India: Corporate Laws: Legal Milestones In 2017 And A Look Ahead

Last Updated: 8 March 2018
Article by Trilegal .

 2017 witnessed the passing of the Companies (Amendment) Act, 2017 and various initiatives towards regulatory liberalisation to attract foreign investment. This update summarises some of the major corporate law developments in the past year and gives you a brief overview of what can be expected in 2018.

The Year That Was

The government continued with its reformist approach, and India's 30-notch jump in the World Bank's rankings for ease of doing business was generally well-received by the business community. The introduction of a nation-wide Goods and Services Tax, and the developments regarding the Insolvency and Bankruptcy Code were the most important talking points.

MAJOR DEVELOPMENTS IN 2017

1. Foreign Investment

(a) Abolition of FIPB

The government continued its bid for attracting greater foreign investment inflows. As part of this process, the Foreign Investment Promotion Board (FIPB) was dismantled, with the relevant departments/ministries now stepping in wherever sectoral approvals were required. A standard-operating-procedure (SOP) was issued to simplify and consolidate the process of obtaining ministerial approvals for various Foreign Direct Investment (FDI) proposals.

(b) FPI Investment in Corporate Debt Securities

Another significant reform was the permission granted to registered Foreign Portfolio Investors (FPIs) to invest in unlisted corporate debt securities. Prior to these amendments, only infrastructure companies could issue unlisted NCDs/bonds to FPIs. This amendment is aimed at providing another avenue for Indian companies to raise debt, with significantly lesser compliance costs.

(c) New FEMA 20

In November 2017, the Reserve Bank of India (RBI) also issued the FEMA (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017, to replace the regulations which were popularly known as 'FEMA 20'. The key changes made under these regulations are:

(i) Classifying FDI and FPI investments

Under the new regulations, FDI has been defined to mean investments by non-residents in unlisted companies or 10% or more in listed companies. An investment of less than 10% in a listed company is classified as a foreign portfolio investment (FPI) and if this limit is crossed, then mandatory reclassification and divestment norms apply. Going forward, this new classification (i.e. FDI v. FPI) will have implications on investments in the listed space, and will affect structuring, pricing, tax and exits.

(ii) Dividend on preference shares

Previously, the rate of dividend that could be paid to foreign investors on preference shares was capped at 300 bps over the SBI prime lending rate. This cap has now been removed.

(iii) Transfers by NRIs

Foreign investors are now permitted to acquire shares from NRIs without any governmental approvals (except in cases where sectoral approvals apply).

(d) Liberalisation of FDI policy

The government liberalized foreign investment restrictions in several sectors. For example, in the aviation space, foreign investment limits in existing aviation projects was increased to 100% under the automatic route (from a 74% limit), and to 100% in scheduled air transport services and regional air transport services.

Sourcing norms in single brand retail trading were also eased and upto 100% foreign investment (under the government route) was allowed for retail trading in respect of food products manufactured in India.

2. Companies Amendment Act

2017 ended with the passing of the Companies (Amendment) Act 2017 (Amendment). The Amendment made over 40 revisions to the Companies Act, 2013, with the aim of strengthening corporate governance norms and improving the ease of doing business.

Key changes include simplifying the private placement process (by reducing the number of filings), harmonizing provisions with SEBI and RBI regulations and removing the requirement to obtain governmental approval when managerial remuneration exceeds prescribed limits.

Another key change is the rationalization of penalties, with the quantum of penalty now being determined after considering the size of the company, nature of business, injury to public interest, nature and gravity of default and repetition of default.

3. Insolvency and Bankruptcy Code, 2016

The Insolvency & Bankruptcy Code, 2016 (Code) attracted immense attention in its first year of implementation, with more than 4300 petitions being filed in the NCLT. The RBI played a particularly proactive role by requiring banks to initiate proceedings against 40 of the biggest NPA accounts.

The government too played an active role, by issuing an Ordinance to plug loopholes and account for developments that had taken place over the course of the year. The most significant change introduced under the Ordinance was to bar certain classes of persons/promoters from submitting resolution plans. Expectantly, this spurred an intense (and ongoing) debate amongst market participants. One view was that the change would end up reducing flexibility for creditors, especially given that certain assets (owing to the nature of business, legacy issues, etc.) would only attract attention from promoters. On the other hand, it was felt that the change would send a powerful signal to promoters and may in fact result in a shift towards a stronger and more disciplined debt repayment culture. The amendment act replacing the Ordinance received Presidential assent on 18 January 2018 and is deemed to be effective from 23 November 2017.

The Insolvency and Bankruptcy Board also issued guidelines on a gamut of issues, including the voluntary liquidation process, fast track insolvency procedures for certain companies, information utilities under the Code, etc.

On the judicial front, as cases made their way through the system, many important issues came up for determination, such as the interplay between the Code and other debt recovery laws, whether the time periods specified in the Code are mandatory or directory, the scope of the role of the insolvency resolution professional, treatment of homebuyers in proceedings against builder companies, etc.

Overall, there was a concerted effort from market participants, the government, courts and the regulators, to make sure that the Code doesn't meet the fate of other debt recovery and resolution efforts of the past.

4. Real Estate

The Real Estate (Regulation and Development) Act came into force in 2017. It provides for the establishment of a Real Estate Regulatory Authority (RERA), with which all real estate projects are required to be registered.

In case of project delays, the developer becomes liable for paying compensation, and its registration can be cancelled. An important development from a developer's and an investor's perspective is the requirement that 70% of all project receivables be deposited in a separate bank account, which can only be used for land and construction costs incurred for that project. This will affect cashflow management for most developers, and market participants expect that there will be a shift from front-ended cashflow models (through pre-sales, soft launches, etc.) to more working capital-intensive models.

Looking Ahead

The government is expected to continue liberalising foreign investment regulations. This trend is evident from the first fortnight of the year itself, with the government easing foreign investment norms in the construction development, single brand retail trading and other sectors.

Other big-ticket steps which bolster the government's reformist credentials (such as Air India's privatization) are expected to take place as well. The government's stated aim of improving the ease of doing business will likely see steps towards strengthening court machinery, making it easier to specifically enforce contracts, harmonizing disparate legislations on the same subject matter, and repealing redundant regulations.

In the insolvency space, the implementation of the Code on the ground will be keenly tracked. The government has already set up a committee to review the functioning of the Code and its recommendations are expected to be issued this year. Additionally, in a number of high-profile test cases the deadline for a resolution-plan approval or ordering a liquidation will be coming up in the first half of 2018 and it will be interesting to see how these play out.

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.

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