REVISION OF FDI POLICY | INDIA RAISING `THE WALL` AGAINST CHINA

In light of the effects of the Covid-19 pandemic, the Government of India (Government) has issued Press Note 3 (2020 series) on 17 April 2020 (Press Note) revising the Government’s position on investments from neighbouring countries and more particularly, regulating Chinese investments in Indian companies. This Press Note will enable the Government to monitor and regulate the Foreign Direct Investment (FDI) coming into the country through Chinese investors.

Prior to this Press Note, according to the Foreign Direct Investment Policy (FDI Policy), a non- resident entity could invest in India, other than the sectors / activities which are prohibited. However, citizens of / entities incorporated in Bangladesh could invest in India through the government route only. Further, citizens of / entities incorporated in Pakistan, could invest in India only through the government route in all sectors other than defence, space, atomic energy and other activities / sectors prohibited by the Government.

After the Press Note, the major change brought about by the Government in the FDI Policy is, that any entity of a country with whom India shares a border or where the beneficial owner of an investment into India is situated in or is a citizen of such country, that entity / individual can only invest in India, through the government route, irrespective of the sector that the investment is in.

The Government further clarified the above by explaining that, in the event of transfer of ownership of any existing or future FDI in an entity in India, either directly or indirectly, resulting in the beneficial ownership falling within the purview of the above paragraph, such investment would also require government approval.

While from the looks of it, this Press Note targets all of India`s neighbouring countries, we believe that the effect of this would be felt greatly by the Chinese companies as it is only Chinese entities which have the financial capability to enter into takeovers/amalgamations/mergers concerning Indian companies.

India has applied the revised FDI Policy across all sectors and not only the ones which were considered to be `sensitive` sectors. Further, the Government, in the Press Note has not made any distinction between majority/control investments or minority or passive investments. This can be further explained by the fact that after this Press Note, all international transactions of Chinese investors with global companies, who have an Indian subsidiary, would additionally require prior approval of the Government. This is so, as the beneficial ownership of the Indian company, will be deemed to have been transferred to the Chinese investor as a result of the takeover of the global company.

Existing FDI made by Chinese investors is not covered in the Press Note. The Press Note only covers new FDI by Chinese investors in India. This would mean that if a Chinese investor wanted to infuse capital in any of its Indian subsidiaries, prior Government approval would be required.

MHCO Comment: The objective of this Press Note seems to curb opportunistic acquisitions in the Indian companies, in light of this pandemic (Covid-19) where the share prices of several blue chip companies have fallen by more than 50% in last 2 months. Complimenting this Press Note, the Securities and Exchange of Board of India (SEBI), also put investments by China and Hong Kong in Indian companies under scrutiny. These efforts to seal the so- called commercial borders of India, come in the light of similar protective and precautionary measures taken by Australia, United States of America, Spain, Germany, Italy and other European countries. While imbibing the essence of measures taken globally, the Press Note has not clarified the term beneficial ownership, neither has it defined the ambit or the method of computation of beneficial ownership. Clarifications from the Government in this regard of awaited.

The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or legalupdates@mhcolaw.comfor any assistance.

IBC UPDATE | REVERSE CORPORATE INSOLVENCY PROCESS TO BE FOLLOWED FOR REAL ESTATE COMPANIES

National Company Law Appellate Tribunal (NCLAT) recently passed a first of its kind Order, in Umang Realtech Case, wherein it held that Corporate Insolvency Resolution Process (CIRP) initiated against a real estate company is to be confined to a particular project and the same cannot affect other projects of the real estate company.

Background:

Two allottees (Applicants), under a project being developed by Umang Realtech Private Limited (Corporate Debtor) moved an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) for initiating CIRP of the Corporate Debtor. National Company Law Tribunal, Principal Bench, New Delhi (NCLT) admitted the application.

As per the IBC, after initiation of the CIRP, it is the duty of the Interim Resolution Professional (IRP)/ Resolution Profession (RP) to keep the company a going concern. For keeping a real estate infrastructure company a going concern, the pending flats/ apartments need to be completed and sold. In the event CIRP is initiated against a corporate debtor who is in the business of real estate development, the flat/apartment purchasers, of not only that project, but of all the projects of that corporate debtor would get hampered.

The order of the NCLT, admitting the application was challenged before the NCLAT by the other flat buyers through the flat buyers association of the said project, as there was already an extra ordinary delay in the completion of the project.

NCLAT observed that::

• The Applicants and the flat buyers association i.e. the appellant, wanted the Corporate Debtor to go through CIRP, but at the same time, did not approve of any resolution plan.
  
  
• Real Estate allottees, unlike other financial creditors, like banks, Non-Banking Financial Companies (NBFC) and other financial institutions, do not have commercial wisdom and thus cannot assess the viability/ feasibility of the resolution plan or commercial aspect of the corporate debtor.
  
  
• Thus, in case of CIRP instituted by financial or operational creditors against a real estate company/ corporate debtor, the same would be limited to that particular project in respect of which the financial or operational debt has been incurred. It cannot affect any other project(s) of the same corporate debtor in other places where separate plan(s) are approved by different authorities, land and its owner may be different and mainly the allottees (financial creditors), financial institutions (financial creditors, operational creditors) are different for such separate project.
  
  
• A secured creditor such as a financial institution/ bank, cannot be provided with the asset (flat/apartment) by preference over the allottees (unsecured financial creditors) for whom the project has been approved. Their claims are to be satisfied by providing the flat/ apartment. While satisfying the allottees, one or more allottees may agree to opt for another flat/ apartment in the same tower or other towers if not allotted to any other allottee. In such a case their agreements can be modified by the IRP/ RP with the counter signature of the promoter and the allottees, so that the allottees (financial creditors), who are paying rent or paying interest to banks may get possession on an earlier date.
  
  
• Thus, in light of the peculiar situation of real estate companies, the NCLAT held that `Reverse CIRP` must be followed in such cases. The NCLAT directed one of the promoters of the Corporate Debtor to act as a financial creditor and disburse amounts for keeping the Corporate Debtor a going concern. Further, the NCLAT observed that the IRP may sell the unsold flats to the intending purchasers and the amount so received should be used for completion of the project and paying the financial creditors. As per the NCLAT, the allottees can also approach the IRP for finding a third party, who is interested in purchasing their flat/ apartment.
  
  
• It would also be open to an allottee to reach an agreement with the promoter (not Corporate Debtor) for refund of amount.
  
  
• The NCLAT directed that only after getting the certificate of completion from IRP and approval of the NCLT, unsold flats/ apartments etc. can be handed over to the promoter.
  
  

MHCO Comment: This is an interesting development under the IBC. NCLAT has recognised the fact that the primary concern of the allottees/ home buyers is getting possession of their homes. The NCLAT order also secured the interest of the allotees/ home buyers of other projects of the Corporate Debtor, who are not facing any issues or problems with their own respective projects. NCLAT has thus formulated a new concept of Reverse CIRP in order to expedite the completion of the real estate project. 

The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or legalupdates@mhcolaw.comfor any assistance.

COMPANIES FRESH START SCHEME | LLP SETTLEMENT SCHEME

Acknowledging the plight of the companies and Limited Liability Partnerships (LLPs) due to the Covid-19 pandemic, the Ministry of Corporate Affairs (MCA) has introduced two schemes for Companies and LLPs: Companies Fresh Start Scheme, 2020 and LLP Settlement Scheme, 2020 respectively to reduce the burden of filing documents and giving a fresh start to defaulting companies and / or LLPs.

The said two schemes have been introduced by the MCA in order a) to condone the delay for filing belated documents; b) to give an opportunity to defaulting companies and LLPs to enable them to file belated documents; and c) granting immunity from launching prosecution or proceeding for imposing of penalty on account of delay in filing of certain documents. The nature and applicability of the said two schemes are enumerated below:

COMPANIES FRESH START SCHEME, 2020

• Applicability: The scheme is applicable to any defaulting company. The term ``Defaulting Company`` in the scheme means company defined under the Companies Act, 2013 (Act) which has made a default in filing documents, statements, returns, annual statutory documents etc. on the MCA-21 registry. The scheme shall be applicable from 1 April 2020 and shall remain in force up to 30 September 2020.
  
  The scheme shall not be applicable to the following companies:
  
  • Companies against which action for final notice for striking off the name under Section 248 of the Act has already been initiated;
  • Application has already been filed by companies for action of striking off name;
  • Companies which have amalgamated under a scheme of arrangement or compromise under the Act;
  • Application has already been filed for obtaining dormant status under Section 455 of the Act; and
  • Vanishing Companies.
• Forms and Fees: The scheme covers filing of relevant forms on the MCA-21. There shall be no penalty except the prescribed fees for filing forms under the Act.
  
  
• Immunity: A company who has filed belated documents under this scheme will have to make an application for seeking immunity under the prescribed form under the scheme. The belated documents will be taken on file or record or approved by the designated authority not later than 6 months from the date of closure of the scheme. Based on the declarations made, an immunity certificate shall be granted by the designated authority. However, immunity shall not be granted in few cases enumerated below:
  
  
  • Where an appeal is pending before the Court and / or management disputes are pending before the Court or Tribunal;
  • Court has ordered conviction or order imposing penalty has been passed by an adjudicating authority and no appeal has been made against such order, before this scheme has come into force.
  
  If the defaulting company has filed any appeal against notice issued or complaint filed or order passed, in respect of which application has been made under this scheme, the applicant shall before filing application for immunity, withdraw the appeal and furnish proof of such withdrawal along with the application.
  
  The designated authority shall withdraw the prosecutions pending, if any, before the Court and prosecution for penalties, on granting immunity to a defaulting company. In case, where defaulting companies have not availed this scheme then on conclusion of this scheme the designated authority shall take action against such companies.
  
• Extension for filing appeal: Due to any delay in filing documents if any penalty was imposed by an adjudicating officer and no appeal has been preferred by the company or its officer, before the regional director, in that case if last date of filing appeal falls within 1 March 2020 to 31 May 2020 then additional 120 days shall be allowed for filing appeal. The company or it’s officers shall not be prosecuted for such additional period.


• Inactive Company: This scheme also grants an opportunity for inactive companies to apply to get themselves declared as dormant companies or apply for striking off their names, while simultaneously filing belated documents.

LLP SETTLEMENT SCHEME, 2020

• Applicability: The scheme is applicable to any defaulting LLP. The term Defaulting LLP in the scheme means LLP defined under the LLP Act, 2008 (LLP Act) which has made a default in filing documents which were due to for filing till 30 August 2020. The scheme shall be applicable from 1 April 2020 and shall remain in force up to 30 September 2020. The scheme shall not be applicable to an LLP who has made an application for striking off its name from the register.
  
  
• Forms and Fees: The scheme covers filing of relevant forms with MCA. There shall be no penalty/ additional fees except the prescribed fees for filing forms under the LLP Act.
  
  
• Immunity: An LLP who has filed belated documents will be granted immunity and shall not be subject to prosecution for default. In case, where defaulting LLPs have not availed this scheme then on conclusion of this scheme the designated authority shall take action against such LLP.
  

MHCO Comment: The aforesaid schemes clearly incentivize compliance and reduce compliance burden during the unprecedented situation of Covid-19. Further, they significantly reduce the financial burden on the entities, thereby giving them an opportunity to make a `Fresh Start`. 

The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or legalupdates@mhcolaw.comfor any assistance

COVID-19 | CLARIFICATIONS AND RELIEFS MEASURES BY MCA

The spread of Covid-19 in India has led the Indian Government to declare a lockdown. The lockdown in India has resulted in a standstill for many businesses, using the work from home option if available or temporarily stopping work.

The Companies Act, 2013 (Act), has laid down stringent procedures and compliances for a company to follow in a time bound manner, failing which the company will be liable inter-alia to pay penalties and face prosecution. In order to ease the hardship faced by companies due to Covid-19, the Ministry of Corporate Affairs (MCA) has issued clarifications and granted reliefs, which are as follows:

CLARIFICATION REGARDING USE OF CSR FUNDS

MCA has issued a clarification stating that spending of CSR funds for activities related to combat Covid-19, will be an eligible CSR activity. The Act obligates the board of a company to ensure that the company spends at least 2% of the average net profit in every financial year as per the CSR policy of the company, for the immediately preceding 3 financial years. The clarification enumerates that the CSR funds may be spent for various activities to battle Covid-19 which are enlisted under item (i) (promotion of health care, including preventive health care) and item (xii) (disaster management, including relief, rehabilitation and reconstruction activities) of Schedule-VII of the Act. MCA has further clarified that the items in Schedule-VII of the Act are broad-based and may be interpreted liberally for the purpose.

RELIEF MEASURES- REDUCTION IN COMPLIANCE BURDEN

In view of the prevalent situation, the MCA has granted relief measures for companies under the Act to cushion the impact of the ongoing pandemic on the economy and to reduce the compliance burden. The said relief measures are discussed below:

• Filing of Documents: Additional fees shall not be charged for late form filing in respect of any document, return or statement, which is required to be filed with the MCA-21 registry, irrespective of its relevant due date, during a moratorium period starting from 1 April 2020 to 30 September 2020;

• Time period for holding Board Meetings: As per Section 173(1) of the Act, every company shall hold the first meeting of its board of directors within 30 days of the date of its incorporation and thereafter hold a minimum of 4 meetings of its board every year, such that not more than 120 days shall elapse between 2 consecutive board meetings. The said mandatory time intervals have been extended by a period of 60 days till 30 September 2020;

• Requirement of Resident Director: As per Section 149(3) of the Act, every company is required to appoint one director who stays in India for a period of at least 182 days in a financial year. The said requirement has been relaxed and a non-compliance of the period of minimum residency by at least one director in India, as mandated shall not be treated as a violation of the provisions of the Act for financial year 2019-20;

• Meeting of Independent Directors: Schedule IV of the Act requires that in every financial year, the independent directors shall hold at least one meeting without the presence of the non-independent directors and the management. The MCA has relaxed the compliance with the above provision, for the financial year 2019-2020 stating that if the independent directors were unable to hold even one such meeting, the same shall not be viewed as a violation of the provisions of the Act;

• Timeline for maintaining deposit repayment reserve: As per Section 73 of the Act, every company inviting, accepting or renewing deposits, must maintain at least 20% of the amount of the deposits maturing during the following financial year in the form of a deposit repayment reserve account in a separate bank account of a scheduled bank. This reserve is required to be created on or before the 30thday of April each year. The MCA relaxed the said compliance with the above provision, for the deposits maturing during the financial year 2020-2021 and the companies may now create such a deposit repayment reserve till 30 June 2020;

• Declaration for commencement of business: As per Section 10A of the Act, a newly incorporated company is required to file a declaration of commencement of business within 6 months of its incorporation. MCA has relaxed the compliance with the above provision by providing a time window of additional 6 months to file such declaration of commencement of business beyond the existing time limit.

MHCO COMMENT:

The above clarification issued by MCA regarding utilization of CSR funds will encourage the companies to utilize their reserves made for CSR to be utilized for combating Covid-19 outbreak in the country. The relief measures and relaxations granted by MCA will certainly reduce the burden of stringent compliance faced by the companies in the current situation.

The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or legalupdates@mhcolaw.comfor any assistance.

COVID-19 | EXTENSION OF LIMITATION PERIOD

On account of Covid -19 lock down throughout India, the Supreme Court of India has recently passed an Order, (Supreme Court Order) exercising its powers under Article 142 read with Article 141 of the Constitution of India extending the limitation period for fixing or stipulating a time frame for initiation of a legal action by the parties at dispute, whether condonable or not, with effect from 15 March 2020 till further order of the court.

Objective of Limitation: Section 2 (j) of the Limitation Act, 1963 (Act), defines `period of limitation` as period of limitation prescribed for any suit, appeal or application by the schedule, and ``prescribed period`` means the period of limitation computed in accordance with the provisions of this Act which covers a range of claims and their timelines. Thus every suit, appeal or application that needs to be filed, has to adhere to Section 3 of the Act subject to the exceptions provided therein. It is pertinent to note that any suit, appeal or application preferred post expiry of limitation period cannot be filed at all as they delay would be out of the scope to be condoned.

Impact of the Supreme Court Order: Considering the difficulties that the litigants can face in filing their suit, appeal or application in wake of Covid-19 and the threat possessed by it, the Supreme Court, being very well aware of the consequences of community transmission of the virus came to the rescue of the litigants by suspending the limitation period from 15 March 2020 till further orders. The question that arose was under what provisions can the suspension of the limitation period be considered. To answer this, a perusal of section 4 of the Act is required, which deals with the extension of limitation period if the limitation period expires during the time when the court is closed viz. on holiday. A perusal of the Supreme Court Order makes it abundantly clear that the courts shall, considering the country is in lockdown, be deemed to be closed and thus any limitation period expiring during the said tenure shall be extended till a further period which is yet to be notified by the apex court. As such, the litigants have been given a breather for the time being without them getting worried about their limitation period, which clearly was the need of the hour.

Impact of the Supreme Court Order for the other Tribunals: As the Supreme Court Order clearly specifies that the said extension shall be applicable to the general as well as special laws, the said extension of limitation shall also be available to the litigants under the Insolvency and Bankruptcy code 2016 (Bankruptcy Code). Both, National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT) have issued separate notifications that the period of limitation for filing appeal before the NCLAT shall stand extended in terms of the Supreme Court Order. Therefore, all cases and the timelines prescribed under the Bankruptcy Code will stand extended. This said, the same shall also be available to various other tribunals. In a latest development the NCLAT vide its Order, dated 30 March 2020 clarified that the period of lockdown as issued by the central government as well as the respective state governments shall stand excluded from the calculation of corporate insolvency resolution process under section 12 of Bankruptcy Code.

Impact of the Arbitration Matters: As already stated above, the Supreme Court Order covers all general and special laws thus, all the time-lines prescribed under the Arbitration and Conciliation Act, 1996 (Arbitration Act), for example, the timeline to file a challenge under section 34 of the Arbitration Act or an appeal arising thereunder will stand extended as per the Supreme Court Order. However, it would be interesting to see whether the proceedings conducted by the arbitral tribunal, which are usually recorded in procedural orders, will be covered under the ambit of the Supreme Court Order.

Impact on other Commercial Cases: Commercial suits like recovery of monies, intellectual property matters etc. are required to be filed within a fixed span of time from the day the cause of action arises (more particularly mentioned in Commercial Courts Act, 2015). As per the Supreme Court Order the said period of limitation as stated in the Act shall stand extended, which otherwise is not available under the statute. 

MHCO Comment: The Hon'ble Supreme Court has made a positive attempt to defer unnecessary fear amongst litigants in terms of expiry of the limitation period in pursuing legal remedies. The Apex Court in affect has negated the effect of all other laws which prescribe limitations for initiating legal proceedings before various courts and tribunals.

The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or legalupdates@mhcolaw.comfor any assistance.