Article Category: Corporate & Commercial

VNC Not so automatic FDI from China to India

Yesterday (i.e. on April 22, 2020), the Indian Government came out with the FEMA NDI Amendment Rules (FDI Amendment). These rules govern matters concerning inflow of foreign exchange and foreign direct investment into India and this comes after the government issued Press Note 3 of 2020 on April 18, 2020 (Press Note). Post the Press Note, a notification was expected, and it has now come in the for form this FDI Amendment, which will govern such matters concerning investments into India with effect from April 22, 2020. The theme under both, the Press Note and the FDI Amendment is the same and requires entities from all countries which share a land border with India, to seek ‘prior approval of the Indian Government’ before making any investment in an Indian entity. Since the Press Note was released, there was some expectation of a possible exception being brought about in the FDI Amendment, however, none happened. This requirement of a ‘prior approval’ also applies to any beneficial owner based out of these neighboring countries. India shares its land border with China, along with Afghanistan, Bangladesh, Bhutan, Myanmar, Nepal and Pakistan.

Since then, there has been a lot of noise about this move by India and in light of the lockdown due to Covid-19, the internet is flooded with questions and doubts. This piece along with a Q&A section below explains the position under the FDI Amendment.

Factually, over the last decade or more, maximum investment has flown into India from China versus any other country. Therefore, primarily, the FDI Amendment seems to add an additional layer of screening for investments emanating from China. As per the Indian government department, DPIIT, during the 2000 to December 2019 period, of the total FDI received from these neighbouring countries, China contributed approximately about 99% of FDI, a large portion of which went to Start-ups. In the recent years, Chinese VC Funds have increasingly been a source of funds for Indian Start-ups. This is evident from the fact that during April 2000 to March 2018, FDI inflow from China grew at a CAGR of 23%, showcasing an exponential growth. As per reports, 18 out of the first 30 unicorns in India are funded by Chinese. Indian companies who have significantly benefitted from Chinese support include Snapdeal (US$700 million), Udaan (US$600 million), Ola, Paytm and Swiggy (US$500 million each), Flipkart (US$300 million), BigBasket (US$250 million) Zomato (US$200 million), etc.

Until this amendment, excepting in the prohibited or sensitive sectors, India had allowed investments from all these seven countries including China, under the automatic route, however, with additional lawyers of scrutiny in various circumstances, for Pakistan and Bangladesh.

The intention showcased by the Indian Government in the FDI Amendment is to curb opportunistic takeovers and acquisitions of Indian companies due to the current pandemic, however, the language seems to require a prior approval for all kinds of investments which shall include fresh investment into India, or a follow-on investment, or even a transfer of existing shareholding to another company based out of the above countries.

Various industry bodies including companies and investors in India and China have already reached out to the government seeking various types of clarification on the Press Note as well as the FDI Amendment.

Answers to some of the common yet critical Questions being asked, are as follows:

  1. Is Chinese FDI into India prohibited?

What is important to note is that this FDI Amendment does not suggest a ban or prohibition on investments from China. Instead, it suggests the requirement of a government approval prior to brining in any investment from China. Typically, such kind of government approval takes between six to eight weeks to get processed. In case the investment is in any sensitive sector (such as defence, telecom, information and broadcasting etc.), there could be an additional time frame of another six to eight weeks. This will certainly add to the timelines of a transaction and may also increase, although marginally, the cost of making an investment due to the involvement of an approval process.

  1. Is there any criteria on the basis of which a application will be evaluated for approval?

Currently, no such criteria has been laid down under the FDI Amendment. Typically, such process involves providing sufficient details about the target company, the investor and details about the investment amounts, stakes, process and timelines in the application. Ideally, these applications should be drafted by lawyers.

  1. Does this impact only FDI or does it include investments under FPI, AIF and VC routes?

The intention of the Government through the Press Note as well as the subsequent FDI Amendment seems to be to cover any form of investment, be it under the FDI, FPI, VC or AIF route. A subsequent Notification by the Indian Government is expected in the coming weeks, which may bring out the finer details of what all is explicitly covered and what could be excluded. Currently, all forms of investments seem to be covered under the ambit of this FDI Amendment and therefore will require a prior approval of the government.

  1. Will an existing Chinese investor also require approval to further capitalise its subsidiary?

Yes, as per the current FDI Amendment, an existing investment from China will also require a prior approval to further capitalise its subsidiary. There are no exceptions provided under the FDI Amendment for existing shareholders. Therefore, a follow-on investment by existing shareholders from China (regardless of past commitments under written contracts or business plans) will also require approval and therefore, investors should factor in additional time for transactions.

  1. Will this cover greenfield investments also or only brownfield investments?

The FDI Amendment will be applicable to any kind of an investment, be it greenfield or brownfield. And therefore, even if it is an investment into India for starting a fresh business (greenfield) or it is a buy-out of existing Indian business (brownfield), both will require an approval of the government prior to making such investment.

  1. Are there any minimum or maximum threshholds that are allowed with prior approval?

No, there are no threshholds which are allowed. Therefore, even 0.1% stake will require a prior approval.

  1. A Chinese company has a UK subsidiary. Will the UK subsidiary also require prior approval for making investment into India?

Yes, if a beneficial owner of any investor is based out of China, its investment will also require a prior approval. Currently, the term ‘beneficial owner’ has not been explained under the FDI Amendment. While there is currently no clarity on the same, however, it is likely that the meaning under the (Indian) Companies Act, 2013 will need to be borrowed for the purposes any assessment.

  1. Will investment from Hong Kong or Macau also require a prior approval?

While the FDI Amendment does not specify this, however, it is likely that the intent is to cover investments from Hong Kong or Macau also under the government approval route. In fact, investments from Taiwan may also be affected, however, specific clarity on this must be sought from the Government of India.

  1. Is there any exclusion for smaller investments in Indian Start-ups?

No, there is no exclusion for making investments in Indian Start-ups. Any investment in any Indian Start-up will require a prior approval of the government.

  1. If certain corporate actions were already initiated by the Indian company for an investment from China, will that be allowed?

No, even if all corporate actions in the line-up for an investment were completed, if the FDI has not been brought in yet, it will not be allowed unless a prior approval of the government is sought. However, any past investments already made by a Chinese company will not be impacted.

Coronavirus outbreak – Relaxed IBC timelines.

Keeping up with the needs of the fast-changing business environment, IBC has been amended for the fourth time since 2016 with multiple amendments under corollary laws in order to ensure a relentless spin of the wheels of the Indian economy

COVID-19 has retarded the momentum of wheels of the Indian economy, the corporates. The All India Association of Industries had estimated a loss of INR 2,00,000 crore (USD 26.35 bn) by March 31, 2020 due to pan India lockdown.

In order to prevent and absorb the effect of such huge losses and to respond to the dynamics of the business environment, which has been changing every second in the wake of the globally-spread WHO-declared pandemic, the central government seems to be responding in a structured manner by providing various sops, relaxation, extensions and amendments to the existing legal framework in the country.

Across the globe, it is observed that the corporates which were in the pink of financial conditions have witnessed a sharp decline due to COVID-19.

Supply chains are disrupted, valuation of the stocks on bourses have substantially decreased amidst global down selling, and the valuation of businesses have fallen steeply.

In such a scenario, it was viewed that insolvency resolution processes under the (Indian) Insolvency and Bankruptcy Code, 2016 (IBC) also needed added layers of cushion from different viewpoints.

Due to the standstill caused by the lockdown in the country, the performance of contracts and payments thereof is manifestly disrupted. This is a trigger event for creditors, both financial and operational, to initiate insolvency against such corporate debtors.

If insolvency proceedings are initiated at a mass scale, then it can have a devastating impact on the economy, because, during the corporate insolvency resolution process (CIRP), the management of the corporate debtor switches hands with the resolution professional and he/she only carries out such activities that are essential for running the businesses as a going concern.

Value addition to the businesses, which is a key driving force behind any economy, is stunted during the CIRP. Also, it has been largely observed that CIRP has become a tool, especially in the hands of the operational creditors, to recover the debt instead of resolving the insolvency of the corporate debtor.

In order to avoid such a situation where corporates are forced into insolvency proceedings, the Finance Minister Nirmala Sitharaman has announced that if the current situation continues beyond April 30, 2020, then it may consider suspending Sections 7, 9 and 10 of the IBC for a period of six months, thereby disabling the financial creditors, operational creditors and promoters from initiating insolvency proceedings against companies.

It will be very interesting to watch out for what happens next, especially if and when the lockdown is lifted, either fully or partially, on April 1, 2020, and these will be questions that will float around for the government to answer and action–How likely is it that there will be a suspension and what will be the criteria for such suspension? What about the large scale and long term impacts such suspension will create? Who all will be most benefitted? Will this end up benefitting only specific sects like the promoters, lenders, or contractors?

Currently, the government has taken certain steps to prevent the initiation of CIRP at a large scale and to avoid any frivolous filings. The Ministry of Corporate Affairs vide a notification dated March 24, 2020, has increased the threshold for initiating the insolvency resolution process from INR 1,00,000 (USD 1,300) to INR 1,00,00,000 (USD 130,000) under Section 4 of the IBC.

This amendment is likely to also help medium and small industries who have been hit the hardest by COVID-19. However, on the flip side, this amendment will adversely impact the ability of operational creditors to initiate CIRP, since the minimum default amount is now ten times higher than the previous minimum default limit. Once the economy sails through the slowdown caused by COVID-19, the government should ponder upon reducing the limit to a lower amount, so that IBC does not merely remain as a toothless tool at the hands of operational creditors.

Amidst the nationwide lockdown on account of COVID-19, the acting president of the National Company Law Tribunal (NCLT) notified that all benches of the NCLT shall hear only inevitable urgent cases with prior notification on email from applicants.

Insofar as matters not construed as urgent, e.g. pertaining to the extension of time, approval of resolution plan and liquidation under IBC, the Insolvency Bankruptcy Board of India (IBBI) has, vide notification dated March 29, 2020, amended the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 granting certain relaxations.

Pursuant to the amendment, Regulation 40C has been inserted, which is a special provision in relation to meeting of the timelines in pursuance of CIRP.

According to Regulation 40C, the period of lockdown shall not be counted for the purposes of calculation of timeline for any activity that could not be completed due to such lockdown, in relation to a CIRP.

Such an amendment was the need of the hour, as the common investor sentiment amidst the lockdown is to protect the liquidity, impacting and stalling the bids under the CIRP, causing delays in the bid process and posing challenges to the CIRP, the insolvent companies and their resolution professionals.

This relaxation also helps avert negative consequences and follow-on actions due to non-compliance which also leads to additional expenditure by the parties involved. However, this amendment is effective from March 29, 2020, thereby looming confusion around the period that shall be excluded for the purpose of calculation of timelines pursuant to CIRP. The intelligible differentia for exclusion of the period of lockdown from March 25, 2020 to March 28, 2020, for calculation of timelines is unclear. It is imperative for IBBI to issue a corrigendum, explicitly affirming that the aforementioned period of three days shall be excluded from the calculation of CIRP timelines.

The Insolvency and Bankruptcy Code (Amendment) Act, 2020 (Amendment Act), (notified on March 13, 2020, by the Ministry of Law & Justice by way of an amendment with retrospective effect from December 28, 2019, due to a prior Ordinance), vide amending Section 5(15) of IBC, authorised the government to notify any debt as interim finance, which means such debts as may be notified by the government shall be considered as priority loans for repayment purposes.

In the wake of COVID-19, various banks have already extended emergency credit lines to ease the liquidity crisis of the borrowers. Once the lockdown is removed and businesses are resumed, if borrowers default in repayment of the emergency credit, the banks may face immense liquidity crisis. In order to keep the banks afloat post resumption of normal economic setup, the government should consider exercising its power under Section 5(15) of IBC and thereby, notifying these emergency credit lines as interim finance, so that any unnecessary defaults in repayment of emergency credit are prevented.

An insight into the 2020 amendment:

Prior to the aforementioned amendments in response to COVID-19, the IBC was revamped vide Amendment Act, to make the resolution process more effective and to promote ease of doing business. Key insights on the Amendment Act have been summarised below:

Section 32A: Liability for offences committed prior to CIRP

Section 32A has been introduced with the aim to protect the successful bidders, the corporate debtor and its assets from any action against offences committed by previous promoters or officers in charge of management or control of the affairs of a corporate debtor, prior to commencement of corporate insolvency resolution process (Management Offences).

This amendment grants immunity to the corporate debtor against the management offences and the corporate debtor shall stand discharged from the date of approval of the resolution plan. This benefit shall be available only if the management or control of the corporate debtor changes, which means that the defaulting management and promoters or the abettors of offence (as identified by the investigating authority) shall no more be in charge of managing or controlling the affairs of the corporate debtor. However, this immunity is not provided to the persons who committed default, hence, the officers of the corporate debtors, such as designated partner of an LLP, officer in default of a company, officer in charge of or responsible for the conduct of the business of the corporate debtor and officer associated with the corporate debtor in any manner, shall continue to be prosecuted and punished.

Subject to the change in management or control of the corporate debtor, the property of the corporate debtor covered under the resolution plan is also protected from any action, such as seizure, attachment, retention or confiscation, that otherwise may be taken against such property in relation to the offence committed prior to the commencement of CIRP. Such immunity shall also be provided to the persons who may acquire the property under the CIRP process or liquidation or liquidation process under IBC.

Section 14: Government authorisations and essential supplies during moratorium

According to amendment in Section 14: (a) if the payments are duly made for the use or continuation of any license, permit, quota, concession, registration, clearances or a similar grant or right during the moratorium period then such license, permit, quota, concession, registration or clearances shall not be suspended or terminated on account of insolvency; (b) moratorium shall not be applicable such transactions, agreements or arrangements as may be notified by the central government in consultation with financial sector regulator or any other authority; and (c) IRP and the resolution professional, if consider supply of any goods or services to be essential for preserving the value of the corporate debtor and managing its operations as a going concern, then supply of such goods and services shall not be interrupted in any manner, subject to IRP or RP making payment towards such essential supply.

The objective of this amendment is to smoothen the CIRP and ensure that the resolution plan or management of the corporate debtor is not hampered for want of government authorisations or essential goods and services.

Section 5(15): Power of central government to notify interim finance

According to amendment in section 5(15), any debt notified by the central government can also be included in the definition of interim finance. In pursuance of this amendment, the central government vide notification dated March 18, 2020, has notified debts raised from the Special window for Affordable and Middle-Income Housing Investment Fund I to be included within the meaning of interim finance.

Interim finance is the debt which is treated as a priority loan for the purposes of repayment. The effect of this amendment is that the central government may notify any debt as interim finance, wherein such debt shall be repaid before all other debts of the corporate debtor.

Section 7: Increase in amount of minimum default for initiating CIRP

In addition to the  criteria of the minimum amount of default being INR 1,00,00,000 (increased from INR 1,00,000, vide notification dated March 24, 2020), certain additional requirements are to be adhered to by the following financial creditors: (a) real estate allottees; and (b) security or deposit holders represented by a trustee or agent, prior to initiating CIRP against a corporate debtor. Applications by these financial creditors should be filed jointly by at least 100 such creditors or 10% of their number, whichever is lower.

The objective behind this amendment is to avoid frivolous litigations against corporate debtors. As of September 2019, of the 10,860 IBC cases pending with NCLT, 1,821 cases (17%) have been filed by homebuyers. However, this amendment may also impede the redressal of grievances of the genuine real estate allottees. The operation of part of the enactment pertaining to the real estate allottees has been stayed by the Supreme Court vide its order dated January 13, 2020.

Conclusion:

Keeping up with the needs of the fast-changing business environment, IBC has been amended for the fourth time since 2016 with multiple amendments under corollary laws in order to ensure a relentless spin of the wheels of the Indian economy.

It will be a great wait and watch if the government eventually relents to industry demands for suspension of key provisions of the IBC for as long as six months. Irrespective, these amendments are likely to smoothen the insolvency resolution process and may prevent the corporates from sailing close to the wind during this period of recession that India Inc. is set to face amidst the lockdown.

India’s FDI changes & Prior Approval Process

Prior Approval process introduced

Recently, on 22 April 2020, the Government of India (GOI) amended India’s foreign exchange control norms to require that investments emanating from countries sharing a land border with India (including any beneficial ownership held in such countries) will require prior approval of the Government. The list of such countries includes China and covers investments made through any mechanism including fresh capital infusions as well as purchase of existing security. Prior to this amendment, investments from China did not require any prior approval process.

It must be noted that these amendments do not prohibit Chinese investments into India. Since these amendments, the GOI through it’s Foreign Investment Facilitation Portal (FIFP) has also modified the mechanism as well as the application form for seeking the prior approval of the GOI. While further clarity is still awaited, below is a very quick brief of this new mechanism introduced so far.

Changes in the Application Form to be filed online

A prior approval of the GOI for foreign investment into India has to be routed through the filing of an application form/ proposal online on the website of FIFP, where various details have to be provided and which facilitates a single window clearance system for this purpose. Once successfully uploaded, the application is forwarded to the relevant ministry of the GOI for its approval. This approval system has undergone some minor tweaks considering the amendments pursuant to the recent amendments:

  • Unlike the method existing prior to the above amendments, an applicant is now required to compulsorily select if the proposal falls within the purview of the recent amendments (Para 3.1.1(a) of the Press Note 3 of 2020).
  • The application is also required to select an appropriate “reason for proposal”. While this tab enlists all provisions of the FDI policy that require the prior approval of the GOI (for e.g. proposed foreign investment in a sector that requires approval, investor is a resident of Bangladesh or Pakistan, transfer of shares, expansion of existing facilities/ wholesale to retain, etc.), however, it does not provide any specific option for “investor is a resident of any other country that shares a land border with India” (this includes China). There could possibly be a change to this process in the coming days.
  • Under the tab concerning the details of the Investor, the applicant is required to provide details such as country of residence (in which China is one of the options in the dropdown – although this is a general list of all countries). Additionally, the applicant is required to provide details of “beneficial owner” and “beneficial owner country”.

Changes in the Security Clearance Form

Pursuant to the said amendments, the format of the security clearance form now requires a self-declaration regarding presence or operations in China (this is in addition to the existing list mentioning Pakistan and Bangladesh). The updated security clearance form does not consider self-declarations from other countries sharing land borders with India (namely, Afghanistan, Nepal, Bhutan, Myanmar).

Next Steps

We have been in engagement with the appropriate departments of the Government of India regarding developments in this area. We understand that certain clarification may be brought about by the GOI although dates for the same are unknown at this stage.

As a part of our Client Outreach Program, we shall keep you posted on further updates. In the meantime, please do not hesitate to reach out to us for any clarification and we will be happy to help.

Law & Policy update – Restricting foreign investment in India – The Sino-Indian context

Through Press Note 3/2020 issued on April 17, 2020, Government of India announced the requirement for prior approval for all foreign investment coming in from countries that share an international border with India, which includes China as well as Afghanistan, Bangladesh, Bhutan, Myanmar, Nepal and Pakistan. Even though this move ostensibly mirrors similar requirements enacted by Australia and many European nations, including the US which had brought about a few changes late last year, this notification surprised both the domestic industry as well as Chinese investors, who have lately emerged as an active and critical source of capital for India Inc.

This embargo on investment from select countries comes in the wake of tumbling valuations of domestic businesses as a consequence of the Covid-19 lockdown and attendant disruption of economic activity. While the move raised immediate concerns in both China and India, it is critical to understand that the notification does not per se prohibit incoming investments from such countries, however, it adds the requirement of a prior government approval, which can typically add 6 weeks’ processing time to the original investment transaction timeline.

In the Sino-Indian context, the notification leaves several aspects unclear, which can have a significant impact on investment transactions and timelines. As the government works to clarify some of these grey areas, a few suggestions which we aim to shortly send out in our communique to the government, to optimally filter inbound investment, are as follows:

  • Allow investments without pre-approval requirement subject to clearly articulated thresholds such as:
    • Enterprise value of the investee company
    • Maximum stake or quantum in the capital of an Indian company
    • Minority investments as against majority control or ownership situations
  • Distinguish between greenfield and brownfield investment, since the former are fairly benign in nature and do not include takeover of an existing entity
  • Specify whether the embargo applies to any single currency coming in from China
  • Clarify whether the restrictions will apply to investments made or capital brought in through other routes like Venture Capital (which could be a multinational investment with Chinese elements), Foreign Portfolio Investment, Alternate Investment Funds etc., including situations wherein a fund manager is based out of China or an investment is routed through China whereas the ultimate beneficial owner is based outside of China
  • Define ‘beneficial ownership’ in the context of evaluating any potential investment for approval requirement

Various industry bodies have already begun reaching out to the Government of India seeking further clarity and requesting for exceptions. It is expected that the government may come out with certain clarification on these aspects soon.

Coronavirus outbreak – IBC suspension.

Suspension of the IBC for a period of 6 months shall further disable the creditors from initiating insolvency resolution proceedings against the corporate debtors, thereby further blocking the mechanism to resolve the debt and recover the credit

In order to prevent community transmission of COVID-19, the government has extended the pan India lockdown. India’s Lockdown 2.0 commenced on April 15, 2020 and shall continue until May 3, 2020. The total count takes it to 40 days since the first phase of the lockdown.

The lockdown has brought India Inc to a standstill, although considering the need to bring the economy back into motion, certain activities in the essential goods and services sector have been allowed, subject to conditions, with effect from April 20, 2020.

The Insolvency Bankruptcy IBC, 2016 (IBC) was enacted in order to provide a solution to creditors, resolve the insolvency of corporate debtors and very importantly, provide a time-bound mechanism to the creditors for debt resolution. Amid COVID-19 outbreak, the government has taken several necessary yet difficult measures such as lockdown, which may render resolution of debts by corporate debtors, strenuous.

Will the IBC be suspended?

As a protectionist move for corporate debtors under the IBC, on March 24, 2020, the Union Finance Minister Nirmala Sitharaman, for the first time, had announced the intention of suspending Sections 7, 9 and 10 of the IBC, in case the difficulties faced by the corporates continue beyond April 30, 2020, amidst the lockdown.

Now that the lockdown has been extended, the government is mulling on promulgation of an ordinance for suspension of the said sections of the IBC. The suspension shall not allow financial and operational creditors as well as corporate debtors themselves from initiating insolvency proceedings.

This is primarily aimed at protecting the medium and small enterprises, which are hit the hardest due to the COVID-19 pandemic, because of disruption of supply chains and disabilities caused by lockdown in carrying out the businesses and generating revenue.

However, a blanket ban on initiation of insolvency proceedings may have been uncalled for as it is likely to have adverse repercussions for certain sections e.g. the creditors. But, the situation may well be unavoidable since the initiation of insolvency proceedings during these times are likely to severely clog the courts and therefore, the government may well press the suspension button, albeit for a temporary period.

We have already seen various measures under the IBC being taken since the last few months including the threshold of minimum default under the IBC being increased ten times from Rs. 1 lakh to Rs. 1 crore thereby swiping off a large number of operational creditors from filing applications for recovery and leaving them toothless under the IBC.

The Force Majeure difficulty

Force majeure is basically a clause which provides an ability to contracting parties to not perform their obligations without being held responsible for it, due to the happening of extraordinary events that were not in their control. Importantly, force majeure is generally not seen in loan agreements. However, business contracts that contain such clauses are likely to see parties invoking it, thereby rendering the performance of contract for the time period, impossible, which means that a corporate debtor, owing to zero or substantially lowered revenues during the lockdown is likely to default on its pay-outs to financial creditors as well as operational creditors. Worse, force majeure clauses in certain contracts may well be drafted in a manner which may not allow an interpretation to be taken such that a pandemic of this nature does not get covered.

If the IBC is suspended, without a doubt, creditors, especially the operational creditors shall be hit hard. Operational creditors, unlike financial creditors are engaged in the supply chain of the corporate debtor and if they are not paid due to invocation of force majeure, this shall further impact their ability to repay their creditors, thereby showcasing a devastating ripple effect on the economy.

RBI’s COVID-19 Regulatory Package

The Reserve Bank of India has allowed financial creditors, i.e., all banks and financial institutions (including NBFCs) to grant a moratorium of 3 months on payment of all term loan installments (including agricultural, retail and crop loans) and interest on working capital loans (such as overdraft facilities), which are due between March 1, 2020, and May 31, 2020.

This not being mandatory in nature, poised a difficult question for borrowers and lenders alike, until India’s largest public sector bank, State Bank of India, opened this line of moratorium and others followed suit. Such moratorium has already made it easy for the debtors to repay their loans and interest after the end of the moratorium.

However, this moratorium shall restrict the liquidity of the creditors and pose difficulty in extending credit to potential borrowers. Even if the credit is extended to potential borrowers considering the hiatus in business activities created by the novel coronavirus pandemic, such borrowers shall be in limited or no capacity to repay at this juncture, which shall only further dry up the liquidity of the creditors. If creditors run out of liquidity, since the Indian banking sector is already exposed to several NPAs, businesses shall be hampered, as a substantial majority run on credit.

How will a suspension be brought about?

The central government may exercise its powers under Section 242 and other provisions of the IBC to issue a notification suspending Sections 7, 9 and 10 of the IBC, in order to prevent the companies at large from being forced into insolvency proceedings. Section 242 empowers the central government to make such provisions not inconsistent with the provisions of the IBC in order to remove any difficulty.

Will a temporary suspension be useful?

Suspension of the IBC for a period of 6 months shall further disable the creditors from initiating insolvency resolution proceedings against the corporate debtors, thereby further blocking the mechanism to resolve the debt and recover the credit.

In light of the aforementioned measures already taken by the government to ensure the corporate debtors to sail through this period of financial stress, suspension of IBC maybe a little too much of an overprotection of the corporate debtors.

Certainly, this suspension will put the creditors in dire financial crisis, as despite the end of the second phase of the lockdown, they will have to remain remediless for at least a period of 6 months, only after which they may seek redressal under the IBC, which shall further take a period of 330 days to recover the loan from the corporate debtors.

This is a long period to throw a lot of creditors, especially the operational creditors out of business. Also, during this extended time, the quality of the asset is most likely going to further decrease.It is imperative to question whether the period of 6 months would be enough for the corporate debtors in regaining the same financial position, as was before the first phase of the lockdown so that repayment towards the loans can be made?

Especially since no economy in the world knows the end date for the current pandemic. Despite that, optimistic economists predict the economic recovery to take at least a span of 9-12 months.

During the IBC’s temporary suspension, corporate debtors may not be reinstated into the pink of their financial conditions, so as to repay their loans. The feeble repayment capacity of the borrowers is evident from various circulars released by RBI upon requests of various stakeholders amid COVID-19.

For instance, the RBI released a circular upon requests of exporters, seeking relaxation in the timeline for realisation and repatriation of funds to India from 9 months to 15 months.

Hence, unless the proceeds are realised, payment of borrowings made by the exporters is only a dream for creditors not coming true anytime soon, even after the period of 6 months for suspension of the IBC is over. This implies that the period of six months may not be enough for the borrowers to regain their repayment capacity, hence the suspension of the IBC may not render envisaged outcomes.

How necessary is suspension of IBC?

However, the suspension of IBC appears to be the last resort before the government to prevent the initiation of mass insolvency proceedings against the companies that may have defaulted during the COVID-19 pandemic impacted period.

Mass insolvency proceedings may cause retardation of economic growth, as vital activities to keep the businesses going are carried out during the insolvency proceedings. Additionally, the already overburdened National Company Law Tribunals (NCLT) shall become further burdened.

Strangely, this time, the debate on whether or not a suspension will be imposed may lie on different pedestals which may not have been why the IBC was brought about in the first place. Unfortunately for the government, India Inc’s engines are corporates themselves and the burden of keeping this engine running may push the government to once again require the banks and financial institutions to shoulder this responsibility. In turn, the government may infuse funding into these banks for sustenance.

 

Data protection – Does india want to be the big state

Authored by Vatsal Gaur, Associate Partner, HSA Advocates

India continues to prove to the world that the State needs to act like a parent for her subjects (data). Good parenting is ideally a result of the parent having lived a life full of rich experience and an ability to master life trajectory. With the democracy still young, and dwindling economic parameters over the last three quarters, the locus standi seems weak. Any attempt to monopolise data, on the pretext of due functioning, is an unfounded approach to monetise the now overused ‘demographic dividend’ of young population.

The recent WhatsApp breach gave further succour to push for a Data State. This was done as the government introduced a draft of the Personal Data Protection Bill (PDP) in Parliament on December 11, 2019. The bill was referred to a joint select parliamentary committee. If the current PDP is anything to go by, there are several opportunity costs. The PDP allows for the processing of personal data for the provision of any ‘service’ or ‘benefit’ provided by the State. In contrast, another provision leaves room to define what constitutes ‘reasonable purposes’ for non-consensual processing of data.

PDP does not have a focus like GDPR, where there is at least onus on the data processor to establish how non-consensual data processing must outweigh the data subject’s fundamental right. Ordinary rules governing judicial review on State action will, therefore, become the default rule for enforcing privacy breaches. However, since the Data Protection Authority (DPA) isn’t under obligation to provide reasoned orders before processing data, the grounds of such judicial challenge will be limited. PDP shall, thus, dilute the Puttaswamy judgment on the right to privacy. A suggestion could be to adopt the GDPR framework to allow subjects to object against data processing by the state in certain situations. The current PDP only allows the right to erasure and call for factual incorrectness of data, but doesn’t provide an outright ability for citizens to object to non-consensual data sharing.

Interestingly, since the technology itself is not sacrosanct and is liable to be manipulated, in case of factually inaccurate data sharing, the State could potentially land in embarrassing situations unless an additional layer of legitimacy is in place. Thus, it is important to staff the DPA not just by appointing retired judges and bureaucrats but also seasoned technology veterans. An intensive boot camp for potential training of candidates is not a far-fetched idea. The Central Government reserves its right to issue binding instructions to the DPA severely compromises the independence, calling the need for an overarching ombudsman structure using established principles of administrative law.

The data localisation requirement under the PDP (although eased from the previous version of the bill) is still not challenge-free. For instance, sensitive personal data (SPD) and personal data would usually be stored as a mixed set, and de-identification may be an arduous exercise. Similarly, leaving the definition of ‘critical personal data’ open to the government, in the absence of legislative guidelines, seems like excessive delegation. Third-party transfers of SPD are required to be approved by the DPA, which could reduce agility in fast-paced innovation, especially blockchain and distributed ledger technology (DLT). An exception for real-time data transmission using DLT should be considered. Similarly, while the sandbox introduced in the PDP is laudable, one needs to take care of the selection criteria of companies. The chances of government owned enterprises competing with private players cannot be excluded. Therefore a ‘neutral’ and well-implemented selection procedure will be imperative.

The government retaining the right to seek anonymised data from data fiduciaries, although patently innocuous, leaves room for enough data sets to be generated which would otherwise not be available to the government. Deanonymisation of data is not entirely off-limits. Further, the blanket right to exclude the applicability of the PDP to State agencies in the interest of ‘sovereignty’, ‘integrity’ or ‘public order’ does place the State on a different footing as far as ownership and processing of data is concerned.

Does India want to be the Big Data State after all, and what is so peculiar about her data subjects that call for them being treated like wayward children? We can only read between the lines for now!

Source: The Financial Express