FDI REFORMS | INDIA IS NOW THE MOST OPEN ECONOMY IN THE WORLD FOR FDI

After significant changes in the Foreign Direct Investment (``FDI``) policy in November 2015, the Union Government through a very recent Press Release announced further important changes that now make India one of the most open economies in the world.

Changes introduced in the FDI policy include (a) Increase in the FDI sectoral caps; (b) Bringing more activities under automatic route; and (c) Easing of conditions for foreign investment in certain sectors. 

Following are the significant changes introduced by the Government:

• Defence Sector:: Earlier, FDI beyond 49% was permissible only through the government approval route in cases of access to modern or ‘state of the art’ technology in the country. But now, this condition of ‘state of the art’ technology has been removed. Government approval is required for cases beyond 49%, in cases wherever it is likely to result in access to modern technology in the country or other exceptional reasons, which are to be recorded.

Further, this FDI limit for the defence sector has also been made applicable to Manufacturing of Small Arms and Ammunitions covered under Arms Act 1959 which was until recently reserved exclusively for Government Agencies.

• Civil aviation: Earlier the policy on airports permitted 100% FDI under automatic route in Greenfield Projects and 74% FDI in Brownfield Projects under automatic route. FDI beyond 74% for Brownfield Projects was under government route. 100% FDI has not been permitted under automatic route in Brownfield airports. Earlier, in the case of domestic airlines, FDI of up to only 49% (under automatic route) was permitted. Now FDI up to 49% has been allowed under the automatic route and up to 100% after government approval.

• Single Brand Retail Trading (SBRT): Earlier, FDI above 49% in SBRT was permitted under the government route. However, if the FDI exceeded 51%, additional conditions, including the condition on sourcing 30% of the value of goods from India, was imposed. It has now been decided to relax local sourcing norms up to 3 years and provide a relaxed sourcing regime for another 5 years for entities undertaking SBRT of products having ‘state-of-art’ and ‘cutting edge’ technology. However, the terms state-of-art and cutting edge technology have not been defined.

• Pharmaceuticals: 74% FDI is now permitted under automatic route in brownfield pharmaceutical sector and the government approval route will continue beyond 74%. Earlier, 100% FDI in brownfield pharma was allowed only through the government approval route.

• Food Products Manufactured in India: 100% FDI is now permitted under the government approval route for trading in respect of food products manufactured or produced in India. This also includes trading through e-commerce. Earlier, the sectoral limit on the trading of the aforesaid food products depended on the nature of trade (whether it was single brand, multi brand or wholesale cash and carry).

• Entry routes in Broadcasting Carriage Services: Earlier 100% FDI was permitted with up to 49% being under automatic route and above 49% was under the government route in Teleports (setting up of up-linking HUBs/Teleports); Direct to Home; Cable Networks; Mobile TV; Headend-in-the Sky Broadcasting Service (`Broadcasting Carriage Services`). Broadcasting Carriage Services can now avail of 100% FDI under automatic route. However, infusion of fresh FDI beyond 49% in a company, which has not sought license/permission from sectoral Ministry, resulting in a change in the ownership pattern or transfer of stake by existing investor to new foreign investor, will require FIPB approval.

• Private Security Agencies: FDI up to 49% is now permitted under automatic route in this sector and FDI beyond 49% and up to 74% would be permitted with government approval route. Earlier, only up to 49% FDI was permitted under the government route.

• Establishment of branch office, liaison office or project office: For establishment of branch office, liaison office or project office or any other place of business in India if the principal business of the applicant is Defence, Telecom, Private Security or Information and Broadcasting, it has been decided that approval of Reserve Bank of India or separate security clearance would not be required in cases where FIPB approval or license/permission by the concerned Ministry/Regulator has already been granted.

• Animal Husbandry: Earlier, 100% FDI in Animal Husbandry (including breeding of dogs), Pisciculture, Aquaculture and Apiculture was allowed under Automatic Route under controlled conditions. It has now been decided to do away with this requirement of ‘controlled conditions’ for FDI in these activities.

MHCO COMMENT

Presently, only the press release has been issued by the Government. However, the Press Note and amendments to FEMA will provide better clarity with regards to the effect that the aforesaid change shall bring about. These changes are in consonance with the Make in India initiative of the government. The aim of Government is clearly to liberalise the FDI regime and provide an environment where doing business in India much easier than before. 

This article was released on 23 June 2016.

(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 contact@mhcolaw.com for any assistance.)

Constitution of NCLT | Notification of allied Sections of Companies Act 2013

The Ministry of Corporate Affairs (MCA) has notified the constitution of the National Company Law Tribunal (NCLT) and National Company Appellate Law Tribunal (NCALT) with effect from 1 June 2016. NLCT shall have eleven benches across India which includes benches in Ahmedabad, Allahabad, Bengaluru, Chennai, Chandigarh, New Delhi Guwahati, Hydererabad, Kolkata and Mumbai. The principal bench of the tribunal is also to be situated at New Delhi. NOTIFICATION OF ALLIED SECTIONS OF COMPANIES ACT 2013: MCA has also notified several sections of the Companies Act, 2013 (Act) in relation to the NCLT. Following are some of the important sections that have been notified: Powers of the Tribunal in cases of oppression and mismanagement.

SECTION	APPLICABILITY AND EFFECT
Sub-section (7) of section 7 [except clause (c) and (d)] of Act.	Authorizes the Tribunal to pass appropriate orders if a Company has been incorporated by furnishing false or misleading information.
Second proviso to sub-section (1) of section 14 of Act	A public company can only be converted into a private company upon an appropriate order to that effect passed by the Tribunal.
Sections 97, 98 and 99 of Act	Power of the Tribunal to call for meetings of the Company and punish officers for a default thereof.
Section 221 of Act	Power of the Tribunal to freeze the assets of a Company pending inquiry and investigation.
Sections 241 and 244 of Act	Confers right upon members to apply to the Tribunal in cases of oppression and mismanagement.
242 [except clause (b) of sub-section (1), clause (c) & (g) of sub-section (2)] of Act
Section 243 of Act	Consequence of modification or termination of existing agreements as a result of orders passed under Section 242.
Section 245 of Act	Power to file class action suits with the Tribunal.

DISSOLUTION OF CLB: With the constitution of the NCLT, the Company Law Board (CLB) stands dissolved. All cases pending before the CLB are now transferred to the NCLT who shall dispose off such cases in accordance with the provisions of the Companies Act, 1956 or the Companies Act, 2013 as the case may be.

MHCO COMMENT

The intention of the Government seems to be the introduction of the NCLT in a phased manner. Provisions of the Companies Act, 2013 in relation to winding up of companies, mergers and amalgamations have not yet been notified. Presently, jurisdictions in these matters rest with the High Court and are governed by the provisions of the Companies Act, 1956. The government shall notify these provisions once the NCLT is fully operational. The eventual aim is to confer the NCLT with exclusive jurisdiction on all matters of Company Law.

This article was released on 6 June 2016. 

(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 contact@mhcolaw.com for any assistance.)

NEW BANKRUPTCY CODE 2016 | SNAPSHOT

Very recently both the houses of parliament have approved the Insolvency and Bankruptcy Code, 2016 (``IBC``) fulfilling the need for codification of multiple laws related to insolvency into a single law. IBC is now awaiting the presidential assent.

Presently the Contract Act, 1872 and special laws such as the Companies Act, 2013;Sick Industrial Companies (Special Provisions) Act, 1985; Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002; Recovery of Debts due to Banks and Financial Institutions Act, 1993; Presidency Towns Insolvency Act, 1909 and Provincial Insolvency Act 1920 etc govern the issue of insolvency.

IBC aims to consolidate the laws relating to insolvency of companies and limited liability entities (including limited liability partnerships and other entities with limited liability), unlimited liability partnerships and individuals, presently contained in a number of legislations, into a single legislation and provide for their reorganization and resolution in a time bound manner for maximization of value of their assets. The essential idea of the new law is that when a corporate entity defaults on its debt, decisions are taken in a time-bound manner, so that there is a greater chance ofsaving the corporate entity as a going concern.

Key features of IBC:

1. Makes no distinction between the rights of international and domestic creditors or between classes of financial institutions: In contrast to the current regulatory landscape, IBC does not make any distinction between the rights of international and domestic creditors or between financial institutions and funds. All financial creditors are, in general, entitled to participate in the insolvency resolution process irrespective of the size of their debt.
2. Allows creditors to assess the viability of a debtor as a business decision: When a corporate entity defaults on its debt, IBC shifts the control of the corporate debtor from its shareholders/promoters to a committee of creditors, who have 180 days (extendable by 90 days in deserving cases) to evaluate proposals from various players about resuscitating the company or taking it into liquidation. IBC therefore allows creditors of the corporate debtor to assess the viability of a debtor as a business decision, and agree upon a plan for its revival or a speedy liquidation.
3. Insolvency process for corporate debtors:To initiate an insolvency process for corporate debtors, the default by the corporate debtor should be at least INR 100,000 (which limit may be increased up to INR 10,000,000 by the Government). IBC proposes two independent stages:
   • Insolvency Resolution Process - As mentioned above, during this process financial creditors assess whether the debtor's business is viable to continue and they mull over the ways to rescue the business; and
   • Liquidation - If the aforesaid Insolvency Resolution Process fails or financial creditors decide to wind up, the assets of the corporate debtor are distributed.

4. Changein the priority waterfall of distribution of liquidation proceeds: IBC has changed the priority waterfall of creditors at the time of distribution of assets after liquidation of a corporate debtor.The priority waterfall is now as follows:
   
   • Insolvency resolution cost and liquidation cost;
     
   • Debts owed to secured creditor (who have relinquished their security interest) and workmens’ dues (for 24 months before commencement);
     
   • Wages and unpaid dues to employees (other than workmen) (for 12 months before commencement);
     
   • Financial debts owed to unsecured creditors and workmen’s dues for earlier period;
     
   • Amounts to the Central and the State Government and debts to secured creditor following enforcement of security interest;
     
   • Remaining debts;
     
   • Preference shareholders and
     
   • Equity shareholders or partners.

5. Adjudicating Authorities for insolvency: The adjudicating authority for corporate insolvency and liquidation is the National Company Law Tribunal, from which the appeals lie in the National Company Law Appellate Tribunal and thereafter go the Supreme Court of India. For individuals and other persons, the adjudicating authority is the Debt Recovery Tribunal (DRT) from which the appeals lie to the Debt Recovery Appellate Tribunal and thereafter go the Supreme Court. IBC separates commercial aspects of the insolvency proceedings from judicial aspects and therefore the role of adjudicating authorities is limited to ensuring due process and they are now given the power to adjudicate on the merits of the insolvency resolution.
6. Insolvency regulator,Insolvency Resolution Professionals, Information Utilities: IBC provides for the constitution of a new insolvency regulator i.e., the Insolvency and Bankruptcy Board of India (Board). The role of the Board is mainly to oversee the functioning of insolvency intermediaries i.e., insolvency professionals, insolvency professional agencies and information utilities (explained below) and to regulate the insolvency process. IBC also provides for Insolvency Professionals who are private intermediaries and deal with commercial aspects such as management of the affairs of the corporate debtor, facilitating formation of committee of creditors, organising their meetings, examination of the claims of the creditors, runs the debtor's business during the moratorium period and helps the creditors in reaching a consensus for a revival plan. IBC also creates the institution of ‘Information Utility’ which would store financial information and data and terms of lending in electronic databases. This would eliminate delays and disputes about facts when default does take place.
7. Insolvency resolution process for partnerships and individuals: For individuals and unlimited partnerships, IBC becomes applicable in cases where the minimum default amount is INR 1000 and above (which the Government may later revise). IBC envisages two separate processes in case of insolvencies i.e. Automatic fresh start and insolvency resolution:
   
   • Under the automatic fresh start process, eligible debtors (basedon their gross income) can apply to the DRT for discharge from certain debts not exceeding a specified threshold, allowing them to start afresh;
   • Under the insolvency resolution process the debtor prepares a repayment plan for approval of creditors. If approved, the DRT passes an order binding the debtor and creditors to the repayment plan. If the plan is rejected or fails, the debtor or creditors may apply for a bankruptcy order.

8. Cross border insolvency: Given that many corporate transactions and businesses involve an international element, IBC provides that the Central government can enter into agreements with any country outside India for enforcing provisions of the Code and notify applicability of the same from time to time.
9. Miscellaneous: In addition, the code has provisions to ensure that the money due to workers and employees from the provident fund, the pension fund and gratuity fund shouldn’t be included in the estate of the bankrupt company or individual. And also has provisions that disqualify anyone declared bankrupt from holding public office, thereby ensuring that politicians and government officials cannot hold any public office if declared bankrupt.
   

MHCO COMMENT

IBC seeks to achieve certainty in the recovery and enforcement proceedings in insolvency cases and maythereforeresult in the growth of investments by Private Equity funds in India and the financial institutions increasing their exposure in Indian entities. It will help the failing business ventures to move on smoothly and rapidly and therefore is a systemic reform, which will give a quantum leap to the functioning of the credit market in India.

This update was released on 30 May 2016.

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.com for any assistance.