India: ‘Preferential Allotment' In Restructuring Schemes

Last Updated: 20 September 2017
Article by K. A. Najmi and Y. Sriniwas Arun

The restructuring of stressed assets under the Strategic Debt Restructuring Scheme (SDR), the Scheme for Sustainable Structuring of Stressed Assets (S4A) or any other deep restructuring under the extant guidelines of the Reserve Bank of India (RBI) seeks to achieve timely resolution of stressed assets.

The purpose of the restructuring is to enable the borrowing company to address intermittent cash stress and meet the repayment obligations of its debts by converting the unsustainable portion of debt into equity or an equity-like instrument, thus substantially reducing the debt repayment and servicing obligation of the company for a considerable time.

A comparison between the allotment of securities by further issue in the normal course and allotments pursuant to the restructuring schemes reveals substantial differences in the processes.

In the case of further issue in the normal course, the Companies Act, 2013, and the rules made under it set out a significant and proactive role for the board of directors in driving the process of further issue of capital by private placement/preferential allotment.

As against this, S4A involves identification or acknowledgement of a stress situation (either current or potential), building consensus on the need for restructuring, subjecting the company to a techno economic viability study by an independent agency, drafting a resolution plan (based on the study) by the majority of the lenders and submitting it to the overseeing committee. The committee reviews the plan and examines whether it is in conformity with the S4A guidelines. If the plan is found to be in order, it becomes binding on the lenders. It is then communicated to the borrower, which is expected to carry out all corporate compliances and allot the securities as per the resolution plan.

A doubt has been raised in some quarters as to whether the issue of securities pursuant to restructuring schemes is in compliance with the Companies Act and rules framed under it in relation to preferential allotment on a private placement basis. Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014, lays down that the issue of shares on a preferential basis should comply with section 42, which in turn stipulates issuance of a "private placement offer letter" by the company. Under S4A the need to make preferential allotment on a private placement basis emanates from approval of the resolution plan by the lenders and is not a normal business need or outcome.

The resolution plan, on being approved, is communicated to the company and triggers further action on the part of the company to achieve the following: (i) approval of implementation of the resolution plan by the shareholders and the board of directors; (ii) issuance of securities pursuant to section 62 and other applicable provisions of the Companies Act pertaining to allotment of securities; and (iii) amendment of the articles of association, if required.

The restructuring schemes have been formulated to address larger interests and are vital for managing the non-performing assets of banks. Hence, the schemes call for a holistic approach from a compliance perspective in accord with the underlying spirit and intent of the legislative prescriptions.

Section 62(3) of the Companies Act allows conversion of debt into equity. However, difficulty is encountered in cases where the conversion option is not available to the lender under the loan agreement and/or a special resolution under section 62(3) was not passed. It is desirable that sub-section (3) of section 62 be suitably amended or that the applicability of sub-sections (4), (5) and (6) of section 62 be extended for the securities issued pursuant to the restructuring schemes.

Another area of concern in the formulation of the resolution plan under S4A has been the pricing of listed shares for conversion purposes where such shares are traded at a price which is far from being representative of their real value as arrived at on the basis of the techno economic viability report prepared by an independent agency.

Where, despite the high price at which the company's shares are being traded, the borrower is in financial distress and approaches its lenders for restructuring of debt, S4A becomes difficult to apply. This is because, under the regulations of the Securities and Exchange Board of India, the debt is to be converted into equity at a price at which the shares are being traded in the market. Hence, in such situations, allowing conversion at a fair value on a case-to-case basis could go a long way in resolving the pricing issue and thus achieving the objective of the restructuring schemes.

Recent Amendments

Recent amendment to Legal Metrology (Packaged Commodity) Rules, 2011.

  1. The Legal Metrology (Packaged Commodities) Rules ("Rules"), 2011 regulates pre-packaged commodities and provides, among other things, certain mandatory declarations to be made on the package or on the label affixed on the package.
  2. Recently, the Ministry of Consumer Affairs, Foods and Public Administration ("Ministry") has notified Legal Metrology (Packaged Commodities) Amendment Rules, 2017 ("Amendment Rules"). The Amendment Rules are aimed at enhancing customer protection, while also balancing the requirement of ease of doing business. The Amendments Rules shall come into force with effect from January 1, 2018.
  3. The substantial changes that have been made to the Rules by the Amendment Rules are summarized below:

    1. The definition of 'institutional consumer' under Rule 2 has been amended to prevent commercial transactions by such institutions. Accordingly, 'institutional consumer' means the institution which buys packaged commodities bearing a declaration 'not for retail sale', directly from the manufacturer or from an importer or from wholesale dealer for use by that institution and not for commercial or trade purposes.
    2. In respect of packages containing food articles, the declaration of name and address of manufacturer, packer and /or importer as provided in Rule 6 (1) (a) of the Rules shall not be applicable and such declarations are required to be made as per requirements specified in Food Safety and Standards Act, 2006. Prior to the Amendment Rules, the entire Rule 6 (1) was not applicable to packages containing food articles, and all the declarations were required to be made as per Food Safety and Standards Act, 2006.
    3. In case of imported products, name of the country of origin or manufacture or assembly should be mentioned on the package.
    4. Declarations such as 'best before or use by date, month and year' should be mentioned on the packages containing items that can become unfit for consumption after the expiry of the stated time. The terms "best before" and "use by date" have been defined. However, if any other law has provisions in respect of "best before" / "use by date", the provisions of the Rules in this regard shall not apply.
    5. Placing barcodes, e-codes and authorized logos of Government schemes, such as Swatch Bharat Mission on the packages has been made discretionary. However, e-code for net quantity assurance of the commodity and other required declarations may be made only after obtaining the same in the manner as specified by the Central Government.
    6. E-commerce entities or in case of market-place model of e-commerce, the manufacturers or the sellers are required to display all the mandatory declarations specified in the Rules, except for month and year in which the commodity is manufactured or packed, on the digital and electronic networks used for e-commerce transactions.
    7. The specifications of height and width of declaration made on the package has been increased, particularly for packages with principal display panel of 50 to 500 square centimeters. Further, the manner of determining the area of principal display panel has also been provided in Rule 7.
    8. Specific mention has been made in the Rules that no person shall declare different MRPs (dual MRPs) on identical pre-packaged commodity unless permitted under any law. This will have a huge impact on the consumers, manufacturers and retailers as no person can overcharge for identical products.
    9. The manner of carrying out test of quantity and error and manner of deciding the samples for the purposes of conducting inspection has been made more scientific.
    10. Definition of the terms consumer, e-commerce, e-commerce entity and marketplace based model of e-commerce has been inserted in the Rules.
    11. Penalty for contravention of provisions where specific penalty is not provided has been enhanced from INR 2,000 to INR 5,000.
  4. In addition to the above, the Ministry has, vide notice dated July 4, 2017 ("Notice"), provided certain clarifications in respect of unsold stock of pre-packaged commodities, subsequent to the introduction of Goods and Services Tax with effect from July 1, 2017. As per the Notice:

    1. Manufacturers, packers or importers of pre-packed commodities are permitted to declare the changed retail sale price (MRP) due to imposition of GST ("Changed Price"), on unsold stock manufactured/packaged/imported prior to July 1, 2017, only till September 30, 2017.
    2. The Changed Price may be mentioned by way of stamping, sticker or printing.
    3. The Changed Price shall not be more than the increase in GST or any fresh tax made applicable on the product.
    4. The Changed Price shall not overwrite the original price already printed on the package.
    5. Notice of Changed Price must be advertised in newspapers, circulated to dealers and to the Director / Controller of Legal Metrology.
    6. Any packaging material or wrapper which could not be exhausted by the manufacturer/packer/importer prior to July 1, 2017, may be used for packaging of material up to September 30, 2017 or till such date the packaging material or wrapper is exhausted, whichever is earlier, after mentioning the Changed Price and adhering to the abovementioned conditions.
  5. As mentioned above, the primary objective of the Amendment Rules is to bring more transparency and accountability. Further, the Notice, with the objective of keeping in pace with the tax reforms, provides transition provisions. It is important for companies dealing with pre-packaged commodities meant for retail consumption in India to review their labels and make necessary changes to ensure that they are not violating the applicable laws, as amended from time to time.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions