ARTICLE
29 November 2024

Recent Developments In India's Corporate & Commercial Laws

Fox & Mandal

Contributor

Our focus on responsive and collaborative engagement with our clients is motivated by a desire to seek alignment of values, purpose and ambition. Our extensive clientele extends across varied industry sectors, Fortune 500 companies, domestic conglomerates, startups, PSUs, MNCs, and non-profits. We have grown and expanded to keep pace with our clients and have a team of 20 partners and over 120 professionals across our offices in Kolkata, Mumbai and New Delhi. Even as our footprint continues to grow in India, F&M’s team supports our clients’ global operations and cross-jurisdictional requirements through a network of international law firms and advisors.
The November 2024 edition of Fox & Mandal's newsletter highlights recent developments in India's corporate, insolvency, capital markets, real estate, and banking sectors. In this edition, we examine RBI's guidelines to simplify conversion of FPI to FDI, IBBI's proposals to streamline the real estate insolvency process, SEBI's proposed revisions to the corporate governance framework for HVDLEs, and other legal and regulatory changes in corporate & commercial laws and their business impact.
India Corporate/Commercial Law

The November 2024 edition of Fox & Mandal's newsletter highlights recent developments in India's corporate, insolvency, capital markets, real estate, and banking sectors. In this edition, we examine RBI's guidelines to simplify conversion of FPI to FDI, IBBI's proposals to streamline the real estate insolvency process, SEBI's proposed revisions to the corporate governance framework for HVDLEs, and other legal and regulatory changes in corporate & commercial laws and their impact on the business ecosystem in the country.

Voluntary pre-institutional mediation for operational creditors

IBBI's discussion paper on mediation before initiating insolvency process

The Insolvency and Bankruptcy Board of India (IBBI) issued a paper calling for public comments on its proposal to include a provision for operational creditors to initiate mediation with the corporate debtor and settle its disputes before initiating insolvency.

Since only around 15% of insolvency applications arising out of operational debt have been admitted, with most settlements happening preadmission compared to any subsequent stage, the IBBI concluded that operational creditors are more interested in repayment of their dues rather than the resolution of the corporate debtor. With the view to resolve the conflict and expedite the admission process, the IBBI proposed to include a provision for mediation under the Mediation Act, 2023 which can be voluntarily invoked by the operational creditor prior to the filing of an application under Section 9 of the Insolvency and Bankruptcy Code, 2016 (Code).

The current framework requires a financial creditor to simply file an application under Section 7 of the Code before the National Company Law Tribunal (NCLT) which is admitted on proving a default of over INR 1 crore, whereas for an operational debt, the operational creditor is required to deliver a demand notice of unpaid operational debt to the corporate debtor under Section 8 of the Code, and in case no payment is made within 10 days, the operational creditor may file an application under Section 9 before the NCLT. Even then, the corporate debtor may take the defence of a pre-existing dispute (regarding quality, performance, breach, etc) requiring further adjudication by the NCLT before the corporate debtor is admitted into insolvency.

Given the insignificant position generally accorded to unsecured operational creditors in successful resolution plans that ultimately provide repayment of only a miniscule percentage of the unpaid operational debt, as well as the risk to the corporate debtor of undergoing insolvency, preadmission settlement is beneficial for all parties. As such, despite the parties having likely attempted to mediate their disputes prior to approaching the NCLT, invoking such a statutory provision increases the incentive of parties to settle their disputes to prevent the risk of CIRP.

Simplifying conversion of FPI over 10% to FDI

RBI introduces guidelines to streamline the reclassification of FPI into FDI

On November 11, 2024, the Reserve Bank of India (RBI) introduced new guidelines to simplify the process for Foreign Portfolio Investors (FPIs) to convert their holdings into Foreign Direct Investment (FDI) if their stake in an Indian company surpasses 10%.

Under prior regulations, FPIs in Indian companies were limited to a maximum stake of 10% of the company's paid-up equity. If this limit was breached, the FPI had to divest the excess shares or navigate a cumbersome reclassification to FDI. This lack of a streamlined reclassification process often led to delays and additional compliance hurdles for FPIs who wished to retain investments over the limit. The current FPI ownership cap remains at 10% of an Indian company's equity. However, FPIs now have a 5-trading-day window to reclassify any excess holdings as FDI, provided they secure approvals from the Indian government and the investee company. FDI restrictions still apply to sectors where foreign investment is prohibited, such as lotteries, chit funds, casinos, and atomic energy.

FPIs wishing to reclassify excess holdings as FDI must follow specific compliance procedures. These include adhering to the Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019 and instructing custodians to transfer shares from the FPI demat account to an FDI-designated demat account. Additionally, custodians must notify SEBI if an FPI breaches the 10% ownership limit and suspend further equity transactions in the company until the reclassification is completed. This framework is effective immediately, allowing SEBI and custodians to enforce these guidelines and ensure market compliance and integrity.

The updated guidelines provide a structured pathway for FPIs to retain holdings that exceed the 10% ownership cap without the need for divestment, making Indian markets more attractive to long-term foreign investors. By reducing compliance burdens, the framework supports the government's goal of fostering sustained foreign investment and creating a more investment-friendly environment. However, the framework does come with challenges such as the requirement to complete reclassification within 5 trading days, which can be difficult, particularly if regulatory approvals are needed. FPIs must also ensure compliance with both reporting requirements and sectoral FDI restrictions.

Stricter rules for Wilful Defaulters of all RBI-regulated Entities

RBI (Treatment of Wilful Defaulters and Large Defaulters) Directions, 2024 effective from October 28, 2024

On July 30, 2024, the Reserve Bank of India (RBI) issued Master Directions on the 'Treatment of Wilful Defaulters and Large Defaulters' (Master Directions), effective from October 28, 2024. These directions apply to banks, higher-tier Non-Banking Financial Companies (NBFCs), All India Financial Institutions (AIFIs), and extend reporting requirements to Asset Reconstruction Companies (ARCs) and Credit Information Companies (CICs). They introduce stricter rules on large defaulters and restrict additional credit for wilful defaulters across all RBI-regulated entities. Previously, the identification and management of wilful defaulters was guided by broad, unspecific norms, making consistent monitoring and debt recovery difficult.

The new framework aims to address these challenges.

Key aspects:

  • A 6-month timeline for classification wherein banks and financial institutions must classify a borrower as a wilful defaulter within 6 months of their classification as a Non-Performing Asset (NPA), following internal reviews that detect wilful default.
  • An additional ground for classification has been introduced according to which a borrower or their promoters can now be classified as wilful defaulters if they fail to meet an equity infusion commitment, provided they have the capacity to fulfil it. Lenders are required to act on this by classifying the borrower as a wilful defaulter if promoters fail to meet any shortfall undertakings.
  • Lenders must include clauses that prevent borrowers from appointing individuals listed as wilful defaulters to management positions. § Borrowers whose promoters, directors, or management are on the wilful defaulter list cannot receive renewals, enhanced facilities, new credit, or restructurings.
  • Companies linked to wilful defaulters are prohibited from obtaining new financial facilities or funding for new ventures for up to five years after being removed from the wilful defaulter list. They are also barred from restructuring existing facilities for 1 year after removal.
  • The Master Directions require lenders to adopt specific policies and guidelines, including the creation of identification and review committees, clear guidelines for settlements with wilful defaulters, forensic audit thresholds, and the appointment of designated officials to issue showcase notices and finalise classification decisions. This ensures a more structured and consistent approach to managing wilful defaulters across institutions.

The RBI's revised framework aims to enhance transparency and accountability by providing clear guidelines for identifying and managing wilful defaulters. With stricter covenants and defined timelines, the framework is designed to streamline the debt recovery process and reduce the risks associated with repeat defaulters. However, these changes may require financial institutions to implement rigorous internal processes to meet the new classification timelines and comply with the additional reporting requirements for both large and wilful defaulters.

By addressing gaps in the previous framework, these guidelines empower banks, NBFCs, and other financial institutions to uphold stricter accountability standards. This regulatory clarity is likely to instil greater confidence among creditors, ultimately strengthening India's financial ecosystem and promoting more responsible lending practices.

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