26 Jan YEAR IN REVIEW 2020: COMMERCIAL LAW
Internet and Mobile Association of India v Reserve Bank of India
- The Reserve Bank of India (RBI) issued a Circular on April 6, 2018, stating that banks and other entities were prohibited from dealing with Virtual Currencies (VC’s). It also barred them from providing services to any other entities or individuals dealing in VC’s. This meant that exchanges that engaged in VC trading could no longer function.
- The RBI cited several concerns to justify the issuance of the Circular. Firstly, it contended that since there was no inherent asset upon which VC’s were based, they could cause speculation and volatility, and those entities dealing in them could suffer large losses. Secondly, it alleged that the VC’s could serve as a medium for financing terrorist activities, and money laundering. Thirdly, they argued that VC’s were also susceptible to hacking. Prior to this Circular, the RBI had released a press note in 2013 highlighting the same concerns.
- In Internet and Mobile Association of India (IAMAI) v. Reserve Bank of India, the petitioners, IAMAI, along with other stakeholders of the crypto-asset exchange platforms, etc. challenged the constitutionality of the Circular through writ petitions filed before the Supreme Court.
- The petitioners’ argument was two-pronged. First, they alleged that the RBI was not empowered to regulate VC’s since they lacked all the essential characteristics of money/legal tenders. They also did not constitute the term ‘payment system’ under the Payment Settlement and Systems Act, 2007. According to them, VC’s should therefore be treated as goods or commodities. Their second contention was that even in the case that VC’s were in fact money/legal tenders, the Circular imposed a disproportionate infringement on the petitioners’ right to practice any trade or profession under Article 19(1)(g) of the Constitution.
- As for the first argument, although the Supreme Court conceded that VC’s ‘belong to different categories ranging from property to commodity to non-traditional currency to payment instrument to money to fund’, it also asserted that if a commodity serves a function that is equivalent to that of a currency in certain cases, the RBI does possess the authority to regulate it, as the foremost authority in India’s financial system. Secondly, the Court held that terms of the Circular did disproportionally restrict the rights of the petitioners as the RBI had failed to show that its entities had suffered ‘loss or adverse effect, directly or indirectly’ due to VC’s. Furthermore, there were alternative regulatory mechanisms available to temper the potential issues with VC’s, as shown by various other countries.
- Although the Court did strike down the restrictive Circular as unconstitutional, it is notable that the Courts are yet to weigh in on the legality of VC’s. Although the Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019 has been introduced in the Parliament, VC’s remain unregulated in the country presently.
Insolvency and Bankruptcy Law Developments in 2020
- The year 2020 witnessed numerous significant developments in Indian Bankruptcy law, starting with the promulgation of the Insolvency and Bankruptcy Code (Amendment) Act, 2020, which followed the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019. The new Amendment eliminated many limitations encountered in the functioning of the IBC, as enumerated below.
- The Amendment modified the definition of the term ‘interim finance’ in order to allow the government to notify additional classes of debt (e.g., last-mile funding) as ‘interim finance’. Prior to the Amendment, all kinds of debts incurred by the corporate debtor before the start of the insolvency proceedings were treated identically. This often resulted in reduced additional funding or debt restructuring. Thus, the Amendment could potentially help debtors raise additional debt which would be treated as ‘interim finance’. This debt which would have superiority over other kinds of debt in the event of insolvency.
- An amendment to Section 11 of the IBC has also enabled corporate debtors to initiate the corporate insolvency resolution process against other corporate debtors.
- Moreover, the Amendment laid down that in the case insolvency applications relating to real estate projects, the application must be filed by a minimum of 100 allottees or 10 per cent of the total number of allotees, whichever was less. This remedied situations where an application by a single allotee halted the entire project.
- The Amendment also states that all licenses, concessions, clearances, permits, etc. provided by the government shall remain valid throughout the moratorium period, and shall not be suspended or terminated due to the insolvency of the corporate debtor, as long as the current dues are being paid.
- Additionally, the Amendment has modified Section 32-A of the principal Act to provide that corporate debtors will not liable for offences that have been committed before the commencement of the insolvency resolution process after the date of approval by the adjudicating authorities. The amended section also states that no action will be taken in respect of any property of the corporate debtor for such an offence, if the property is included under the plan approved by the adjudicating authorities or is part of the sale of liquidation assets.
- The Government has also introduced some crucial modifications to alleviate the effects of the COVID-19 pandemic. In March 2020, the threshold for initiation of the insolvency resolution process against defaulting companies was raised from Rs. 1 lakh to Rs. 1 crore.
- Further, the Insolvency and Bankruptcy (Amendment) Ordinance 2020 was promulgated on 5th June, 2020. It suspends Sections 7, 8, 9 and 10 of the Code that provide for initiation of corporate resolution proceedings by financial creditors, operational creditors and corporate debtors. Although this suspension evoked a mixed response from stakeholders, the Insolvency and Bankruptcy (Second Amendment) Act, 2020 was passed in September 2020, which added Section 10 A to the Act. S. 10 A states that no application for the initiation of the resolution process shall ever be filed in respect of a default that occurred after 25th March, 2020. The latest notification by the MCA, released on December 22nd, extends the suspension period up to March 25, 2021.
Taxation- Abolition of Dividend Distribution Tax
- Presented by Finance Minister Nirmala Sitharaman, the Union Budget 2020-21 has incorporated several big reforms for investors, including the treatment of the dividend distribution levy (DDT).
- In its budget address, the FM suggested the abolition of DDT and the introduction of the classical scheme in which the dividend is taxed in the recipients’ hands at their relevant slab rates and the businesses are no longer needed to pay DDT.
- At both the business and mutual fund levels, the dividend distribution tax (DDT) has been abolished.
- However, at the rate of 10 percent, tax will be deducted at source (TDS) on such dividend income in excess of Rs 5,000 per annum .
- The abolition of DDT requires corporations to share with shareholders their entire distributable profits; however, its effect on receivers of dividends is unequal.
- According to the government, this policy reform will benefit all taxpayers, and it will benefit corporations, but it will really benefit all end-investors who earn dividends and who will now have to pay tax on them.
- The irony is explained by the fact that while some groups of equity holders, after the abolition of DDT, would benefit from lower taxes on their dividend revenue, others will end up paying through their nose.
SEBI Circulars- Disclosure of COVID related impact on business, Social Stock Exchange etc.
- SEBI has issued an advisory on the disclosure of the material impact of COVID-19 to listed entities under the LODR vide circular SEBI/HO/CFD/CMD1/CIR/P/2020/84 dated 20 May 2020 (‘SEBI Circular’) encouraging them to assess, qualitatively and quantitatively, to the extent possible, the impact of the COVID-19 pandemic on their sector, performance and finances and to disseminate the same to the Stock.
- Concerning the effects of the COVID-19 pandemic, the SEBI Circular offers guidelines on concerns that may be protected by disclosure:
- The SEBI Circular guides on the matters which can be covered under disclosure concerning the impact of COVID-19 Pandemic:
- Impact of the CoVID-19 pandemic on the business;
- Ability to manage activities like the working and closed-down factories/units/office spaces;
- Schedule, if any, for operations to restart;
- Measures are taken to ensure smooth organisational functioning;
- Estimation of COVID-19’s potential effects on its operations;
- Effect information on CoVID-19 on the listed entity’s
- Financial and capital resources;
- Place on liquidity;
- The willingness to pay the debt and other provisions for financing;
- Financial internal monitoring and control;
- Chain of supply;
- The market for its services/products;
- Current contracts/agreements where either party’s failure to fulfil obligations would have a major effect on the business of the organisation listed;
- Furthermore, the Circular indicates that the Company will periodically report further material updates and provide the effect of COVID-19 on its financial statements along with the financial statements submitted to the Stock Exchange.
Imposition of Moratorium and other Issues in the Banking Sector
· In light of the various hindrances to the economy, the banking sector seems to have felt the tremble in 2020. The pre-existing problems were met with newer challenges amongst the Covid-19 outbreak, and numerous changes were brought about in regulation of the banking sector in order to counter the effect of the pandemic.
· An issue warranting caution was highlighted in a report by research consultancy Capital Economics, namely, the concerning condition of the banking sector, which has been further adversely impacted by the coronavirus pandemic.
· In March 2020, a moratorium on repayment of retail loans was announced by the Reserve Bank of India, to ease the ongoing crisis. The repayment schedules of all term loans of all banks and lenders were permitted to be extended by 3 months, up till May 31, 2020, which was then further extended till August 31, 2020.
· In June 2020, the President promulgated an ordinance, the Banking Regulation (Amendment) Ordinance, that enabled the Reserve Bank of India to revive banks without imposition of a moratorium, in order to prevent any disruption of the financial system. The amendment was introduced in Section 45 of the Banking Regulation Act, 1949. The ordinance sought to bolster the cooperative banks and provide protection to the depositors.
· The Banking (Amendment) Act, 2020, is set to come into force in place of the ordinance. It will mainly amend Section 3, Section 45, and Section 56 of the Banking Act.
· Further, a 30-day moratorium was proposed in November for the revival of Lakshmi Vilas Bank Ltd. (LVB), in addition to a draft scheme for its amalgamation with DBS bank, India, a subsidiary of DBS of Singapore.
Revival of Modes of Restructuring: RBI initiatives in this regard
· The Reserve Bank of India sanctioned the loan restructuring scheme for stressed borrowers, in its monetary policy review, providing a special window that enabled one-time loan restructuring to individuals as well as companies. It was aimed to provide relief especially to those negatively affected by the Covid-19 pandemic.
· The ones possessing loan accounts in default for not over 30 days as of March 1, 2020, were alone held to be eligible for the one-time loan restructuring. A resolution plan was allowed to be devised till December 31, 2020, in respect of corporate borrowers, which could be implemented till June 31, 2020.
· Till the date of invoking of plan, such a loan account would continue to be standard, and the one-time window was proposed to be available across all sectors.
· A five-member committee, headed by K V Kamath, was set up for the very purpose of overseeing this plan, including setting benchmark ranges specific to different sectors, and factoring in various parameters for each resolution plan.
· The restructuring was envisioned to offer relief to those companies that serviced loan obligations on a timely basis, however, faced difficulties during the pandemic due to a direct negative effect of the series of lockdowns on their revenues. Thus, companies previously in default, were not allowed to avail this facility.
Key Features of the Companies (Amendment) Act, 2020
The Ministry of Finance introduced the Companies (Amendment) Act, 2020 in order to make some amendments to the Companies Act, 2013. It seeks to decriminalise minor procedural or technical lapses….into civil wrong and focuses on providing certain relaxation and benefits for greater ease of living for law abiding corporate.
Some of the features of this amendment act are as follows:
- Decriminalization Of Certain Offences – The bill proposes changes to certain offences in relation to technical and procedural defaults which can be determined objectively or otherwise lack any element of fraud or do not involve larger public interest.
- Producer Companies – It proposes a new chapter XXIA relating to “producer companies and its incorporation”. This chapter has been introduced for the benefit of farmers, handloom, agriculture as well as cottage industries. The CLC Report defines a “Producer Companies as, “a body corporate comprising of farmers and agriculturists who work in cooperation with each other to promote better standard of living and gain easier access to credit, technology, market, etc.”
- Corporate Social Responsibility – The bill exempts the companies with a CSR liability of up to Rs. 50 lakh a year from setting up CSR committee. Furthermore, the Bill allows eligible companies to set off the excess amount towards there CSR obligations in the subsequent financial years.
- Direct Listing – It allows direct listing of securities by Indian companies in permissible foreign jurisdiction as per rules to be prescribed. This would be considered beneficial for start-ups to tap overseas market for raising capitals.
- Reduced Timeline For Issue Of Rights – As per section 62 of the Act the timeline of providing offer letter to the existing shareholder has been reduced to 15 days to not more than 30 days, beyond which the offer is to be deemed declined.
- Exemption of Filing Resolutions and Agreements-Section 117 requires the filing of resolution with the ROC. As per Companies Act, 2013 it exempts banking companies providing loan, guarantee, and security in connection of providing loan from filing the resolution in e-Form MGT-14. The current bill now proposes to extend such exemption to registered NBFC license and HFCs.
- Benches Of NCLAT – The Companies (Amendment) Bill,2020 proposes section 418A for setting up benches of the National Company Law Appellate Tribunal in order to ease the burden and also to decrease the pendency of cases. The ceiling of the maximum strength of NCLAT under section 410 of the Act has been proposed to be removed in the bill.
- Periodical Financial Results – This is a newly inserted clause in the bill under section 129A. The Central Government shall require such class or classes of Unlisted companies as may be prescribed.