Corporate & Financial Law

The Insolvency and Bankruptcy Bill, 2015 introduced in Parliament

Licensed under  CC BY-SA 3.0     NY

Licensed under CC BY-SA 3.0 NY

In the Indian economy, one of the significant factors for the failure of credit market is the lack of resolution of insolvency. The current laws governing insolvency are fragmented, multi-layered and the adjudication of insolvency matters take place in multiple fora, resulting in the development of an unpredictable regime.

Several government committees have worked on this subject for the past few decades. However, the Bankruptcy Law Reform Committee (BLRC) which was set up in August, 2014 under the chairmanship of Mr. T.K. Vishwanathan (former Secretary General, Lok Sabha and former Union Law Secretary) is the first committee with the mandate of suggesting comprehensive and not incremental reforms. The BLRC extensively studied the insolvency regime within India as well as various international jurisdictions and proposed an all-encompassing law for corporate and individual insolvency, reflecting the best practices from across the globe.

In November this year (2015), the BLRC submitted to the Ministry of Finance its final report in two volumes, which was put up for public comments. The report was well received by stakeholders and is pegged as a major reform for the Indian economy, needed for facilitating credit and creating a higher flow of capital in the economy. In his budget speech, Finance Minister Arun Jaitley identified Bankruptcy Law Reform as a key priority for improving the ease of doing business in India.

Volume I captures the rationale and design of the proposed law elaborates upon the economic rationale for the proposed law and the infrastructure required to set the law in motion.

The underlying principle for corporates is the assessment of viability of an enterprise in the early stages of insolvency, such that the creditor and the debtors can negotiate a financial arrangement while preserving the economic value of the enterprise. However, if the negotiations fail, then the enterprise is liquidated. The insolvency resolution is required to be done within a period of 180 days, and there is also a provision for fast track insolvency resolution for certain entities which is required to be completed within 90 days.

Since the stigma attached to bankruptcy is higher for individuals, the focus of the individual insolvency is on negotiated repayment between the creditors and the debtor. Bankruptcy is triggered only on a failure of such negotiations, however, unlike corporate insolvency, it is not automatic. A special mechanism of debt waiver for a specific set of indigent persons is also envisaged, to provide them with a fresh start.

Volume II encapsulates the draft of the Insolvency and Bankruptcy Code for the country. The intent is to provide a sound framework of law with procedural and judicial certainty. The code contains the legal provisions governing the mechanisms for corporate and individual insolvency and bankruptcy resolution. It also contains the law for - setting up and operationalizing the insolvency and bankruptcy regulator, the functioning of the adjudicator and insolvency professionals and the establishment of information utilities and insolvency professional agencies.

The Bill was introduced in Parliament on 21st December and has been hailed as an 'excellent reform' for India that will pay a critical role in improving the ease of doing business.

Vidhi assisted the BLRC and the Ministry of Finance in the research and drafting of the Code, and is presently assisting the ministry in follow up work.  

RBI takes steps to improve credit rating of infrastructure company bonds

Photo by Ramnath Bhat licensed under CC BY-SA 2.0

Photo by Ramnath Bhat licensed under CC BY-SA 2.0

The RBI recently issued a circular that allows infrastructure companies to issue bonds (debt instruments) supported by credit enhancement through an irrevocable contingent line of credit provided by commercial banks up to a limit of 20% of the bond issue size.  Such partial credit enhancement will enable the bonds to get higher credit ratings, which should attract investments from insurance and provident/pension funds, which are otherwise unable to invest in such bonds because of the low credit ratings. The circular promotes an alternative source of finance for infrastructure companies, which are heavily dependent on banks for their financing requirements. 

Vidhi advised the RBI on certain key aspects of this circular. 

Report of the Committee to recommend measures for curbing mis-selling of financial products

Image by Katrina.Tuliao  l icensed under CC2.0

Image by Katrina.Tuliao licensed under CC2.0

The Ministry of Finance recently released a Report prepared by a Committee to recommend measures for curbing mis-selling and rationalising distribution incentives in financial products . The remit of the study undertaken for the Report was to analyse the incentive structures of various financial investment products and suggest measures for ensuring the protection of consumers. Bearing in mind the inferences from the study, the Report makes specific recommendations in the context of product structures, costs, commissions and necessary disclosures for the benefit of the consumers.

Vidhi provided research assistance to the Committee constituted to draft the Report.

New RBI Norms on Debt Restructuring

The Reserve Bank of India has notified a ‘Strategic Debt Restructuring Scheme’ as part of its ‘Framework for Revitalization of Distressed Assets in the Economy’. Among other provisions, the scheme allows lenders to acquire a controlling interest in a distressed debtor company and appoint professional management to run the affairs of the company as part of a debt restructuring exercise in appropriate cases. 

This is based on Vidhi’s recommendations in a concept paper submitted to the RBI in October last year as part of our research mandate from the RBI. The Scheme can be accessed here.  

 

Revival and Rehabilitation of MSMEs

The Notification on instructions for the Framework for the Revival and Rehabilitation of Micro, Small and Medium Enterprises, issued by the Central Government dated 29th May, 2015 provides for an out-of-court mechanism for the rehabilitation of sick MSMEs. It intends to provide early and feasible solutions to bankruptcy proceedings, without procedural delays. 

The Notification is based on the recommendations contained in Chapter 8 of the BLRC's Interim Report, which Vidhi assisted in drafting. 

 

Concept Papers for the Reserve Bank of India

By Nichalp CC2.5

Vidhi has the mandate of preparing Concept Papers for the Reserve Bank of India in critical areas of law reform. This includes

1. Disciplining wilful defaulters

2. Empowering the RBI in relation to resolution of failed or failing banks

3. Resolution of the problems concerning non-performing assets in the banking sector

4. Improving the consumer financial protection regime.

Recommendation made by us in our report on 'Devising better legal mechanisms for identifying and disciplining wilful defaulters and deterring wilful defaults' were incorporated to bring about substantive changes in the RBI's Master Circular on Wilful Defaulters

Bankruptcy Law Reform

The Interim Report of the Bankruptcy Law Reform Committee (headed by former Law Secretary TK Viswanathan and set up by the Ministry of Finance) has been released and it suggests changes in India’s corporate bankruptcy legal framework. Vidhi assisted the Committee with legal research and drafting of the report. The Report can be accessed here.

The report has been well-received by the stakeholders. It has been covered by several national and international dailies including the Economic Times, the Business StandardLive Mint, the Financial Express, the Hindu, and IFR Asia (a Thomson Reuters publication). 

Vidhi will now be assisting the Committee in drafting a Bankruptcy Code for India.