to the CCI. If the disclosures are deemed to be vital, a lesser penalty may be imposed on the Entities by the CCI. This mechanism is generally known as the ‘Leniency’ regime, interchangeably used with the ‘Lesser Penalty’ regime. [iv] The LP Regulations deal with both the Lesser Penalty (“LP”) and Lesser Penalty Plus (“LP Plus”) regimes, which have been discussed below.

The LP Regulations impose a few conditions for Entities seeking the benefit of the LP or LP Plus regime, as per which the Entities have to:

  • cease to participate in the cartel after disclosing information to the CCI;
  • provide vital as well as all relevant information regarding the contravention of section 3 of the Act;
  • cooperate genuinely, fully and throughout the investigation and not destroy or conceal any relevant documents or give any false evidence[v];
  • provide names of all individuals who are involved in the cartel on whose behalf either LP or LP Plus regime is sought;
  • comply with other requirements as prescribed by the CCI under Regulation 3 of the LP Regulations.

Understanding the Lesser Penalty Regime

The LP regime has been operationalised in a tiered approach, with the first applicant receiving the maximum benefit, and subsequent applicants getting a lesser reduction in the monetary penalty imposed.

Applicant

Requirements

Benefit

1st Applicant

The applicant is the first to make a vital disclosure by submitting evidence of a cartel to the CCI. This evidence should enable the CCI to form a prima facie opinion regarding the cartel’s existence.[vi]

Reduction in penalty of up to or equal to 100% of the penalty imposed by the CCI.

The applicant is the first to make a vital disclosure which establishes the contravention of Section 3 of the Act by a cartel, in a matter which is under investigation by the CCI.[vii]

2nd Applicant

The applicant discloses evidence which provides ‘significant added value’ as per the CCI, to the evidence already in possession of the CCI. [viii]

It is clarified that ‘significant added value’, for the purposes of the LP Regulations, means the extent to which the evidence provided enhances the ability of the CCI to establish the existence of a cartel.[ix]

Reduction of monetary penalty up to or equal to 50% of the penalty imposed.

3rd or subsequent Applicants

The applicant discloses evidence which adds ‘significant added value’ as per the CCI, to the evidence already in possession of the CCI. This information should help in establishing the existence of the cartel.[x]

Reduction of monetary penalty up to or equal to 30% of the penalty imposed.

Lesser Penalty Plus Regime

The LP Regulations provide for the LP Plus regime, in addition to the LP regime. LP Plus regime permits an applicant, who had earlier made a full, true, and vital disclosure regarding the contravention of Section 3 of the Act by a cartel (“First cartel”), makes a full, true, and vital disclosure regarding the existence of another cartel (“Second cartel”) of which it was a part of, and has allegedly violated Section 3 of the Act, is eligible to get reduced monetary penalty.

The reduced monetary penalty for the applicant sharing information about the Second cartel will be two-fold. Firstly, the applicant may be granted an additional reduction in penalty up to or equal to 30% of the penalty imposed as regards the First cartel. Secondly, the applicant may receive the benefit of a reduction in penalty up to or equal to 100% in terms of the Second cartel i.e. the newly disclosed cartel.

Other Features

The LP Regulations provide for the procedure for the grant of either LP or LP Plus. The procedure involves the applicant filing an application with all the requisite details. The details to be included in the application have also been listed in the LP Regulations.[xi] Another key feature of the entire scheme is the identity of the applicant being kept confidential. This includes all information, documents, and evidence furnished by the applicant to the CCI.[xii]

Analysis

The LP Regulations are a positive step for regulating anti-competitive cartels in the economy. It will enable any entity and individual who is facing potential penalties from the CCI, to apply for a lesser penalty. The earlier applicant under this regime gets a greater reduction in monetary penalty as compared to subsequent applicants. Additionally, the confidentiality norms safeguard the identity of the ‘whistle-blower’ during the course of the investigations.

These Regulations also appear to be in line with anti-trust regulations across multiple jurisdictions. To name a few jurisdictions, the Leniency Plus regimes are currently being followed in the United States, United Kingdom, Singapore, and Brazil. The new LP Regulations, which mark a watershed moment in competition regulation in India, would hopefully lead to enhanced enforcement against cartels and anti-competitive agreements, act as a deterrent for possible wrongdoers and increase market transparency by bringing into light previously unknown cartels, which is bound to ensure fair competition in the market.

References:

[i] Available at: https://www.cci.gov.in/images/whatsnew/en/gazzete1708451685.pdf

[ii] Section 33 of the Competition (Amendment) Act, 2023; available at: https://prsindia.org/files/bills_acts/acts_parliament/2023/The%20Competition%20(Amendment)%20Act,%202023.pdf

[iii] The draft CCI (Lesser Penalty) Regulations, 2023; available at: https://www.cci.gov.in/images/stakeholderstopicsconsultations/en/draft-lesser-penalty-regulations1697431514.pdf

[iv] FAQ 4 of the CCI’s FAQs on Lesser Penalty Regime; available at: https://www.cci.gov.in/images/whatsnew/en/faqs-on-cci-lp-regime1708500979.pdf

[v] Regulation 3(1) of the LP Regulations.

[vi] Regulation 4(a) of the LP Regulations.

[vii] Proviso to Regulation 4(a) of the LP Regulations.

[viii] Regulations 4(b) and 4(c)(i) of the LP Regulations.

[ix] Explanation to Regulation 4(b) of the LP Regulations.

[x] Regulations 4(b) and 4(c)(ii) of the LP Regulations.

[xi] Schedule I and Schedule II of the LP Regulations.

[xii] Regulation 8(1) of the LP Regulations.

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The LP Regulations provide for the LP Plus regime, in addition to the LP regime. LP Plus regime permits an applicant, who had earlier made a full, true, and vital disclosure regarding the contravention of Section 3 of the Act by a cartel (“First cartel”), makes a full, true, and vital disclosure regarding the existence of another cartel (“Second cartel”) of which it was a part of, and has allegedly violated Section 3 of the Act, is eligible to get reduced monetary penalty. The reduced monetary penalty for the applicant sharing information about the Second cartel will be two-fold. Firstly, the applicant may be granted an additional reduction in penalty up to or equal to 30% of the penalty imposed as regards the First cartel. Secondly, the applicant may receive the benefit of a reduction in penalty up to or equal to 100% in terms of the Second cartel i.e. the newly disclosed cartel.

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Delving into RBI’s Directions on Government Securities Lending

On December 27, 2023, the Reserve Bank of India (“RBI”) released the RBI (Government Securities Lending) Directions, 2023 (“Directions”) to enable lending and borrowing of government securities and prescribe a framework for the same.[1] Earlier this year, draft directions were made available to the public, seeking comments on the same. Upon consideration of the comments so received, the Directions were finalised. This article delves into the new directive and its accompanying accounting standards, shedding light on the key aspects that are poised to shape the landscape of Government Securities Lending (“GSL”) transactions.

Key Elements of the Directions

A government security is any security created and issued by the government for the purpose of raising a public loan or for any other purpose as may be notified by the government in the official gazette.[2] GSL transactions involve the lending of eligible government securities by the owner (lender) to a borrower for a specified period, with the borrower providing collateral in the form of other government securities. The agreement stipulates that the borrower must return the borrowed security, and the lender would return the collateral at the end of the agreed period based on the terms of a standard bilateral master GSL agreement.[3] The Directions specify eligible securities as any government security issued by the central government.[4] According to the Directions, all GSL transactions can be routed via any mutually agreed trading platform.[5]

In the hope of providing investors with a platform to utilise idle securities efficiently and streamline business processes, the initial leg of the transaction will be settled by the Clearing Corporation of India Limited (“CCIL“)[6] on either a T+0 or T+1 basis.[7] Notably, the RBI’s dynamic directive aims to enhance transparency and efficiency in GSL transactions by valuation based on market prices and allowing for versatile use of borrowed securities, including sale, repo transactions, meeting delivery obligations, and participation in other GSL transactions. The directive also permits collateral substitution with eligible securities, enhancing transparency and efficiency in India’s financial landscape. Aspects of misreporting or multiple reporting of the same OTC market deal by a counterparty are required to be reported to the CCIL. Additionally, aside from prohibiting the party from engaging in any GSL transactions for a period not exceeding one month, the new framework provides for penal or regulatory action for any party violating the prescribed direction.[8]

Accounting Guidelines

The Directions stipulate a set of accounting guidelines that will apply to all GSL transactions. The accounting treatment outlines steps that ensure that the economic essence of the GSL transaction is accurately reflected in the books of both the borrower and the lender, based on the agreed terms of the transaction.[9] For instance, the security lender must maintain the securities lent in its investment account, while the security borrower should not include borrowed securities in its balance sheet during the GSL transaction. In terms of pricing, the first leg shall see lending in market prices and the same prices have to reflect in the second leg, provided it includes a consideration amount for the GSL fee. Additionally,  GSL income or expenditure shall be accounted for on an accrual basis, with outstanding GSL fee balances transferred to the Profit and Loss account; for transactions on the balance sheet date, only accrued income or expenditure is considered, and any remaining amounts are accounted for in the subsequent period.[10] Lastly, In GSL transactions, lenders shall continue accruing interest on lent securities, and borrowers shall do the same on collateral. If the interest payment date occurs within the loan period, borrowers shall promptly pass on the coupon to lenders. This prospective approach ensures a seamless and fair treatment of coupon or discount, enhancing transparency and financial integrity in the process.[11]

Conclusion

The RBI has demonstrated a commitment to swift and impactful regulatory changes, notably enhancing time efficiency and ensuring increased liquidity for investors compared to the draft directions issued earlier in the year. In particular, the centralisation of GSL transactions through the CCIL and the flexibility provided for routing GSL transactions via any mutually agreed trading platform aim to streamline and simplify the GSL process, fostering a more agile and investor-friendly financial environment. The regulatory amendments, coupled with the emphasis on transparent accounting practices and the prospective treatment of coupon or discount, collectively contribute to an auspicious start for GSL transactions in the upcoming year.

References:

[1] Reserve Bank of India (Government Securities Lending) Directions, 2023 which can be found at https://rbidocs.rbi.org.in/rdocs/notification/PDFs/GSLDIRECTIONS0AF9CACC130344C0A261EAD47F277AF0.PDF

[2] Section 2(f) of the Government Securities Act, 2006.

[3] Direction No. 15 of the Reserve Bank of India (Government Securities Lending) Directions, 2023

[4] Direction No. 3 of the Reserve Bank of India (Government Securities Lending) Directions, 2023

[5] Direction No. 6 of the Reserve Bank of India (Government Securities Lending) Directions, 2023

[6] Direction No. 10 of the Reserve Bank of India (Government Securities Lending) Directions, 2023

[7] Direction No. 7 of the Reserve Bank of India (Government Securities Lending) Directions, 2023

[8] Direction No. 16 of the Reserve Bank of India (Government Securities Lending) Directions, 2023

[9] Clause 2, Annex to the Reserve Bank of India (Government Securities Lending) Directions, 2023

[10] Clause 4, Annex to the Reserve Bank of India (Government Securities Lending) Directions, 2023

[11] Clause 5, Annex to the Reserve Bank of India (Government Securities Lending) Directions, 2023

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The RBI has demonstrated a commitment to swift and impactful regulatory changes, notably enhancing time efficiency and ensuring increased liquidity for investors compared to the draft directions issued earlier in the year. In particular, the centralisation of GSL transactions through the CCIL and the flexibility provided for routing GSL transactions via any mutually agreed trading platform aim to streamline and simplify the GSL process, fostering a more agile and investor-friendly financial environment. The regulatory amendments, coupled with the emphasis on transparent accounting practices and the prospective treatment of coupon or discount, collectively contribute to an auspicious start for GSL transactions in the upcoming year.

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Govt Mandates Private Companies to Issue Dematerialised Shares

On October 27, 2023, the Central Government notified the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023, requiring private companies to issue securities only in dematerialised form w.e.f. September 30, 2024. The amendment rules modify Rule 9 and insert Rule 9B, Form PAS-7 and Form PAS-8 in the 2014 rules.

When it comes to unlisted public companies, the Government had mandated the issue of securities in dematerialised form via an amendment to the 2014 rules and the addition of Rule 9A, in the year 2018. In this article, we look at the major changes introduced under the 2023 amendment rules.

Conversion of share warrants

By inserting Rule 9(2), the amendment rules require public companies which have not converted the share warrants issued prior to the commencement of the Companies Act, 2013, into shares, to inform the Registrar about the details of the share warrants in Form PAS-7 (including information such as date of issue, number of shares, name of person, etc.), within 3 months. Such companies should also ensure that the bearers of the warrants surrender them and get the shares dematerialised in their account within 6 months. To bring this requirement to the knowledge of the bearers of share warrants, the said provision mandates companies to display and publish a notice in Form PAS-8 on their websites and in newspapers (in vernacular and English languages), respectively.

In case the warrant bearers fail to surrender the warrants within the stipulated time, it is the company’s responsibility to convert the share warrants into dematerialised shares and transfer them to the Investor Education and Protection Fund.

Private companies to issue securities in dematerialised form

The amendment rules provide for the insertion of a new provision, Rule 9B which deals with the issue of securities by private companies. All private companies, other than small companies, have been mandated to issue securities only in dematerialised form and facilitate the dematerialisation of all its securities. As per Sub-rule (2) of Rule 9B, private companies have to comply with the requirements listed under Rule 9B within 18 months of the closure of the financial year, i.e., by September 30, 2024. A private company, which is a small company per the audited financial statements for such financial year, will not be required to comply with the provisions of Rule 9B. Moreover, Government companies have been excluded from the purview of the rule.

After the said date, private companies referred to in sub-rule (2), before making any offer for issue of any securities, buyback of securities, issue of bonus shares or rights offer, have to ensure that “entire holding of securities of its promoters, directors, key managerial personnel has been dematerialised in accordance with the provisions of the Depositories Act, 1996 (22 of 1996) and regulations made thereunder”.

On or after September 30, 2024, the transfer of securities of private companies by its holder would require the holder to get the securities dematerialised before the transfer. Further, a holder of securities of such private companies would be required to ensure that all his securities are held in dematerialised form before subscribing to any securities of the concerned private company (i.e. if the subscription is made on or after the said date).

The provisions pertaining to the filing of application before a depository, compliance with circulars of SEBI or depository, filing of security holders’ grievances before the Investor Education and Protection Fund Authority, etc. under Rule 9A(4) to (10) would apply “mutatis mutandis” to the dematerialisation of securities under Rule 9B.

Remarks

The amendment rules clearly specify that the provisions regarding the issue of securities in dematerialised form do not apply to small companies. As per a joint reading of Section 2(85) of the Companies Act, 2013, and Rule 2(1)(t) of the Companies (Specification of Definition Details) Rules, 2014, a small company means a company, other than a public company, whose: –

  • Paid-up share capital does not exceed Rs.4 crore; and
  • Turnover as per profit and loss account for the immediately preceding financial year does not exceed Rs.40 crore.

The thresholds for paid-up share capital and turnover were last amended in September 2022. The Act also specifies that the said limits prescribed by the Government should not exceed Rs.10 crore and Rs.100 crore, respectively.

A proviso to Section 2(85) states that the said Section is not applicable to: –

  • Holding or subsidiary company;
  • Company registered under section 8 of the 2013 Act;
  • Body corporate or company governed by any special Act.

It follows that the abovementioned companies will not be treated as small companies even if they fulfil the conditions pertaining to paid-up share capital and turnover, and hence, would be bound by the present notification.

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The amendment rules provide for the insertion of a new provision, Rule 9B which deals with the issue of securities by private companies. All private companies, other than small companies, have been mandated to issue securities only in dematerialised form and facilitate the dematerialisation of all its securities. As per Sub-rule (2) of Rule 9B, private companies have to comply with the requirements listed under Rule 9B within 18 months of the closure of the financial year, i.e., by September 30, 2024. A private company, which is a small company per the audited financial statements for such financial year, will not be required to comply with the provisions of Rule 9B. Moreover, Government companies have been excluded from the purview of the rule.

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LLP Third Amendment Rules, 2023: Key Takeaways

On October 27, 2023, the Central Government notified the Limited Liability Partnership (Third Amendment) Rules, 2023, bringing in major changes pertaining to maintaining a register of partners, providing of declaration disclosing beneficial interest, etc.

The key features of the amendment rules, which came into force on the aforementioned notification date, are as follows: –

LLPs to maintain register of partners

As per the newly inserted provision, Rule 22A, if a Limited Liability Partnership (LLP) is incorporated subsequent to the date on which the amendment rules came into effect, it is required to maintain a register of its partners in Form 4A, from the date of its incorporation. The said register has to be kept at the LLP’s registered office. In case the LLP is already in existence, the LLP has to maintain such a register within 30 days of commencement of the amendment rules. The register of partners would have particulars including personal details of the partners (such as name, Corporate Identification Number, etc.), information regarding assets and other forms of contribution, and beneficial ownership, along with other necessary details.

When it comes to companies, such a requirement is already in place; a register of members has to be maintained by every company, as per Section 88 of the Companies Act, 2013, in the prescribed manner.

Declaration regarding beneficial interest

If a person with no beneficial interest in contribution is named in the register of partners, he has to furnish details of the person who actually holds the beneficial interest, in the form of a declaration in Form 4B, under Rule 22B. This declaration should be filed with the LLP within 30 days from the date on which his name was entered in the register. In the amendment rules, such persons are referred to as registered partners.

Sub-rule (2) of the said rule casts an obligation on persons whose names are not entered in the register but who hold or acquire a beneficial interest in contribution of the LLP, to disclose the beneficial interest vide declaration in Form 4C. The same has to be filed by such beneficial partners with the LLP within 30 days of acquiring the beneficial interest.

The abovementioned requirements to make declarations in respect of beneficial interest are similar to the ones applicable to companies under Section 89 of the Companies Act, 2013; if a person with no beneficial interest in the shares of a company has been named in the register of members of the company as the holder of shares, he is obligated to make a declaration in the prescribed manner. A person who holds or acquires a beneficial interest in the shares is also required to make a declaration to such a company.

Recording of declaration in the register of partners

When an LLP receives a declaration in Form 4B or Form 4C, the same has to be recorded in the register of partners. Further, the LLP has to file a return in Form 4D with the Registrar of Companies in this regard. The return has to be filed within 30 days from the date of receipt of the declaration.

This provision mirrors Section 89(6) of the Companies Act, 2013, as per which companies have to file a return with the Registrar in respect of the declaration received.

Appointment of designated partner

Under Rule 22B(4), an LLP is mandated to specify a designated partner for sharing information regarding beneficial interest in contribution, with the Registrar or any other authorised officer. The LLP would have to provide details of such a designated person in Form 4.

On a similar line, the Ministry of Corporate Affairs notified amendments to the Companies (Management and Administration) Rules, 2014, on the same day, i.e. October 27, 2023, making it mandatory for every company to designate a person for cooperating with and providing information to the Registrar (or any other authorised officer), with respect to beneficial interest in the shares of the company. The details of such a designated person have to be furnished by the company in its annual return.

Takeaways

As mentioned earlier, the Companies Act, 2013, requires every person who holds or acquires a beneficial interest in the share of a company to make a declaration in this regard. And now, the beneficial partners are mandated to file a declaration with the LLP, disclosing the beneficial interest, on par with the company form of entities. This will enable the Government of India to understand beneficial owners whose names may not always appear through direct investments.

On comparison of the provisions applicable to LLPs and companies, one can deduce that while the Companies Act, 2013, imposes punishment in the form of fines for failure in maintaining the register of members, making the declaration in respect of beneficial interest, or filing of return in respect of the declaration received by the company, the present notification makes no reference to the consequences of non-compliance with the amendment rules. However, in case of such non-compliance, Section 74 of the Limited Liability Partnership Act, 2008, would apply. The said Section specifies that if no penalty is provided for the contravention of any of the provisions of the Act or rules made thereunder, the penalty applicable to the LLP, partner, designated partner, or any other person who is in the default, would be as follows: –

  • a penalty of five thousand rupees.
  • in case of a continuing contravention, a further penalty of one hundred rupees for each day after the first during which such contravention continues, subject to a maximum of one lakh rupees.

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Under Rule 22B(4), an LLP is mandated to specify a designated partner for sharing information regarding beneficial interest in contribution, with the Registrar or any other authorised officer. The LLP would have to provide details of such a designated person in Form 4. On a similar line, the Ministry of Corporate Affairs notified amendments to the Companies (Management and Administration) Rules, 2014, on the same day, i.e. October 27, 2023, making it mandatory for every company to designate a person for cooperating with and providing information to the Registrar (or any other authorised officer), with respect to beneficial interest in the shares of the company. The details of such a designated person have to be furnished by the company in its annual return.

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MCA Eases Shifting of Registered Office for New Management

The Ministry of Corporate Affairs has notified the Companies (Incorporation) Third Amendment Rules, 2023 specifying that the shifting of the company’s registered office from one State to another may be allowed in case a new management has taken over the company under a resolution plan approved by the adjudicating authority under Section 31 of the Insolvency and Bankruptcy Code, 2016. The amendment rules have come into operation w.e.f. October 21, 2023.

As per provisions of the Companies Act, 2013, the shifting of the registered office from one State to another requires the passing of a special resolution and adherence to Section 13 of the Act. The said Section specifies that such change in the memorandum will have to be duly approved by the Central Government. To facilitate the same, Rule 30 of the Companies (Incorporation) Rules, 2014, elaborates on the procedure to be followed for obtaining the approval.

Overview of Procedure

Rule 30 provides that the application for the Central Government’s approval has to be made in Form No.INC-23. Further, the prescribed fee has to be paid and the application has to be filed along with the requisite documents including copies of the MOA, minutes of the general meeting (where the resolution on the memorandum’s alteration was passed), and the Board Resolution or POA or Vakalatnama. The 2014 rules also envisage the submission of affidavits, advertising the application in Form No.INC-26 (in vernacular and English newspapers), and serving of notices to creditors and debenture-holders (and if the company is listed, to the Registrar and SEBI, and if it is regulated under any special Act or law, then to the concerned regulatory body). If no objection is received to the advertisement or notices, no hearing will be held and the Central Government will directly proceed with issuing an order, either approving the memorandum’s alteration or rejecting it. In case any objection is received, a hearing will be held and based on the company’s affidavit recording the consensus of the parties or the manner in which the objection would be resolved, the Central Government will pass an appropriate order.

After the Central Government passes the order approving the memorandum’s alteration, a certified copy of the same has to be filed in Form No.INC-28 along with the necessary fee, before the Registrar of the State (under Rule 31). The provisions of the 2013 Act mention that such a copy must be filed with the Registrar of both the States and “the Registrar of the State where the registered office is being shifted to, shall issue a fresh certificate of incorporation indicating the alteration”.

Sub-rule (9) of Rule 30 empowers the Central Government to lay down terms and conditions while approving the application for alteration if required. However, the proviso to said sub-rule states that the shifting of registered office from one State to another will not be permitted if any inquiry, inspection, or investigation has been initiated against the company or any prosecution is pending against the company under the Act.

Changes under the Amendment Rules

The amendment to sub-rule (9) of Rule 30 provides that the shifting of the registered office may be allowed in case a new management has taken over the company under a resolution plan approved by the adjudicating authority under Section 31 of the 2016 Code. However, the same is subject to the following conditions: –

  • no appeal against the resolution plan is pending in any Court or Tribunal; and
  • no inquiry, inspection, or investigation is pending or initiated after the approval of the said resolution plan.

A joint reading of the provisos leads one to the following conclusions: –

  • The Central Government confirming the alteration shall no further have the right to order costs to approve the shifting of the registered office from one State to another.
  • The Central Government shall not allow shifting of the registered office from one State to another in case the management of the company has been taken over by new management under a resolution plan approved under section 31 of the Code, when: –
  1. appeal against the resolution plan is pending in any Court or Tribunal; or
  2. inquiry, inspection, or investigation is pending; or
  3. inquiry, inspection, or investigation is initiated after the approval of the said resolution plan.
  • The words “under the Act” have been used under the first proviso to sub-rule (9) of Rule 30 which pertains to the inquiry, inspection, or investigation under the Companies Act. However, the second proviso of sub-rule (9) to Rule 30 does not contain the words “under the Act / under the Code”, which causes ambiguity.

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The amendment to sub-rule (9) of Rule 30 provides that the shifting of the registered office may be allowed in case a new management has taken over the company under a resolution plan approved by the adjudicating authority under Section 31 of the 2016 Code. However, the same is subject to the following conditions: –

  • no appeal against the resolution plan is pending in any Court or Tribunal; and
  • no inquiry, inspection, or investigation is pending or initiated after the approval of the said resolution plan.

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Reasons For Failure Of Mergers & Acquisitions Deal

Mergers and Acquisitions are vital tools of business strategy to facilitate organizational and economic growth of a business. The terms are often used inter-changeably, however both offer different legal implications. Mergers mean the unification of two players into a single entity, while acquisitions are situations where one player buys out the other to combine the bought entity with itself[1]. Mergers can take place in the form of a purchase in which one business buys another, or they can be a management buyout, in which the business is bought by the management from the owner.

With reference to the legal process of initiating an M&A strategy, the businesses are required to undergo a long drawn and tedious process of sanctioning the initiation of the M&A process by the High Court. At different stages various provisions of the Companies Act, 2013 have to be complied with. Further, the involvement of the central government through the appointment of an Official Liquidator (OL) or the Regional Director of the Ministry of Company Affairs also has to be dealt with. All of the compliances should be carried out to the satisfaction of the Court, resulting in unavoidable delays that may sometimes render the M&A irrelevant or detrimental to the business by the time it is concluded.

However, the serpentine legal process is not the only factor that contributes to an unfavorable M&A. This article aims to analyze the various reasons that add to the failure of M&A deals and enable businesses to mitigate the related risks in the future.

Analysis and Reasons for Failed M&A Deals

Mergers and acquisitions gained significant popularity after 2015. Nearly 3,600 deals worth more than $310 billion were associated with mergers and acquisitions. [2] They are lengthy and complex processes, so a lot can go wrong when negotiating a deal. As per a recent article by Harvard business review, nearly 70% to 90% of the mergers and acquisition deals were deemed to be a failure.[3]

Regulatory issues

Adhering to the legal mandates of the relevant jurisdiction is necessary. There is a chance that the shareholders of an organization may cause legal difficulties by dissenting from the approval of the mergers or by disagreeing with the business’s decision to merge. This would significantly slow down the functioning of the company, forcing it to pay appraisals to the shareholders as a remedy.

Example: HDFC and Max Life Merger Deal:

HDFC Life and Max Life had announced their merger plans in August 2016 through a three-step merger process, under which Max Life would first merge with its parent company Max Financial Services, and subsequently the life insurance business would be demerged from Max Financial and would be merged into HDFC Life. This merger transaction would have led to the automatic listing of HDFC Life through a reverse merger process and would enable HDFC Life to hold a majority stake in the combined entity. The Insurance Regulatory and Development Authority of India (IRDA) denied permission for the proposed merger of Max Life Insurance Co. Ltd and HDFC Standard Life Insurance Co. Ltd (HDFC Life), and observed that the structure of the deal violates Section 35 of the Insurance Act, 1938, which barred the merger of an insurance company with a non-insurance firm.[4]

Mistakes in Negotiation and Overrated Synergies

In various mergers and acquisitions, there are cases of overpayment for the purpose of breach of agreement. Acquiring a company based on money without knowing the working format, procedure, structure of the company and going through the due diligence process will lead to a failed merger.

Mergers and acquisitions are considered significant tools for increasing revenue, reducing net working capital, and improving venture power. Overvalued synergies go hand in hand with transfer overpayment. Overvaluation of exchange synergies is often the initial stage of overpayment. While the prospect of numerous costs remaining largely equivalent between the two combined organizations is attractive, it is also decidedly harder to achieve in practice than most directors admit. Also, energy cooperative income is no less confusing. M&A practitioners would therefore be encouraged to look at the expected cooperation from the exchange through a deeply traditionalist contact point.

Lack of Due Diligence

The importance of due diligence can never be emphasized enough. One of the main problems that arise during the process is that the acquirer depends on the target company to provide information that is not always suitable for their management. This creates obvious problems with agency.

Example: Daimler-Benz and Chrysler Group

In 1998, German automaker Daimler Benz merged with Chrysler Group for $36 billion. This was seen as a win-win situation for both companies as it was essentially a merger between equals. However, after a few years, Chrysler’s value dropped to just $7.4 billion. The merger proved unsuccessful. Many reasons contributed to this, but all experts agree that Daimler Benz never did  proper due diligence before merging with Chrysler. In other words, it overestimated the value of the target company, which led to the failed merger.

Hence, even though an M&A deal may seem lucrative on paper, it is essential for the respective businesses to carry out thorough due diligence and research on predicted profitability trends and projected growth patterns of the proposed merger or acquisition.

Deficiency in Strategic Plan

A good “why” is an essential part of all successful M&A transactions. This means that without a good motive for the transaction, it is doomed from the start.

The academic M&A literature is replete with studies of managers engaged in “empire building” through M&A and research on how hubris is a common trend in M&A.

Difficulty with Integration and Swap Ratio Differences

Integration difficulties that are mostly faced by companies when a new company has to follow or accept a new set of challenges and regulations to position itself in the market. It is very difficult for society to adapt to new conditions. Various plans are created in the form of strategies to help the company adapt to the new environment. This integration sometimes becomes the reason for the failure of the merger due to insufficient effort and imprecise planning.

Example: IDFC Group and Shriram Group deal:

IDFC Group and Shriram Group called off their talks of a merger after failing to agree on a swap ratio. A swap ratio is the ratio at which the acquiring company offers its shares in exchange for the target company’s shares during a merger or acquisition.

The two parties had, on July 8, 2019, entered into a 90-day agreement to evaluate a strategic combination of their relevant financial services. Shriram Employee Trust, Piramal Group and Sanlam Group were set to become the largest shareholders in IDFC and drive the business, but the deal would have hurt the government, which owned a 16.38 per cent stake in IDFC. So due to the difficulty in integration and swap ratio differences this deal was called off. This was the reason for the failure of this deal.[5]

Lack of Involvement of Top Management:

Management involvement is a catch-all answer that also includes many of the abovementioned reasons within its ambit. 

No phase of the M&A process can successfully sustain itself without proper involvement of the management, from the search for a suitable target company to the integration of both companies into a newly created entity.

When managers consider other tasks in their company more important than successful M&A implementation, they should not be surprised when their business is ultimately considered a failure.

Lack of Adequate Communication

Proper communication is one of the most important features of any agreement or contract. If the purpose of closing the deal is unclear, the intent of the buyers and sellers is also unclear, then communication is poor. If there is a lack of synergy and the buyer and seller are unable to articulate the desired results, this is a sign of poor communication. Not only that, but poor communication can also include a lack of communication between key managers and employees. Whenever a company enters into a merger or acquisition, there should be an honest and clear disclosure of the motive and intent. All doubts should be clarified at the initial stage. All levels of society should be given the opportunity to have their say. Messages should be interpreted in a general sense and according to common sense.

Culture Mismatch

Culture mismatch is another significant factor that causes merger failures. If companies have different cultural aspects, then there is a chance of low employee productivity, which leads to lower profits. Culture includes the willingness of employees to collaborate, share, support and team together with a single motive. Company culture is shaped by company founders, but it was also influenced by company managers and employees.

Example: Facebook and WhatsApp

Facebook bought messaging platform “WhatsApp” in 2014 for $22 billion. However, companies quickly realized that the corporate cultures were clashing. There are some memorable articles about table size and toilet stall arguments, but there have been discrepancies in values. WhatsApp famously valued the privacy of its customers and employees (no wonder they had a problem with short toilet boxes), while Facebook had more of an “open door” policy when it came to privacy. Since WhatsApp had committed to using a no ads and no encryption policy for the app its customers, it was clearly not a match that would have succeeded and the founders of WhatsApp eventually left Facebook.

Therefore, while considering an M&A it is not only important to ascertain the collective vision and objectives of the businesses, but also to make sure that the culture, policies and values of the businesses stay in alignment going forward.

Human Resource Issues

Human resource issues also pose a threat to the merger. There is insecurity as people tend to leave their jobs due to sudden changes in the course of work or because of cultural or identity issues. There are many human resource related issues even in the pre-combination stage such as the acquisition of key talent etc. as those could be the major concern for the companies for acquisitions. Another critical HR issue is the selection of a leader who will actually manage the new business combination for smooth business operations. These issues may lead to a lack of direction and the postponement of major business decisions. Companies should put their best people in charge of implementing M&A deals, and seek union and community involvement to avoid the risk of deal failure.

Geographic Restrictions

Geographical barriers cannot be overlooked. These play an important role when it comes to cross-border mergers. In general, when a cross-border merger occurs, a two-layer articulation is needed due to the merger of two different companies into different countries with a different set of rules and regulations prevailing in the respective countries.

Other External Factors

External factors may include market position, competition, financing situation, and credit in the company’s lending. If all these things are against the company, there is a chance for the merger to fail.

                                                                          Source: PWC Report[6]

The Way Forward

It is expected that mergers and acquisitions will exceed $105 billion, breaking the record for the largest transactions. [7]  High-rated deals like Reliance Industries’ (RIL) potential $10 billion (Rs 76,000 crore) acquisition of European drug chain Walgreens Boots; the Adani and JSW groups, bidding for Ambuja Cements, and the HDFC twin merger are the leading big mergers and acquisitions (M&A) deals. Consolidation of all the market players has been a major driving force behind the M&A transactions. Tech Mahindra and Infosys focused on exiting entities, while Byju’s acquired Aakash Education, White Hat Junior and Topper Technologies.

According to the 2022 M&A report, despite the ongoing challenge posed by the Covid-19 pandemic and geopolitical tensions in South Asia, the market is showing strong signs of recovery. M&A volumes hit an all-time high in 2021 with more than 80 deals worth more than $75 million. The increase in investment can be partly attributed to Indian government policies such as the productivity-linked incentive program introduced under the Ease of Doing Business initiative. [8]

Thanks to the great interest of foreign buyers, the Indian market for mergers and acquisitions also did well (the US accounted for 35 percent of invested dollars). India’s economy is set for strong growth in 2022 – The IMF has forecast GDP growth of 8.2 percent in 2022, making it the fastest growing major economy and double the expected growth rate of China.

With a total of 174 deals in Q1 2022 (up 28% year-on-year), the stage is set for India’s M&A market to witness strong technology-driven performance. This would make the M&A management process more efficient and powerful. For example, sellers are seeing in real-time how artificial intelligence and machine learning are automating many of the time-consuming parts of M&A—from preparation and marketing to due diligence on both the sell-side and the buy-side. [9]

According to Data site, a leading provider of SaaS technologies to the M&A industry worldwide, deal activity from January to May 2022 shows that companies continue to invest in technology acquisitions as they undertake digital transformations accelerated by Covid-19. Trading on the Datasite platform shows that new global TMT projects rose 18 percent worldwide in the first quarter.

The median time to open and close a new deal or asset sale or merger at Data site increased five percent year-over-year this year, while deal preparation time is also increasing, up 31 percent over the same period. This means that many vendors are “ready” but have not yet launched their projects. [10]

                                                                            Source: VCC Edge[11]

If handled properly, mergers and acquisitions can be a powerful means of propelling a business to greater profitability. Businesses should be cognizant of the abovementioned factors discussed before taking the M&A leap, to ensure sustainable and stable growth projections for their future.

References:

[1] https://www.mca.gov.in/MinistryV2/mergers+and+acquisitions.html

[2]https://tradebrains.in/biggest-mergers-acquisition-india/

[3] https://hbr.org/2020/03/dont-make-this-common-ma-mistake

[4] https://www.livemint.com/Companies/CBGIbJmiwVHYNeSiSQyT8O/Irdai-denies-permission-to-proposed-Max-HDFC-Life-Insurance.html

[5] https://www.thehindubusinessline.com/money-and-banking/idfc-shriram-12-b-merger-called-off-on-differences-over-swap-ratio/article64285553.ece

[6] https://www.pwc.in/assets/pdfs/services/deals/deals-in-india-annual-review-and-outlook-for-2022.pdf

[7] https://www.business-standard.com/article/companies/blockbuster-m-as-keep-india-s-deal-street-buzzing-despite-market-volatility-122042801482_1.html

[8] https://economictimes.indiatimes.com/magazines/panache/with-174-total-deals-in-q1-2022-indian-ma-market-set-to-witness-strong-performance-reveals-datasite/articleshow/92864647.cms

[9] https://economictimes.indiatimes.com/magazines/panache/with-174-total-deals-in-q1-2022-indian-ma-market-set-to-witness-strong-performance-reveals-datasite/articleshow/92864647.cms

[10][10] https://economictimes.indiatimes.com/magazines/panache/with-174-total-deals-in-q1-2022-indian-ma-market-set-to-witness-strong-performance-reveals-datasite/articleshow/92864647.cms

[11] https://www.vccedge.com/

It can be fairly concluded that mergers and acquisitions are powerful means to propel a business to greater profitability, if dealt with properly. Businesses should be cognizant of the abovementioned factors discussed before taking the M&A leap, to ensure a sustainable and stable growth projections for their future.

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Inter-Se Priority Among Secured Creditors in Liquidation - A Judicial Dichotomy  

The Insolvency and Bankruptcy Code, 2016 (“IBC”/”Code”) came into force on 28th May, 2016 with the primary objective of consolidating and amending the laws of reorganisation and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner to maximise the value of their assets. The Code has been evolving over the last six years, with changing scenarios and adapting to practical circumstances along the way. As a result, the Code has undergone amendments from time to time. The provisions in the Code have also been interpreted and clarified by judicial pronouncements of the Hon’ble NCLTs, the Hon’ble NCLAT and the Hon’ble Supreme Court of India. The law relating to the Code is still emerging and there are a number of issues which are still required to be addressed with unambiguous certainty. One such issue is the distribution of proceeds in liquidation from the sale of assets under Section 53 of the Code to the secured creditors vis-à-vis the validity of inter se priority among secured creditors in respect of their security interests (charges) during liquidation.

What is the meaning of “Charge” and “Inter se Priority”?

Section 3(4) of the Code defines the term “charge” as an interest or lien created on the property or assets of any person or any of its undertakings or both, as the case may be, as security and includes a mortgage.

Several charges can be created in respect of a particular asset. This can be done by way of creating a pari passu charge over the asset where all the charge holders are placed on an equal footing or by way of the creation of a first charge and a subservient charge wherein the first charge holder can satisfy its debts in entirety prior to the subservient charge holders. This principle is embodied in Section 48 of the Transfer of Property Act, 1882. However, under Section 52 of the Code, a secured creditor has two options to realise its debts from secured assets held by it relating to a corporate debtor in liquidation:

Although the Code does not specifically indicate the validity of inter-se-priority of charges at the time of distribution in accordance with the waterfall mechanism provided under Section 53, the issue has been deliberated and decided upon by the Hon’ble NCLTs, Hon’ble NCLAT and Hon’ble Supreme Court of India in recent times, through judicial interpretation.

Pre-IBC Regime: Legal Position under the Companies Act, 1956

Under the earlier Companies Act, 1956, Sections 529 and 529A governed the ranking of creditors’ claims and the distribution of sale proceeds by the Official Liquidator in respect of a corporate debtor in liquidation.

The legal position vis-à-vis inter-se-priority of charges in the pre-IBC regime was discussed at length by the Hon’ble Supreme Court of India in the case of ICICI Bank vs Sidco Leathers Ltd. [Appeal (Civil) 2332 of 2006, decided on April 28, 2006]. In the said case, the Hon’ble Apex Court, while interpreting Sections 529 and 529A of the Companies Act, 1956, observed that even though workmen’s dues and secured creditors’ debts are treated pari passu, this does not negate inter se priorities between secured creditors. The Hon’ble Court stated that since the Companies Act of 1956 is a special statute which contains no provisions regarding inter se priority among secured creditors, the specific provisions set forth in the Transfer of Property Act, 1882 shall prevail. The Hon’ble Court further held that if Parliament, while amending the provisions of the Companies Act, 1956, intended to take away secured creditors’ entitlement to property, it would have stated so expressly. The Hon’ble Court, while deciding the issue, observed the following:

“Section 529A of the Companies Act does not ex facie contain a provision (on the aspect of priority) amongst the secured creditors and, hence, it would not be proper to read therein to things, which the Parliament did not comprehend. The subject of mortgage, apart from having been dealt with under the common law, is governed by the provisions of the Transfer of Property Act. It is also governed by the terms of the contract.”

“Merely because section 529 does not specifically provide for the rights of priorities over the mortgaged assets, that, in our opinion, would not mean that the provisions of section 48 of the Transfer of Property Act in relation to a company, which has undergone liquidation, shall stand obliterated.”

From the aforesaid, it is evident that the Hon’ble Apex Court upheld the validity of the Transfer of Property Act, 1882, which is a general law, over the provisions of the Companies Act, 1956, which is a special law and which did not recognise the concept of inter-se priority of charges.

 

Post-IBC Regime: Legal Position under the Code and the Report of the Insolvency Law Committee 2018

 

Report of the Insolvency Law Committee dated March 26, 2018

In the Report of the Insolvency Law Committee (ILC) dated March 26, 2018, it was noted that inter-creditor agreements should be respected. The ILC relied on the judgement of the Hon’ble Supreme Court in the case of ICICI Bank vs. Sidco Leathers Ltd. and came to the conclusion that the principles that emerged from the said case are also applicable to the issue under section 53 of the Code. The ILC in its report stated that Section 53(1)(b) of the Code only kept the workmen and secured creditors, on an equal pedestal and no observations were made on the inter-se priority agreements between the secured creditors and the same would therefore remain valid. The Report further clarified that the provision of Section 53(2) would come into effect only in cases where any contractual arrangement interferes with the pari passu arrangement between the workmen and secured creditors which means that contracts entered into between secured creditors would continue to remain valid.

 

Judicial Interpretation in recent times

Section 53 of the Code lays down the waterfall mechanism with respect to payment of debts to the creditors of the corporate debtor. The workmen’s dues and the debts of secured creditors rank pari passu under Section 53. However, the Code does not expressly provide for the preservation of inter-se-priorities between secured creditors at the time of distribution of sale proceeds realised by the liquidator by the sale of assets. The issue is to be understood and interpreted in the light of recent judicial decisions. Some of the recent judgments which have dealt with the issue are:

 

Technology Development Board vs Mr. Anil Goel & Ors. [I.A No. 514 of 2019 in CP(IB) No. 04 of 2017 decided on 27th February, 2020 by the Hon’ble NCLT, Ahmedabad]

In the instant case, the liquidator had distributed proceeds from the sale of assets to the first charge holders, in priority to the applicant who was a second charge holder without considering the claim of the applicant as a secured creditor that such distribution ought to have been made prorate among all secured creditors. It is pertinent to mention here that all the secured creditors had relinquished their security interests in the common pool of the liquidation estate. The Applicant was one of the secured financial creditors of the Corporate Debtor having a 14.54% voting share in the CoC of the Corporate Debtor.

Aggrieved by such distribution which recognised inter-se-priority among secured creditors, the Applicant moved the Hon’ble NCLT, Ahmedabad Bench.

The issue to be determined:

The primary issue that was to be decided by the Hon’ble NCLT was that once a secured creditor has not realised his security under Section 52 of the Code, and has relinquished the security to the liquidation estate, whether there remains no classification inter se i.e., by joining liquidation, all the secured creditors are ranked equal (pari passu), irrespective of the fact that they have inter-se-priority in security charge.

Observations of the Hon’ble NCLT

The Hon’ble NCLT while deciding the aforesaid issue held:

  • It is a settled position that when a charge is created on a property in respect of which there is already a charge, it cannot be said that the creation of the second charge on the property should have been objected to by the first charge holder as an existing and registered charge is deemed to be a public notice.
  • Emphasis was placed on Section 53(2) of the Code, which provides that any contractual arrangements between recipients under sub-section(1) with equal ranking, shall be disregarded by the liquidator if it disrupts the order of priority under that sub-section. In other words, if there are security interests of equal ranking, and the parties have entered into a contract in which one is supposed to be paid in priority to the other, such a contract will not be honoured in liquidation.
  • The whole stance in liquidation proceedings is to ensure parity and proportionality. However, the idea of proportionality is only as far as claims of similar ranking are concerned.

Decision:

The Hon’ble NCLT, relying on the judgement of the Hon’ble Supreme Court of India passed in ICICI Bank vs. Sidco Leathers Ltd., held that inter se priorities among creditors remain valid and prevail in the distribution of assets in liquidation.

 

Technology Development Board vs Mr. Anil Goel & Ors. [Company Appeal (AT) (Insolvency) No.731 of 2020 decided on 5th April, 2021 by the Hon’ble NCLAT, Principal Bench, New Delhi]

The issue to be determined:

Aggrieved by the aforesaid order dated 27th February 2020 passed by the Hon’ble NCLT, Ahmedabad, an appeal was preferred by the Applicant before the Hon’ble NCLAT wherein the issue raised for consideration was whether there could be no sub-classification among the secured creditors in the distribution mechanism adopted in a Resolution Plan of the Corporate Debtor as according to priority to the first charge holder would leave nothing to satisfy the claim of the Appellant who too is a secured creditor.

Observations of the Hon’ble NCLAT

The Hon’ble NCLT while deciding the issue took note of Sections 52 and 53 of the Code and held:

  • Section 52(2) of the Code stipulates that a secured creditor, in the event it chooses to realise its security interest, shall inform the liquidator of such security interest and identify the asset subject to such security interest to be realised. The liquidator’s duty is to verify such security interest and permit the secured creditor to realise only such security interest, the existence of which is proved in the prescribed manner. It is abundantly clear that there is a direct link between the realisation of a security interest and the asset subject to such security interest to be realised.
  • Section 53 deals with distribution of assets by providing that the proceeds from the sale of the liquidation assets shall be distributed in the order of priority laid down in the section. The provision engrafted in Section 53 has an overriding effect over all other laws in force.
  • The essential difference between the two provisions i.e Sections 52 and 53, lies with regard to the realisation of interest. While Section 52 provides an option to the secured creditor to either relinquish its security interest or realise the same, Section 53 is confined to the mode of distribution of proceeds from the sale of the liquidation assets.
  • Whether the secured creditor holds the first charge or the second charge is material only if the secured creditor elects to realise its security interest.
  • A secured creditor who once relinquishes its security interest ranks higher in the waterfall mechanism provided under Section 53 as compared to a secured creditor who enforces its security interest but fails to realise its claim in full and ranks lower in Section 53 for the unpaid part of the claim.
  • Section 52 incorporating the doctrine of election, read in juxtaposition with Section 53 providing for distribution of assets, treats a secured creditor relinquishing its security interest to the liquidation estate differently from a secured creditor who opts to realise its security interest, so far as any amount remains unpaid following enforcement of security interest to a secured creditor is concerned by relegating it to a position low in priority.
  • The non-obstante clause contained in Section 53 makes it clear that the distribution mechanism provided thereunder applies in disregard of any provision to the contrary contained in any Central or State law in force.
  • A first charge holder will have priority in realising its security interest provided it elects to realise and not relinquish the same. However, once a secured creditor opts to relinquish its security interest, the distribution would be in accordance with the Section 53(1)(b)(ii) wherein all secured creditors have relinquished their security interest.

Decision

It was held by the Hon’ble NCLAT that the view taken by the Adjudicating Authority on the basis of the judgement passed by the Hon’ble Apex Court in ICICI Bank vs. Sidco Leathers Ltd. and ignoring the mandate of Section 53, which has an overriding effect and was enacted subsequent to the aforesaid judgment, is erroneous and cannot be supported. The Hon’ble NCLAT therefore held that the order of the Adjudicating Authority holding that the inter-se priorities amongst the secured creditors will remain valid and prevail in the distribution of assets in liquidation cannot be sustained and the liquidator was directed to treat the secured creditors relinquishing the security interest as one class ranking equally for distribution of assets under Section 53(1)(b)(ii) of the Code and distribute the proceeds in accordance therewith.

 

Kotak Mahindra Bank Limited vs Technology Development Board & Ors. [Civil Appeal Diary No(s). 11060/2021]

The aforesaid order passed by the Hon’ble NCLAT has been further challenged before the Hon’ble Supreme Court of India. The appeal is currently pending adjudication, but the Apex Court has stayed the operation of the impugned order dated 5th April passed by the Hon’ble NCLAT, by order dated 29th June, 2021 . The appeal has been last heard on April 29, 2022, wherein an order has been passed to list the matter after eight weeks. It would be interesting to see whether the Apex Court upholds the order of the Hon’ble NCLAT and disregards the inter se priority among creditors at the time of distribution of sale proceeds under Section 53 of the Code or upholds the validity of the same.

 

Oriental Bank of Commerce (now Punjab National Bank) vs Anil Anchalia & Anr. [Comp. App. (AT)(Ins) No. 547 of 2022 decided on 26th May, 2022 by the Hon’ble NCLAT]

  • In the instant case, the appellant, who was the first and exclusive charge holder with respect to the assets of the corporate debtor, had relinquished its security interest in the liquidation estate. The liquidator, however, distributed the sale proceeds on a pro rata basis under Section 53 of the Code. Being aggrieved by the said distribution, the Appellant filed an application [IA (IBC)/101(KB)2022] before the Hon’ble NCLT, Kolkata, which was rejected by an order dated March 4, 2022. Aggrieved by the same, the appellant preferred an appeal before the Hon’ble NCLAT.
  • One of the contentions raised by the Appellant in the instant case was that the order of the Hon’ble NCLAT in the case of Technology Development Board vs. Mr. Anil Goel & Ors. that secured creditors after having relinquished their security interest could not claim any amount realised from secured assets once they elected for relinquishment of security interest, and that they would be governed by the waterfall mechanism under Section 53 has been stayed by the Hon’ble Supreme Court of India and therefore the Appellant is entitled to receive the entire amount realised from its secured assets.
  • The Hon’ble NCLAT rejected the aforesaid contention and observed that in the light of the judgement passed by the Hon’ble Supreme Court in “India Resurgence ARC Private Limited vs. Amit Metaliks Limited and Anr. [2021 SC OnLine SC 409] and “Indian Bank vs. Charu Desai, Erstwhile Resolution Professional & Chairman of Monitoring Committee of GB Global Ltd. & Anr.[CA(AT)No. 644 of 2021] the issue is no more res integra. In the aforesaid two cases, a similar contention was raised by the Appellants that the dissenting financial creditors are entitled to receive payment as per their secured interest, wherein it was decided that “when the extent of value received by the creditors under Section 53 is given which is in the same proportion and percentage as provided to the other Financial Creditors, the challenge is to be repelled”.
  • Since the issue is no more res integra and has been decided in the case of India Resurgence ARC Private Limited vs. Amit Metaliks Limited and Anr. by the Hon’ble Apex Court by its judgment dated 13.05.2021, the instant appeal was also dismissed.

 

Conclusion

 

Section 52 of the Code gives each secured creditor the option of relinquishing their right to the liquidation estate or realising their security interest on its own, subject to the Code’s requirements.

It can be possibly interpreted that once the secured creditor has relinquished its security interest in the liquidation estate, such a secured creditor exercises its option in favour of losing its priority rights over assets charged to it and joins the liquidation pool wherein the secured creditor is paid from the proceeds of the liquidation estate in accordance with Section 53 of the Code. The Code has provided the option to a secured creditor to enforce its first and exclusive charge by taking recourse to Section 52, whereby in the event it is unable to realise its entire dues, it would be ranked lower under Section 53 for realisation of the balance amount. A secured creditor cannot enjoy the fruits of both the provisions under Sections 52 and 53 of the Code at the same time. Once the secured creditor relinquishes its security interest to the common pool of the liquidation estate, it will be treated at par with all other creditors.

It can also be argued that the NCLAT has ignored the legislative intent clarified in the Insolvency Law Committee Report which after considering the decision of the Hon’ble Supreme Court in ICICI Bank vs Sidco Leathers Ltd. applied its principles to the issue under Section 53 of the Code and recommended that inter-se-priority among creditors was not disturbed by Section 53. Section 53 does not deal with inter-se-rights amongst creditors. It merely deals with the distribution of proceeds arising from the sale of assets to various stakeholders. The non-obstante clause in Section 53 would apply to scenarios where the provisions of the section are contrary to any law. Section 53(1)(b) merely mandates that workmen’s dues and debts owed to a secured creditor, in the event such secured creditor has relinquished security in the manner set out in Section 52, shall rank equally and nothing more. The said section does not deal with mortgages or inter-se-priorities amongst creditors/mortgagees. Mortgages are governed by the provisions of the Transfer of Property Act, 1882 and as such inter-se-priorities between mortgagees have been dealt with in that Act. Therefore, there may not be any justification for excluding the applicability of the provisions of the Transfer of Property Act, 1882 relating to mortgages for payment of dues to creditors under Section 53. The absurd result of not providing inter-se-priority to creditors at the time of distribution of sale proceeds under Section 53 would be that every secured creditor holding the first charge on assets would encourage liquidation and realise its dues by selling assets itself by opting to not relinquish the assets to the liquidation pool under Section 52. The chance of selling the corporate debtor as a going concern would then absolutely be eradicated, which would be contrary to the object and spirit of the Code.

It is expected that the Supreme Court will finally rest the issue while deciding the appeal in the case of Kotak Mahindra Bank Limited vs Technology Development Board & Ors. [Civil Appeal Diary No(s). 11060/2021 which is scheduled to appear for a hearing later this month.

Image Credits: Photo by Dennis Maliepaard on Unsplash

Section 53 does not deal with inter – se – rights amongst creditors. It merely deals with the distribution of proceeds arising out of sale of assets to various stakeholders. The non – obstante clause in Section 53 would apply to scenarios where the provisions of the section are contrary to any law. Section 53(1)(b) merely mandates that workmen’s dues and debts owed to a secured creditor, in the event such secured creditor has relinquished security in the manner set out in Section 52, shall rank equally and nothing more. The said section does not deal with mortgages or inter – se – priorities amongst creditors / mortgagees. Mortgages are governed by the provisions of the Transfer of Property Act, 1882 and as such inter – se – priorities between mortgagees has been dealt with in that Act.

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Voluntary Liquidation Process Under IBC: An Update

The Insolvency and Bankruptcy Code, 2016 read with, the Insolvency and Bankruptcy Board of India (Voluntary Liquidation Process) Regulations, 2020, establish a procedure for the voluntary liquidation of solvent corporate persons.

However, in practice, it can be observed that the majority of voluntary liquidation processes are getting delayed. As per the Discussion Paper released by IBBI, as on December 31st, 2021, 1105 voluntary liquidation processes have been initiated. Of which, the liquidators have submitted final reports to the Adjudicating Authority (AA) in 546 cases only. In other words, more than 50% (i.e., 559 cases) of the voluntary liquidation processes are still ongoing. On closer perusal of the ongoing cases, it is found that 293 cases (around 52%) of them have crossed the one-year time mark. In this background, the Voluntary Liquidation Process (Amendment) Regulations, 2022 have been introduced on April 5th 2022 by the IBBI.

Brief Analysis of the Voluntary Liquidation Process Amendments

The new changes seek to complete the voluntary liquidation process in a quick and efficient manner and ensure that the company does not lose value on its remaining assets since the asset value falls drastically with time. Further, the amendment seeks to clarify the date of the commencement of the liquidation process.  Now, the liquidator shall complete the liquidation process and ensure the submission of final reports within 270 days, 90 days earlier as compared to the statutory time period of 12 months. As per the Discussion Paper released by IBBI, Voluntary Liquidation, being non-adversarial in nature, can be completed in 270 days. Further, the liquidator is directed to distribute the proceeds from realization within 30 days from the receipt of the amount to the stakeholders, as compared to the earlier mandated time period of 6 months.

For the past few years, the government has been promoting several initiatives focusing on “ease of doing business” for corporates. However, it is essential to observe that “ease of doing business” does not only include ensuring a seamless start of a business but also includes a quick and easy structure for the exit.

In this backdrop, in the Union Budget 2022-2023, the Honourable Finance Minister announced that “Now the Centre for Processing Accelerated Corporate Exit (C-PACE) with process re-engineering, will be established to facilitate and speed up the voluntary winding-up of these companies from the currently required 2 years to less than 6 months[1].”

Further, in a Discussion Paper released in February 2022[2], IBBI identified the following problems plaguing the voluntary insolvency process:

  1. It was pointed out that the values of assets fall drastically, and hence a quick and efficient liquidation process is pertinent. However, the Code has failed to stipulate a time limit for such a voluntary liquidation process.
  2. It was also observed that more than 50% of the voluntary liquidation cases had been ongoing as per the data presented to the Board (as of December 31st, 2022). Further, 52% of the ongoing cases had crossed the one-year mark.

The relevant stakeholders also observed that one of the aspects that prolong the voluntary liquidation process is the practise of seeking a ‘No Objection Certificate’ (NOC) or ‘No Dues Certificate’ (NDC) from the Income Tax Department by liquidators during the process, even though the Code and the Voluntary Liquidation Regulations have not mandated the issuance of NOC/NDC. In this regard, the Board issued a Circular in November 2021, clarifying that “an insolvency professional handling a voluntary liquidation process is not required to seek any NOC/NDC from the Income Tax Department as part of compliance in the said process.”[3]

In alignment with the intention of the legislation, the Board has introduced the following amendments to optimize the voluntary insolvency process:

Section 10 (2) (r): Corporate Debtor shall be substituted by Corporate person

The amendment states that the liquidator shall maintain such other registers or books as may be necessary to account for transactions entered by the corporate debtor with the corporate person. This ensures holistic coverage of all financial transactions of the corporate debtor for the purpose of liquidation.

Section 30 (2): timeline for preparation of the list of stakeholders in case where no claims are received is reduced

 

Section 30 (2) requires the liquidator to compile a list of stakeholders within 45 days from the last date for receipt of claims. The amendment inserts the following provision; “Provided that where no claim from creditors has been received till the last date for receipt of claims, the liquidator shall prepare the list of stakeholders within fifteen days from the last date for receipt of claims.”

Previously, no differentiation between the timelines was prescribed in cases where there were no claims from creditors. This timeline was introduced because if no such claims were received till the last date, then it must not take much time for the preparation of a list of stakeholders as the list of shareholders/partners is available with the liquidator at the time of commencement.

Section 35: Timeline for distribution of the proceeds from realization reduced

The amendment reduces the period for distribution of proceeds from realisation to the relevant stakeholders to a period of thirty days from the receipt of the amount, from the earlier mandated six months.

The reason for the reduction of this timeline is that the liquidator remains in close contact with the corporate person and hence should be able to distribute the proceeds quickly.

Further, in cases where there are creditors, since the resolution regarding the commencement of the process is approved by the creditors representing two-thirds of the value of the debt of the corporate person, distribution to the creditors should also take much less time than is currently stipulated.

Section 5(2): Timeline for intimation of appointment as liquidator to the Board enhanced.

5(2) provides that an insolvency professional shall notify the Board about his appointment as liquidator within 3 days of such appointment.  As per the amendment, the regulation has changed the timeline for the intimation from 3 days to 7 days.

Section 37: Timeline to complete the liquidation process reduced.  

The amended provides that if the creditors approve the resolution, the liquidator shall complete the liquidation process and submit the final report to the registrar, board, and adjudicating authority within 270 days from the date of the commencement of the liquidation and within 90 days from the liquidation commencement date in all other cases (where there are no creditors for the company). Previously, the time period for completion of liquidation was one year and no such bifurcation of the time period for completion of liquidation on the basis of the presence or absence of creditors was enumerated. The reason for this reduction in the timeline for completion is that the liquidation estate of the corporate person undergoing the voluntary liquidation process is non-adversarial and also generally straightforward both in terms of the size and heterogeneity of the assets involved. Therefore, the realisation of the assets involved during the voluntary liquidation process takes less time as compared to the liquidation process.

Section 38(3): Final Report and Compliance certificate shall be submitted in Form-H.

Section 38 directs the liquidator to submit the final report to the adjudicating authority along with the application. The amendment has specified Form H for submission of the final report. Such specifications were not provided previously. A compliance certificate provides a summary of actions taken by the liquidator during the voluntary liquidation process. It will assist the Adjudicating Authority in expediting the adjudication of dissolution applications.

Section 39(3): Form H substitutes Form I

As per the amended Rules, Section 39 (3), the stakeholder claiming entitlement to any amount deposited into the Corporate Voluntary Liquidation Account, may apply for an order for withdrawal of the amount to the Board on Form H and not Form I.

Date of Commencement of Liquidation

The amendment clarified that for the corporate person who has creditors representing two-thirds of the debt of the corporate person, the date of liquidation commencement is the date on which such creditors approve the declaration passed for the initiation of the liquidation.

Note: In order to curb delays in liquidation, the Board had recently issued a circular clarifying that an Insolvency Professional handling a voluntary liquidation process is not required to seek any NOC/NDC from the Income Tax Department as part of compliance in the said process.

Conclusion

The amendments effectually fall in line with the Board’s intention to substantiate a streamlined and quick voluntary insolvency procedure, which certainly can be perceived as an initiative in the right direction. The proposed amendments by curtailing the unwarranted time spent on various activities (such as obtaining a No-Objection Certificate from the Income Tax office) may ensure the early completion of the voluntary liquidation process, thereby, providing a quicker exit for the corporate person. Further, the proposed reduction in the time taken for distribution of proceeds would result in an early distribution to the stakeholders and thereby, promote entrepreneurship and the availability of credit. It will assist the Adjudicating Authority in expediting the adjudication of dissolution applications.

References: 

[1] https://www.timesnownews.com/business-economy/budget-proposed-c-pace-for-accelerated-corporate-exit-process-article-89283883

[2] https://ibbi.gov.in/webfront/Discussion-Paper-on-Voluntary-Liquidation-process-Jan-2022.pdf

[3] https://www.ibbi.gov.in/uploads/legalframwork/cc881169aad7ee239aea7954505a76ab.pdf

 

Image Credits: Photo by Melinda Gimpel on Unsplash

The amendments effectually fall in alignment with the Board’s intention to substantiate a streamlined and quick voluntary insolvency procedure, which certainly can be perceived an initiative in the right direction.  The proposed amendments by curtailing the unwarranted time spent on various activities (such as obtaining No-Objection Certificate from the Income Tax office) may ensure early completion of the voluntary liquidation process, thereby, providing a quicker exit for the corporate person.

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