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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Direct Listing of Securities in GIFT City: Exploring the Nuances

The Ministry of Finance recently allowed for the direct listing of securities by Indian companies on international exchanges. It follows that Indian companies can now offer equity shares directly to non-resident Indians as well. This is in line with the Government’s vision to make India an international hub for businesses. This will open new and better avenues for investments for Indian companies by giving them access to an alternate source of capital, a broader investment base, better valuation, facilitation of their international employee compensation, brand awareness and visibility, etc. Additionally, it will be an attractive proposition for foreign investors as they would have the option of participating in the value creation of one of the fastest-growing economies.

This article will briefly give an overview of the roadmap to the direct listing of securities on international exchanges via Stock Exchanges in the Gujarat International Finance Tec-City, popularly called the GIFT City, discuss the two recent rules and amendments passed for this purpose, and explore the gaps that need to be fixed.  

Roadmap to direct listing of securities on international exchanges

The Government’s move is facilitated by the setting up of the International Financial Services Centre Authority (IFSCA), which was established on April 27, 2020, under the IFSCA Act, 2019. This authority now assumes the responsibility of regulating industries in the International Financial Services Centres (IFSCs). The country’s first IFSC was set up in GIFT City. IFSCA now regulates the industries in the GIFT City, which was previously regulated by the Reserve Bank of India (RBI), the Securities and Exchange Board of India (SEBI), the Pension Fund Regulatory and Development Authority (PFRDA), and the Insurance Regulatory and Development Authority of India (IRDAI). The main intention of establishing these IFSCs in India is to allow for a strong global connect and create opportunities to compete on a global level.

A roadmap to listing of securities on international exchanges was made as early as 2021 through the passing of the IFSCA (Issuance and Listing of Securities) Regulations, 2021 (ILS Regulations). Through the ILS Regulations, a thorough outline was created for the listing of different kinds of securities. It allowed for security instruments such as equity instruments through Initial Public Offer (IPO), Follow-on Public Offer (FPO); listing of specified securities by a start-up company or an SME company, secondary listing of specified securities, IPO of specified securities by a special purpose acquisition company; depository receipts; debt securities; and ESG debt securities. It further lays down the requirements for listing, such as the eligibility criteria, application, issue size, minimum subscription, type of allotment, lock-in, pricing, disclosure requirement, etc. Prior to this, Indian companies raised foreign funds through the issue of depository receipts listed outside or non-residents subscribed to issuances made in India or by way of borrowing overseas.

Regulatory changes

Although the ILS Regulations were in place, there were no enabling provisions to facilitate the listing of securities on international exchanges. In 2020, Section 23(3) was incorporated in the Companies Act, 2013 to enable companies to issue securities in permissible foreign jurisdictions or such other jurisdictions. This Section was notified on October 30, 2023. The Ministry of Corporate Affairs, on January 24, 2024, issued the Companies (Listing of equity shares in permissible jurisdiction) Rules, 2024, and certain amendments were made to the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (NDI Rules) on the same day. In the new NDI Rules, along with other additions and amendments, Schedule XI is added with the heading, “Direct Listing of Equity Shares of Companies Incorporated in India on International Exchanges Scheme”, which acts as the main scheme for direct listing of securities.

Through a series of amendments and new rules, public companies in India are now allowed to list and issue securities in IFSC in India on two stock exchanges namely – India International Exchange and NSE International Exchange.

Eligibility conditions

The aforementioned rules permit both listed and unlisted public companies to list their securities on international exchanges. This may be in the form of an IPO by the company or through an Offer for Sale (OFS) by the existing shareholders. There is a prohibition on certain categories of companies from offering shares on international exchanges, such as Nidhi companies, Section 8 companies, companies limited by guarantee and also having share capital, companies having a negative net worth, companies which have defaulted in payment of dues to any bank or public financial institution or non-convertible holder or any other secured creditor, companies which have made any application for winding up, and has defaulted in filing of an annual return or financial statements within the specified period.

Companies which engage in activities such as lottery business, gambling, chit funds, trading in transferable development rights, real estate business or construction of farmhouses, manufacturing of cigars, cheroots, cigarillos, and cigarettes, of tobacco or of tobacco substitutes, and activities which are not open to private sector investment will not be allowed to issue securities. In addition to this, the companies are also restricted to the sectoral caps as per Schedule I of the NDI Rules.

Further, companies or their existing shareholders are not allowed to issue or offer shares where the director or promoter of the concerned company is debarred from accessing the capital market, is or are wilful defaulter(s) or fugitive economic offender(s). The companies which are under inspection or investigation under the provisions of the Companies Act, 2013, are also not permitted to list their securities.

Permissible holders under the 2024 amendment

The Scheme restrict persons resident in India from applying for the securities offered through direct listing on the international stock exchanges. There are no special restrictions for NRIs, and they are free to trade in such securities. Although all of these transactions are under the automatic route, some approvals by the Central Government are needed for citizens of neighbouring countries, who intend to buy shares from the companies listed on and through international stock exchanges.

The burden is on the issuing company to disclose these restrictions to the subscriber through the offer document. A permissible holder can hold or invest only up to 10% of the total paid-up equity capital on a fully diluted basis.

Price of issue or transfer of equity shares

For a company that is already listed in India, the issue price in the international stock exchange should not be less than the price applicable to the corresponding mode of issuance of such equity shares to domestic investors.

For an unlisted public company, the issue price should be determined by the book-building process as permitted by the international foreign exchange, and it should not be less than the fair market value as applicable under the Foreign Exchange Management Act, 1999.

Obligations of public Indian companies

The new amendments collectively impose certain obligations on the company which have to be followed before and after the listing of securities on the stock market. Accordingly, companies should ensure that the aggregate of equity shares which are, or which may be offered along with equity shares already held in India by persons resident outside India, do not exceed the sectoral caps under Schedule I to these NDI Rules.

In addition to that, the Direct Listing Scheme also stipulates that public Indian companies listing their securities on the international stock exchange should ensure compliance with all laws and regulations pertaining to issuance of equity shares such as the Securities Contracts (Regulation) Act, 1956, the Securities and Exchange Board of India Act, 1992, the Depositories Act, 1996, the Foreign Exchange Management Act,1999, the Prevention of Money-laundering Act, 2002, or the Companies Act, 2013.

Gaps to be addressed

The status of the public unlisted Indian companies which have listed their securities on international stock exchanges does not change despite the listing. As per Section 2(54) of the Companies Act, 2013, a listed company “means a company which has any of its securities listed on any recognised stock exchange”. The recognition of stock exchanges is as per Section 4 of the SCRA. Both the international stock exchanges are not recognised stock exchanges for this purpose. Despite listing their securities on a stock exchange, the unlisted companies are excluded from all the other obligations and compliances for listed companies as laid down in the Companies Act, 2013. A few of these obligations are in place to provide investor protection. Whether such a measure was taken to reduce the compliance requirements to encourage smaller and medium-sized companies to list their securities or whether there would be an amendment to the Companies Act, 2013, in the future, is unclear. However, it is essential to lay down some compliances to ensure investor protection.

Conclusion

Foreign investments, along with domestic investments also bring in other perks such as brand recognition, brand visibility, knowledge about global best practices, technological advances, etc. The direct listing of securities in international stock exchanges will not only aid big companies in raising foreign funds but will also encourage start-ups and MSMEs to look for foreign investment opportunities by allowing even unlisted companies to list their securities on international stock exchanges.  

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The status of the public unlisted Indian companies which have listed their securities on international stock exchanges does not change despite the listing. As per Section 2(54) of the Companies Act, 2013, a listed company “means a company which has any of its securities listed on any recognised stock exchange”. The recognition of stock exchanges is as per Section 4 of the SCRA. Both the international stock exchanges are not recognised stock exchanges for this purpose. Despite listing their securities on a stock exchange, the unlisted companies are excluded from all the other obligations and compliances for listed companies as laid down in the Companies Act, 2013. A few of these obligations are in place to provide investor protection. Whether such a measure was taken to reduce the compliance requirements to encourage smaller and medium-sized companies to list their securities or whether there would be an amendment to the Companies Act, 2013, in the future, is unclear. However, it is essential to lay down some compliances to ensure investor protection.

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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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IBBI Paper: 16 Proposals to Strengthen the Liquidation Process

On October 20, 2023, the Insolvency and Bankruptcy Board of India (IBBI) released a discussion paper presenting a total of sixteen proposals to strengthen the liquidation process. In this paper, the Board has also annexed the draft of the IBBI (Liquidation Process) (Amendment) Regulations, 2023.

The changes proposed seek to address the existing issues and safeguard the interests of stakeholders. The comments on the proposals and the draft regulations may be shared by November 10, 2023.

The sixteen proposals put forward by the Board are as follows: –

  • No verification of prospective bidders

The paper proposes to do away with the verification or inspection of all prospective bidders by the liquidator and instead envisages the submission of an affidavit or declaration by them confirming that they are eligible under Section 29A of the Insolvency and Bankruptcy Code, 2016. To deter the submission of wrong affidavits and participation of ineligible bidders, the liquidator would be empowered, on due consultation with the Stakeholders’ Consultation Committee (SCC), to effect forfeiture of Earnest Money Deposit (EMD). After declaration of the highest bidder, due diligence on the eligibility of such bidder has to be done within 3 days. If the liquidator does not accept the highest bid above the reserve price, it would be imperative for the liquidator to consult with the SCC on the same.

Comment: In the existing regulations, liquidators have been provided about 14 days for completion of verification of prospective bidders and/or declaration of qualified bidder. The proposed amendment to Schedule I requires due diligence and verification of the eligibility of only the H1 bidder within three days of declaration of the H1 bidder pursuant to auction. The provision, therefore, restricts the function of the liquidator to verify by due diligence the declaration of H1 bidder only. Generally, in complicated cases where Section 29A is attracted and/or applicable for bidders, liquidators are required to engage qualified consultants for conducting the due diligence. The main purpose of such due diligence is to prevent promoters, their associates, relatives and connected persons from acquiring and/or being provided a backdoor entry into the corporate debtor or its assets in liquidation. There is no provision for an extension of this three days’ period for complicated cases and such a situation may be detrimental. The proposal indicates that the liquidator can, with consultation with SCC, not accept the highest bid in an auction for any reason. It may be important to appreciate the sanctity of an auction where an H1 bidder succeeds at a value higher than the liquidation value. In such cases, the liquidator and the SCC should be provided with minimum discretion in rejection of the H1 bidder to avoid collusion and favouritism between a particular bidder, the SCC, and the liquidator. This is of course for such cases where the H1 bidder is not rejected on the ground of eligibility.

In fact, an eligible H1 bidder who is rejected would have ample ground to challenge such rejection before the Adjudicating Authority. The liquidator may get involved in litigation thereby leading to deterioration of assets of the corporate debtor and consequential loss of value of the corporate debtor arising out of time consumed in litigation.

  • Reserve price reduction limited to 10%

Clause 1(4A) of Schedule I provides that in case the auction fails at the reserve price, the liquidator may reduce the reserve price by up to 25% in the subsequent auction. Even though the provision says, “up to 25%”, it has been observed that liquidators have been reducing the reserve price by the maximum limit instead of doing it in stages. Hence, it is proposed to remove the said provision and thereby limit the reduction in reserve price to 10% at a time.

Comment: The existing provision in Clause (4A) of Schedule I provides that the liquidator may reduce the reserve price by 25% in an auction held subsequent to the first failed auction. This provision was extremely beneficial in cases where both the liquidator and the SCC felt that the liquidation value was way above the realizable market value of liquidation assets. Every auction involves considerable liquidation expenses and time being consumed. An amendment mandating and restricting the reduction of reserve price to 10% at a time may only increase liquidation costs and delay the process in several cases. The discretion to reduce the reserve price to a percentage which is suitable for a particular auction of liquidation assets should be left for the SCC and the liquidator to decide.

  • Consultation before private sale

To improve accountability, the liquidator would be required to hold prior consultation with the SCC before the corporate debtor’s assets can be sold via private sale.

Comment: Regulation 33(2)(d) of the existing regulations contemplates a situation where prior permission of the Adjudicating Authority has been obtained for a specific private sale. The proposal made for confirmation of a successful buyer after consultation with SCC should not be made applicable to a case where a specific private sale has been approved by the Adjudicating Authority. The SCC cannot sit over and/or modify a decision of the Adjudicating Authority.

  • Centralised listing platform for assets

To enhance participation of and provide more time for conducting due diligence to potential bidders, the assets of the corporate debtor would be listed much before the auction date. The assets with the necessary details (such as envisaged mode of sale, likely date of auction, etc.) would be listed on a centralised listing platform. 

Comment: The aforesaid proposal for listing of all assets of a corporate debtor on a listing platform would also alert and notify the public at large including all persons having an interest in such properties of the corporate debtor. This would encourage the resolution of disputes arising out of interest in assets of the corporate debtor well before the stage of auction.

  • Progress reports to be shared with stakeholders

The liquidator would be required to submit progress reports to the SCC (I.e., apart from filing them with the Adjudicating Authority and the Board). The same is to ensure that the key stakeholders are updated on the progress in the liquidation process.

No comments.

  • New and simplified manner of calculating liquidator’s fee

The liquidator fee has to be calculated based on figures of realisation provided in quarterly progress reports instead of calculating the realisation in six months from the liquidation commencement date.

Comment: The Regulation should include a clear definition of “realisation” to facilitate calculation of the liquidator’s fee in a transparent manner. The definition should clearly restrict realisation to amounts received by the corporate debtor from the sale/assignment of assets only.

  • Liquidator to hold regular meetings of SCC

Through amendment of Regulation 31A(6), the liquidator would be mandated to hold regular meetings of the SCC. The gap between two such consecutive meetings should not be more than 30 days.

            No comments.

  • SCC’s views on the draft preliminary report to be obtained

Before finalising and submitting the preliminary report to the Adjudicating Authority, Board and members of the SCC, the suggestions, or observations of the SCC on the draft have to be requested for and duly considered by the liquidator under Regulation 13.    

No comments.

  • Actual liquidation cost exceeds estimated cost

If the actual liquidation cost exceeds the cost as estimated in the preliminary report or exceeds 10% of the corporate debtor’s liquidation value, the reasons for the same would have to be informed to the SCC to initiate a dialogue to rationalise it.

No comments.

  • Fresh valuation – methodology to be explained to SCC

Where fresh valuation of assets has been opted for under Regulation 35(2), the methodology adopted for arriving at the valuation has to be explained by the two registered valuers appointed by the liquidator, to the SCC. Once the valuation report is finalised, the same has to be shared with the members of the SCC.

No comments.

  • Advice of SCC for continuing or instituting legal proceeding on behalf of corporate debtor

If the liquidator seeks to continue or institute any legal proceeding on behalf of the corporate debtor, he has to present the “economic rationale” for the same and obtain the SCC’s advice after the committee’s reconstitution under Regulation 31A. In every meeting of the SCC, the consolidated status of all the legal proceedings has to be provided.

Comment: The proposed provision requires the liquidator to seek the advice of the SCC for continuing or initiating legal proceedings. Continuing legal proceedings may include proceedings filed against the corporate debtor. Some of such proceedings may also have members of SCC as interested parties. Therefore, an exception may be carved out for legal proceedings where any member of the SCC and/or the stakeholders they represent are interested.

  • Carrying on the corporate debtor’s business as a going concern

If operating the business of the corporate debtor as a going concern is economically unviable, the liquidator would be required to consult the SCC, to decide whether to keep the corporate debtor as a going concern or otherwise.

No comments.

  • Form H to include details regarding realisation and distribution

The compliance certificate in Form H to be submitted by the liquidator to the Adjudicating Authority under Regulation 45(3) should have additional details pertaining to the amount realised from the sale of the liquidation estate and the amount distributed to the stakeholders, to avoid discrepancies.

Comment: The proposed amendment should make a distinction between “realisation” and the actual amount realised/received by the liquidator. As discussed earlier, “realisation” should include amounts received from the sale of assets only. While amount realized/received should include all amounts received and/or collected by the liquidator from any source.

  • Assets underlying proceedings pertaining to preferential transactions

When it comes to proceedings before the Adjudicating Authority pertaining to preferential, undervalued, extortionate credit and fraudulent transactions of the corporate debtor referred to in Sections 43 to 51 and Section 66 of the 2016 Code, the liquidator would be empowered to assign the assets underlying such proceedings even before the matter has been adjudicated upon by the Adjudicating Authority.

No comments.

  • Consultation with SCC before applying for early dissolution

The liquidator has to consult with the SCC before applying for early dissolution of the corporate debtor under Regulation 14.

No comments.

  • Claims for withdrawal of amount from Corporate Liquidation Account

If the Board receives a claim for withdrawal of any amount deposited into the Corporate Liquidation Account under Regulation 46(7) after the submission of the dissolution application but before the order of the dissolution of the corporate person, the Board must direct the liquidator to verify such claim and submit a report to enable it to take a decision on whether to allow the withdrawal or not. The same is proposed to be incorporated in the form of a proviso to Regulation 46(8).

No comments.

Remarks

Most of the aforesaid proposals to amend the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 are being proposed to enhance the information available to SCC and their involvement in conducting the liquidation process. While the proposals, if implemented, would increase SCC’s role in the conduct of the liquidation process, a balance is required to be maintained between the liquidator’s powers as an officer of the Adjudicating Authority and the SCC/stakeholders. In situations where the SCC/stakeholders have a conflict of interest, the liquidator’s actions if taken in accordance with law including the IBC and regulations made thereunder are required to be protected and upheld. Any attempt by the SCC/stakeholders to thwart any such action and/or steps taken by the liquidator should be stopped at the threshold. The SCC should not be allowed to remove the liquidator in such cases without adequate opportunity of being heard before the Adjudicating Authority which should in such cases provide a reasoned order upholding/rejecting an application for removal of the liquidator. The aforesaid would avoid liquidators being reduced to being merely agents and/or spokespersons of the SCC.

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The existing provision in Clause (4A) of Schedule I provides that the liquidator may reduce the reserve price by 25% in an auction held subsequent to the first failed auction. This provision was extremely beneficial in cases where both the liquidator and the SCC felt that the liquidation value was way above the realizable market value of liquidation assets. Every auction involves considerable liquidation expenses and time being consumed. An amendment mandating and restricting the reduction of reserve price to 10% at a time may only increase liquidation costs and delay the process in several cases. The discretion to reduce the reserve price to a percentage which is suitable for a particular auction of liquidation assets should be left for the SCC and the liquidator to decide.

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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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