Different Types of Shares and Debentures

Capital is needed by companies, both private and public to increase their productivity or market reach or to purchase latest modern equipment and machines. So, companies go for Initial Public Offering (IPO) and if they had already gone for IPO they go for Follow – on Public Offer (FPO). In FPO or IPO, they generally sell their shares and debentures to the investors.


Shares:

To raise the capital these marketable instruments are issued by the companies. Each issued share goes to the public. They are traded in everyday stock market and the value of the company is decided by the value of the shares at the end of the day.

A company to put its share in the market have to first prepare a memorandum in which the authorized capital is to be written down which is further to be verified by the competent authority which is SEBI.


Types of Shares:
1.    Equity Shares: they are generally issued and traded in everyday stock market. Their returns are not fixed.


Types of Equity Shares:
a.    Blue Chip Shares: The big companies which have the potential to dictate the terms come under this umbrella. These companies are never fixed as performance of these companies may fall apart sometimes.
b.    Income Shares: The companies coming in this area, are generally stable and do not vary much in their performance.
c.    Growth Shares: These companies have secured their positions in specific industry; their shares have less dividend payout ratio and thus, more growth potential.
d.    Cyclical Shares: The share of the companies coming into this umbrella varies with the economy. A definite business cycle keeps on operating and the performance keeps on operating with the stages of the cycle.
e.    Defensive Shares: The shares of the company do not vary with the economy.
f.    Speculative Shares: The shares of a company which has usually more speculation than others and they cannot be categorized into one category only and may overlap with blue chip shares.

Another classification is given by investor Peter Lynch:

a.    Slow growers: These are the companies having growth rate equal to the industrial growth rate or higher than GDP.
b.    Fast Growers: Newly started companies having good growth rate.
c.    Stalwarts: The big companies having and whose dividend payout is high.
d.    Cyclicals: The shares of these companies  are not going through the business cycle or varying to the business cycle.
e.    Turn-around: The shares of those big companies whose performance were very bad in the past but a sudden turn around takes place and they started performing very good.
f.    Asset Plays: these shares generally do not have recognition instead of having a large asset base.


2.    Preference Shares: It has the qualities of both equity shares and debentures. As in case of debentures, fixed rate of dividends is paid to the preference shareholder, despite the profits earned by the company it is liable to pay interest to the preference shareholders.

Types of Preference Shares:

a.    Cumulative and Non-cumulative Shares: Let us say that a company was not doing well for 4 years but suddenly in the 5th year it started performing well. Then, the persons having cumulative shares will get the interest of past 5 years but the persons having non-cumulative shares will get only the interest of the 5th year.
b.    Redeemable and Non-redeemable: Redeemable shares could be matured during the lifetime of the company or before the company closes down , they have a maturity period but the non-redeemable shares mature only after closing down of the company.
c.    Convertible and Non-convertible: Shares that could be converted into other kinds of shares and security say equity shares or debentures is known as convertible shares and if they are not convertible on their maturity they are known as non-convertible shares.
d.    Participating and Non-participating: In case of winding up of the company, the debenture holders were paid up first, then the preference shareholders and then the equity shareholders were paid up, after this if any surplus amount is left, it is distributed equally to equity shareholders and participating shareholders if investors have participating preference.

Debentures:

These are also the capital market instruments which are used to raise the medium and long term capital funds in the public. These are the debt instruments which acknowledges a loan to the company and is executed under the common seal of the company and the deed shows the amount of loan and date of repayment.

Types of debentures:

1.    On point of view of record:
a.    Registered debentures: These debentures are registered with the company and the amount is payable only to those debentures holders whose names are registered with the company.
b.    Bearer debentures: These debentures are not registered with the company, these are transferable merely by delivery and the debenture holder will get the interest.

2.    On the basis of security:
a.    Secured or mortgaged debentures: These are secured by a charge on the assets of a company. The principle amount and the unpaid interest could be recovered by the holder out of the assets mortgaged by the company.
b.    Unsecured debentures: They do not get any security in reference to principal amount or unpaid interest. They are simple debentures.

3.    On the basis of Redemption:
a.    Redeemable Debentures: They are issued for a fixed period and the principle amount is paid off only at the expiry of that period or at the maturity.
b.    Non-redeemable debentures: They are matured only after the liquidation or closing down or winding up of the company.

4.    On the basis of convertibility:
a.    Convertible debentures: These can be converted to shares after the expiry of the period i.e; on their maturity.
b.    Non –Convertible debentures: These cannot be converted to shares on their maturity.

5.    On the basis of priority:
a.    First debentures: These are redeemed before other debentures.
b.    Second debentures: These are redeemed after the redemption of the first debenture.

Authored by: Vaibhav Luthra, Faculty of Law, Delhi University

Private Placement of Shares

One thing we need to understand is that no company can run and carry out its operations without the usage of funds. Raising investment is an important part of every modern enterprise. Capital is needed by every business to commence its business operations and even for the purpose of expansion and growth.

Private Placements- Then and Now!

In this article, we will basically cover and compare the changes introduced in the Private Placements as from the Companies Act, 1956 to the newly enacted Companies Act, 2013.

The expression “Private Placement” is defined under the Explanations of Section 42 of the Companies Act, 2013 which means “any offer of securities or invitation to subscribe securities to a select group of persons by a company (other than by way of public offer) through issue of a private placement offer letter and which satisfies the conditions specified in this section.”

In a layman’s language, when the securities are offered to the selective group of persons by issuing private placement offer, it is known as the Private Placement.

Section 42 of the Companies Act, 2013 read along with the Rule 14(1) of Companies (Prospectus and Allotment of Securities) Rules, 2014 regulates the Private Placement of Shares.

What are the changes that have been introduced to the Private Placement of Shares?

The changes that are introduced are as follows:

  1. Initially the rules related to Private Placement were applicable only to the Private Companies, but according to the provisions of the Companies Act, 2013 some rules also applies to both public and private companies as well.
  2. Earlier the shares could be issued to any person or authority automatically by the directors of the private company without taking any approval from the shareholders. But according to the new act, it has now become mandatory to seek approval of the shareholders for the same. Rule 14(2)(a).
  3. Earlier the limit was restricted up to 49 investors which have now been relaxed to 200 investors.

What are the Restrictions that are imposed on Private Placement Securities?

  1. A Private Placement offer must be prepared.
  2. Offer should not be made to more than 200 people.
  3. It authorizes to issue only one kind of securities at a time.
  4. The amount of subscription in either case should not be less than Rs. 20,000.
  5. The valuation of securities should be done by a registered merchant or Chartered Accountant with at least 10 years of practise.

One thing must be noted that according to Section 42(10), if the directors or promoters of the company don’t comply with the provisions then they may be fined with an equal amount involved in the offer or Rs. 2 crores whichever is higher.

What steps can be taken by companies to comply with the new provisions of the Companies Act, 2013 to issue securities through Private Placement?

Step 1: Identification of the persons to whom the offer is to be made

As per Section 42(7) of the Act, all offers shall be made only to those persons whose names are already recorded by the company prior to the invitation to the subscription is made.

Step 2: Preparation of the Offer letter

As per the requirements of Form No. PAS 4 the offer letter should be made. Rule 14 (1)(a)

Step 3: Approval of the shareholders shall be taken regarding the offer.

By passing a special resolution, the shareholders may approve the offer of securities. The offer shall be made within a period of 12 months from passing the resolution. Rule 14 (2)(a).

Step 4: Maintenance of records

A complete record of private placements offers in the Form PAS- 5, offer letter in Form PAS-4 along with the name of the persons who are identified as prospective offerees had to be filed with the Registrar of Companies within 30 days. Rule 14(3).

Step 5: Separate Account must be opened for keeping the Subscription amount.

It is covered under Section 42(6) of the Act.

Step 6: Allotment of Securities and Issue of the Share certificates.

As per Section 42(6), the allotment should be made within 60 days on receipt of the application money. In case of failure, the company must repay the collected amount within 15 days from the end of 60 day period. An interest of 12% will be charged from the 60th day if the company fails to repay the money.

Step 7: Filing of return of allotment with the Registrar.

As per Rule 14 (4), a return of allotment of securities must be filed with the Registrar within 30 days of allotment in the Form PAS-3, with the relevant fees with a complete list of security holders containing:

  • Full name, address, PAN and E-mail Id of such Security Holders.
  • Class of security held.
  • Date of becoming security holder.
  • Number of securities held, nominal value and amount paid up on such securities and particulars of consideration received.

Conclusion:

Since as per the new provisions of the Act, the raising of funds have become more complex and strict as per the Private placement, so for the companies, the burden to increase the funds have increased as it involves a lot of steps and procedures to be followed.

Sources:

http://www.mondaq.com/india/x/305626/Securities/PRIVATE+PLACEMENT+UNDER+COMPANIES+ACT+2013

Author- Bhavneet Singh Vohra

Vivekananda Institute of Professional Studies

By Bhavneet Vohra 

Sale Purchase Agreements

Sale Purchase Agreements (SPAs) are formal contracts signed between buyer/s and seller/s to effect sale and purchase of shares. They are meant to function like other formal contracts, albeit with the specific function of effecting sale and purchase of shares.

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Case study: Jurisdiction of Indian courts over foreign seated arbitration

E-City Entertainment (I) Pvt. V. IMAX Corporation is the latest case in which defendants face charges. According to the Supreme Court of India, its courts cannot exercise jurisdiction over arbitration living abroad.
The Court considered an application challenging the external award under section 34 (application for waiver of arbitration award) of the Arbitration Act, 1996 (Arbitration Act). Arranged the institutional arbitration, namely the ICC Rules of Arbitration, and the arbitration body thereafter decided to hold arbitration in London outside section I of the Arbitration Act and also the power of the Indian courts to hear the challenge facing the award given abroad.


SHORT BACKGROUND
In agreement with E-City Entertainment (I) Pvt. Ltd. (E-City), IMAX Corporation (IMAX) will offer major theatre projects throughout India. The clause in the agreement reads as follows:
“This Agreement shall be governed by and construed in accordance with the laws of Singapore, and its affidavits of the Singapore Judiciary. . “
The agreement was governed by Singapore law and arbitration was governed by the ICC Rules of Arbitration. However, the law governing the mediation process was not selective.
IMAX filed a lawsuit with the ICC in June 2014 and sought damages in connection with the dispute. The ICC decided to mediate in London after negotiations with the parties in October 2004. IMAX received its first final award in February 2006, holding E-City in breach of contract and liable for payment. The second partial award was made in August 2007 and the last one was awarded in March 2008, collectively called the ‘prize’.
The first E-City award was made more than two years ago, when the company filed an appeal against the awards in the Bombay High Court. Due to the close link between the agreement and India and the delay, the Supreme Court acquitted the delay and held that the Indian courts would have jurisdiction to challenge the award of prizes made in India without explicit exclusion of Part I of the Arbitration Act parties.
The Supreme Court reverses the decision of the Supreme Court
Bombay High Court decision on IMAX appealed to the High Court. The Supreme Court was required to rule that the challenge of an award submitted under Part they could bring me of the Arbitration Act to an Indian court.
In considering the location of the arbitration and where the actual trial took place, the Supreme Court has stated that it must be decided whether the parties intend for the arbitration to take place and whether it has occurred. In addition, it has been noted that when an arbitration agreement states that it will take place outside of India, Part I of the Mediation Act will be excluded from the application.
The parties explicitly agreed that arbitration would be carried out in accordance with the ICC Resolution Rules and agreed to allow the ICC to choose a mediation venue. Both parties agreed that the arbitrator should be arrested in London after consultation with the ICC, and the arbitration took place without opposition. All prizes were awarded in London and presented to the teams. As a result, the Supreme Court found that the conduct of the parties was a clear indication that Part I of the Mediation Act should not apply.
As the Supreme Court noted, there was no selection of arbitration chair in the agreement, only institutional arbitration rules. The rules of the ICC Arbitration provide the conditions for adjusting the arbitration seat. It would be assumed that the parties intending to elect London as the mediator seat under the ICC Rules as their consultations were agreed upon after due consultation. Therefore, the Indian courts could no longer exercise their powers under Part I of the Mediation Act.
According to that ruling, in the Indian courts, there will be no challenge to the prizes.


AL Review:

The Supreme Court has clearly stated the principle that the rules of the arbitration tribunal shall govern. To prevent unnecessary interference by the Indian courts in the formal settlement of foreign affairs, this decision is significant because it supports the close relationship between the arbitration tribunal and the law governing the arbitration agreement.
This decision also highlights the important differences between ‘law of contract’ and ‘law of mediation’. In contrast, contractual law refers to the law that governs what parties are entitled to do under the agreement (i.e., applicable law) while arbitration law states how disputes between parties are resolved through arbitration. In procedural law, the way in which the applicable law will apply is determined by the use of technology. Although Singapore law was set up as a law governing the agreement, the parties failed to clarify the law of arbitration.

By Tanay Sharma

Guide for new Commercial Establishments

This blog post aims to serve as a one-time reference guide with regard to opening new shops and commercial establishments in India. It deals with various licenses and registrations that one has to compulsorily acquire in order to set up a business. Every state in India has the jurisdiction to enact its own Shops Act to regulate every business that exists within their territories. It is one of the most powerful tools to ensure that all legal businesses are recorded with the respective state governments.

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The Importance of Being Importer Friendly

PART I

We all realize the importance of trade and commerce and most of us are aware of the World Trade Organisation (WTO), the only global international organization dealing with the rules of trade between nations[1], formed in 1995. The WTO replaced the General Agreement on Tariffs and Trade (GATT), an agreement signed in 1947. The replacement now has four major documents: a major revision of the original GATT, General Agreement on Trade in Services (GATS), The Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS), and the Dispute Settlement Understanding (DSU).

Until then, the GATT set out important rules governing trade between countries, and had been the forum for negotiating lower customs duty rates and other trade barriers. Since 1995, the updated GATT has become the WTO’s umbrella agreement for trade in goods.[2] Article VIII of the GATT 1995, in particular caught my attention. You can read the Article here. The Article basically states that countries that are a part of the WTO, must ensure that the importers or exporters must not be subject to too many burdensome formalities and requirements.

This was when I thought, how easy is importing for our own importers? The GATT seeks to prevent one country’s protective measures against another. But what about the importers within the same country? There are importers I know, who, despite living in Kolkata, which is closer by sea to Hong Kong (where they import goods from), route it through other cities, like Mumbai, despite the round-about route, simply because it is less burdensome, faster, and people are generally more eager to work.  So which states are most businessman friendly, especially when it comes to importing?

Let us look at the overall figures. Gujarat stands at the top of a number of lists[3]. According to the Economic Freedom of the States of India Report- 2013, Gujarat is not only the freest state, but it has also registered the fastest rate of improvement with an average growth of 12%.[4] In the same report in 2005, its overall score was 0.46 (Rank 5), which is 0.65 (Rank 1) in 2013. There is also a very wide gap between Gujarat and the second in rank, in the report (Tamil Nadu, with a score of 0.57). In a report by the CLSA[5], the reasons that Gujarat seems to be doing so well is that: firstly, unlike the other states who jumped from an agrarian economy directly to a service sector centric economy, Gujarat made sure that it has many manufacturing industries, which provide for large scale employment. Even so, it did not ignore its agrarian sector. The report goes on to say, that agriculture contributes 13 per cent to Gujarat’s GDP and supports 53 per cent of the population. Yields in food grains are almost double the country’s average. Secondly, its long coastline and entrepreneurial nature of its people are certainly a plus. Thirdly, its dependence on funds from the centre has been low, with 84% of its revenue coming from taxes. Also, the report point out, Gujarat does not ignore the expenditure on medical and educational facilities by replacing it with social security in welfare, a mistake made at the national level.

In the Economic Freedom report, Gujarat and Tamil Nadu are followed by Andhra Pradesh, Haryana and Himachal Pradesh.

It is believed that Tamil Nadu is ranked so high up, because of the effective legal machinery. With a low rate of dacoity and robbery reported in 2012 (no cases, according to the National Crimes Records Bureau); people in general afraid to break the law; bribes being low, and sometimes nil; zero tolerance for communal violence; and swift arbitration and conciliation, Tamil Nadu, many believe[6], deserves to stand at Rank 2. However, its points get docked when it comes to its high rate of labour disputes and severe shortage of power, to which there seems to be no solution so far.

The regulation of labour and business is a very important factor for a businessman, which is one of the three factors the Economic Freedom Report looks at.[7] Gujarat has been rank 1 since 2005, till 2013[8]. Tamil Nadu, Himachal Pradesh, Uttarakhand, Karnataka, Maharashtra and Kerala follow respectively.[9] Once again, there is a very large gap between the score of Gujarat and Tamil Nadu, making Gujarat the most conducive for business in this category, without question. According to the report, there has been a sharp decline in man-days lost due to strikes, higher market wage rates, and a decline in pendency of cases.[10]

As for Andhra Pradesh, which ranks 3rd in the report, it seems to be by virtue of it being a large base for Agro and Food Processing (especially since the state accommodates seven different agro-climatic conditions); the “mineral house of the country”; the “bulk drug capital” of the country, with 1/3rd of the country’s Bulk Drug Production; and a huge IT economy.[11] However, with the state being split into two,[12] we have to see how things will work out for each of the two new states.

In my next blog post, I will be concluding my article after looking at how individual cities fare at treating importers.

PART II

In my previous blog post, I discussed the import-friendliness of states. Let us now look at the performance of individual cities and where India stands as a nation, and why all this matters.

When it comes to ease of importing in cities, Bhubaneswar seems to be the friendliest city, according to the Doing Business Report by the International Finance Corporation and the World Bank[13], with 16 days taken to import goods.[14] Ahmedabad does come a close second with 18 days taken to import. The costliest city according to the report is Jaipur (at US$1,384 per container).[15] A clothes merchant based in Kolkata, who wishes to remain anonymous, told me that Chennai and Vishakapatnam are also very friendly when it comes to imports. He categorically states that Kolkata is quite hostile to importers. The Kidderpore port in Kolkata, for instance, is badly maintained and under-utilised. There seems to be an unwillingness to create a business friendly environment, he said, labeling the attitude as “babu-giri“.

India doesn’t seem to fare that well in the world, being ranked 48 according to Bloomsberg Ranking[16]; Rank 98 according to Forbes[17]; and Rank 134 in the Doing Business Report 2014[18]. The Doing Business Report puts India at Rank 132 for ease of trading across borders, a 3-Rank fall from the previous year. It takes 11 documents, on an average, to import something into India, compared to 10 for the South Asian countries and 4 for the OECD.[19] It takes an average of 20 days to import something into India, while it takes on 10 days for the OECD.[20]

India’s economic freedom has undoubtedly increased since the 1990s, yet India’s ratings remain low on the global index. As the Economic Freedom report rightly states, as India opens its national markets to international investment and commodity flows, it cannot afford to constrain its own entrepreneurs. India is a very centralized country, especially compared to China.[21] Yes, we use the phrase “centre-state relations”, but as the report has correctly pointed out, it “reflects a patronizing mindset, suggestive of a centre and a periphery”. Perhaps this is a legacy of our independence struggle, one which we seem to have inherited unknowingly, due to the predominance of a single party back then.[22] Ironically, the “Centre” so far seems to suffer from a lack of interest and/or ability to change things, thus putting the burden on the “states”.

With the reported increase in imports[23], it is high time that the “centre” learns something from the leading states and implements the same. With US$489 billion worth of imports, India is ranked the 10th biggest importer in the world, by the WTO, accounting for 2.6% of the world’s imports.[24] You can see how much of each product India imports here. You can also check out the import tariffs for agricultural products here.

The WTO realizes how important it is to protect its members from harassment in the form of delays and unnecessary rules. It is time we realize the same. Is the proposal of letting the Major Ports decide tariff rates going to serve this purpose?[25] Maybe, maybe not. Perhaps, with the ex-CM of the leading state of Gujarat as our new Prime Minister for the next sixty months, we might see some improvement for the importers. The Modi government promised the country: achhe din aane waale hain (Good days are going to come). Only time will tell how good the days of the future are going to be. We can only hope and wait for them to fulfill this promise of theirs.

[1] As per the website, www.wto.org.

[2] http://www.wto.org/english/thewto_e/whatis_e/inbrief_e/inbr03_e.htm

[3] See, for instance thisthis or this. You could also read this article, which gives five things that make Gujarat different from other states.

[4] Economic Freedom of the States of India Report- 2013, Bibek Debroy, Laveesh Bhandari, Swaminathan S. Anklesaria Aiyar. Available at http://www.cato.org/sites/cato.org/files/economic-freedom-india-2013/economic-freedom-states-of-india-2013.pdf.

[5] See http://www.business-standard.com/article/economy-policy/five-reasons-why-gujarat-is-different-from-other-states-clsa-112101603014_1.html for five things that make Gujarat better than the other states.

[6] See http://www.rediff.com/money/slide-show/slide-show-1-column-why-tamil-nadu-is-one-of-the-best-states-for-doing-business/20131209.htm#1

[7] The report looks at the size of the government: expenditures, taxes and enterprises; legal structure of the state; and regulation of labour and business in the state, and awards points accordingly.

[8] With a score of 0.87.

[9] Scores: 0.51, 0.46, 0.46, 0.44, 0.43, 0.42 Respectively. See Table 1.6 of the Report.

[10] Page 34 of the Report.

[11] Read the detailed report by Commiserate of Industries and FICCI on how Andhra Pradesh is a great state for business here.

[12] See http://www.business-standard.com/article/politics/telangana-foundation-day-on-june-2-114030500314_1.html.

[13] See http://www.doingbusiness.org/ in general, and http://www.doingbusiness.org/data/exploretopics/trading-across-borders/india in particular.

[14] See how the time and all related parameters are calculated here

[15] However, this could be because the report takes into account goods imported by sea transport.

[16] See http://www.bloomberg.com/visual-data/best-and-worst/best-for-doing-business-countries.

[17] See http://www.forbes.com/best-countries-for-business/list/.

[18] See http://www.doingbusiness.org/rankings.

[19] See http://www.doingbusiness.org/data/exploreeconomies/india#trading-across-borders

[20] The number takes into account: Documents preparation; Customs clearance and technical control; P orts and terminal handling; And Inland transportation and handling. The documents considered are: Bill of Entry, Bill of Lading, Cargo release Order, Certificate of Origin, Technical standard Certificate, Commercial Invoice, Foreign Exchange Control Form, Inspection report, Packing list, Product manual and Terminal handling receipts.

[21] Bardhan, Pranab (2010). Awakening Giants, Feet of Clay, Assessing the Economic Rise of China and India. Oxford University Press, in the Economic Freedom of States in Inida Report (Page 73).

[22] For more on this, see Report of the Commission on Centre-State Relations, available at http://interstatecouncil.nic.in/volume1.pdf

[23] India’s imports gained while exports grew negligibly from FTAs: ASSOCHAM study. Article available here.

[24] See Appendix table 3 here. Also see a detailed report on India’s imports and exports, by The Guardian here.

[25] http://articles.economictimes.indiatimes.com/2014-02-02/news/46923648_1_major-port-trusts-tamp-new-tariff-guidelines

By Ashwini Tallur

IBC Amendment and IBBI Regulations on Pre-Packaged Insolvency Resolution Process come as boon to MSMEs

The Central Government, on April 4 2021, by way of an Ordinance titled ‘Insolvency and Bankruptcy Code (Amendment) Ordinance 2021’, amended the Insolvency and Bankruptcy Code 2016 (IBC) to introduce the concept of Pre-Packaged Insolvency Process (PPIP). The Ordinance inserts a new chapter (III-A) to the IBC and provides for making an application for initiating PPIP with regards to a micro, small or medium enterprise (MSME) in light of the impact that the pandemic has had on businesses, financial markets and economies all over the world. The Ordinance is a welcome step towards the resolution of insolvent MSMEs. The objective of the Ordinance states that the PPIP for MSMEs has been introduced to provide them with an efficient alternative insolvency resolution process that will achieve value maximization in a quicker and cost-effective manner while causing the least disruption to the business.


Due to the simpler corporate structure of the MSMEs, Corporate Insolvency Resolution Process (CIRP) for reorganization is considered a tedious task which when dragged out leads to disruption in business. To overcome this problem, the PPIP mechanism has been introduced which will function as a hybrid framework blending both formal and informal processes within the basic mechanism of the IBC.

On 9th April 2021, the Insolvency and Bankruptcy Board of India notified the PPIP regulations for MSMEs. The regulations detail the forms that stakeholders are required to use, and the manner of carrying out various tasks as part of the pre-pack resolution process. It also provides details about various aspects, including eligibility criteria to act as a resolution professional, identification and selection of authorised representative, competition between the base resolution plan and the best resolution plan. 


The process can be initiated by the corporate debtor (CD) who will have to serve notices of a meeting to all unrelated financial creditors five days in advance, in order to seek their approval. The regulations prescribe at least 66% approval from the creditors. The Creditors will then have seven days to raise their objections to the notice of claims submitted to the resolution professional by the CD.


The resolution professional must necessarily be independent of the CD. This means the resolution professional and all partners and directors of the insolvency professional entity, of which they are a partner or director, have to be independent of the corporate debtor. If the concerned insolvency professional entity or any of its partners or directors represent any of the stakeholders, the person will be ineligible for being appointed as a resolution professional.


Another highlight of the PPIP is that it enables the management of affairs of the corporate debtor to continue to be in the hands of the Board of Directors or partners of the CD. This is in stark contrast to the CIRP, where the resolution professional is handed the reigns along with the assistance of the financial creditors. Creditors still have the option to initiate bankruptcy proceedings against the MSMEs under the CIRP.


After approval from the unrelated creditors, the CD will proceed with filing an application before the National Company Law Tribunal (NCLT) to initiate the PPIP, after taking a mandate from the directors and shareholders. The plans must be submitted within 90 days and the NCLT must approve of such plans within 30 days. The whole process will be completed within 120 days as opposed to the 270 day time period prescribed for the CIRP. Once the application is admitted by NCLT, the CD will itself first provide a Base Resolution Plan and if such plan is unsatisfactory, the resolution professional will publish an invitation for resolution plans within 21 days of the commencement of formal proceedings.


The Pre-Packaged Insolvency Resolution Process makes the debtor the only person capable of triggering the bankruptcy process. This scheme will yield faster resolution than the CIRP and will also reduce litigation, triggered by defaulting promoters, while simultaneously cutting costs. The process is also expected to run smoother due to the requirement of 66% approval from unrelated creditors. If the NCLT infrastructure is improved by the government, this ordinance is a welcome step in the corporate world as it will genuinely lift the weight off the shoulders of MSMEs.

By Adil Zawahir

Fast track insolvency procedure

Closure of a business in an efficient, timebound manner and with less burden on the owners is the aim of the Fast Track Insolvency Process under the Insolvency and Bankruptcy Code. Read on to know more and for any issues related to the closure of your business, connect with Flywork.io.

Introduction:

When a company/business debtor (Corporate Debtor) is unable to continue daily operations in a business, he/she files for insolvency, which further results in formation of plans to repay the creditors, employees, workmen, etc. The maximum number of days needed to complete the resolution procedure under the Insolvency and Bankruptcy Code, 2016 is 270 days. This is not very practical for business/companies which have a smaller line of business, as the creditors involved in a small-business enterprise is low compared to that of a bigger company. Faster settlement would lure buyers to small businesses and start-ups, the majority of which do not last long. Thus, in order to eliminate the unnecessary delay induced by a small-scale company’s insolvency the Government introduced a quicker option to complete the Corporate Insolvency Resolution Process (CIRP), i.e., Fast-track Insolvency Procedure under the Sections 55-58 of the IBC, 2016 read with the Insolvency and Bankruptcy Board of India (Fast track Insolvency Resolution Process for Corporate Persons) Regulations, 2017.

Sections 55 to 58 of the Code of 2016 were added to resolve the issue of undue delay in insolvency proceedings involving small businesses; the fast-track insolvency procedure takes 90 days to complete from the insolvency filing date. The time period for settlement can be extended only once by the Adjudicating Authority upto a period of 45 days, if it thinks fit, subject to support by voting share of at least 75% of the Committee of Creditors.

Process:

The following is the procedure to be followed under the Insolvency and Bankruptcy Code, read with the Insolvency and Bankruptcy Board of India (Fast track Insolvency Resolution Process for Corporate Persons) Regulations, 2017 –

Sl. No.StepExplanation
 Appointment of Resolution Professional Only an Insolvency Professional (IP) who has no relationship with the corporate debtor is qualified to be appointed as a resolution professional. In order to be appointed as a resolution professional, the insolvency professional must be self-sufficient/independent. At the time of his nomination, the insolvency professional must declare his independence at the time of appointment. 
 Public Announcement After being named as an interim resolution professional, the insolvency professional must make a public statement within three days of his appointment. The public notice must be distributed in one English and one regional language newspaper that is commonly distributed in the location of the corporate debtor’s registered office and principal office. A corporate debtor’s website and the board’s website would both have the same official announcement. 
 Claims – Submission, Verification and Proof of claims  The interim resolution professional shall provide 10 days to provide proof of claim. Operational creditors, financial creditors, workmen, employees, and other creditors must provide evidence of their statements in the specified forms, along with any additional documentation or clarifications.
When applications are submitted, the resolution professional must validate them within seven days of the claim submission deadline. After that, the resolution professional will create a list of creditors. 
 Formation of a committee of Creditors The resolution professional would assemble a group of creditors made up of the corporate debtor’s financial and operational creditors, which shall be known as the Committee of Creditors (CoC). The CoC will constitute only operational creditors if the corporate debtor has no financial debt or if the financial creditors are an associated party (related party) of the corporate debtor. 
 Meeting of the committee of creditors Within seven days of filing the paper, the resolution professional must call the first meeting of the newly formed committee of creditors. Following that, the committee will meet at any time if and when it is required. After receiving a vote of 33 percent voting share, the resolution professional will call a meeting of the committee at the request of committee members. The meeting notice must be sent at least seven days before the scheduled meeting date. The meeting notice must be in writing and sent to members either by hand, by speed post, or online. 
 Conduct of the fast-track process Under Section 26-29 of the Regulations, the Resolution Professional, within seven days of his appointment, must select a registered valuer to determine the liquidation value of the corporate debtor. After personally checking the inventory and fixed assets of corporate debtors, the registered valuer shall apply an indicative liquidation value. 
 Formation, approval and submission of the Resolution Plan The resolution plan must include the steps that must be taken to put it into action. The resolution plan must be written with the requisite mandatory material in mind. Under the time frame, the resolution applicant must apply the drafted resolution plan to the resolution professional. The resolution professional would then present the shortlisted resolution plans to the Committee of Creditors, for approval. The committee has the authority to approve any resolution proposal, with or without changes, as it sees fit.The resolution applicant must apply the authorized resolution plan, along with all appropriate certifications, to the adjudicating authority. On receipt of the resolution plan, the adjudicating authority must issue an order approving or refusing the resolution plan. 

Conclusion:

However, the fast-track process does have a few setbacks, for example, failure to complete the Fast-track procedure within 90 days (or with an extension of 45 days, depending on the approval of the Adjudicating Authority) will lead to initiation of liquidation process, which is disadvantageous to the corporate debtor, i.e., it destroys organizational capital and renders resources idle till reallocation to alternate uses. Another challenge regarding the procedure is whether 90 days is sufficient for the entire CIRP to be completed as the efficiency of the same depends on the resolution plans, approval by the CoC, etc. 

The Fast-Track Corporate Insolvency Resolution Process is a great initiative to target a particular segment of corporate debtors against which creditors or the corporate debtor himself may begin insolvency proceedings. The time limit is often set in such a way that less complex cases can be solved in a short amount of time, allowing adjudicating officials to devote more time to more complex cases.

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References:

  1. Sections 55 to 58 of the Insolvency and Bankruptcy Code, 2016 and 
  2. Insolvency and Bankruptcy Board of India (Fast track Insolvency Resolution Process for Corporate Persons) Regulations, 2017.
    By Achyutha Bharadwaj

How the Biotechnology Regulatory Authority of India Bill will affect your dinner?

A graduate from Calcutta University who is scheduled to start her L.L.M (International Law) in Queen Mary University in London in 2014-2015 Session

There is an old saying that goes like this –  “you are what you eat”. Today we definitely do not want to be what we eat, as “healthy” and “wholesome” are two adjectives that are slowly moving away from the word “food”. Many people believe that this new “organic revolution” worldwide is a fad, but the truth is, the food that is being produced is fast becoming more and more “in-organic”. It is not just pesticides and insecticides that are harming our health, there seems to be another new villain in the block, called GMO’s or genetically modified organisms.

A few years ago, if you might remember, there was a nation-wide protest for banning the introduction of “Bt[1] brinjal.”  Luckily for us the Bt brinjal is yet to see the light of the day; but what was all the fuss about? Monsanto-the American pioneer in genetically modified crops and Mahyco – India’s prime seed company, collaborated to create a genetically modified strain of brinjal. This brinjal promised to increase yields, but the flip side was its alleged effects on animal and human health not to forget environmental hazards. In the past a similar Bt strain of cotton had done more harm than good, with farmers committing suicides and the extinction of indigenous varieties of cotton[2]. (You can follow this link for further reading).

What is this BRAI Bill all about? And how does it affect us, is what I intend to bring to light through this article.

The Biotechnology Regulatory Authority of India (BRAI) Bill was passed in 2013.The object of this Bill being “to promote safe use of biotechnology”, and it was proposed by the, then Ministry of Science and Technology. The Bill was drafted in furtherance of India’s obligation to the Cartagena Protocol on Biosafety 2000[3], to ensure safe and responsible use of biotechnology. A few key features of this Bill are explained below which may make you ponder whether if at all India needs this Bill.

The object of the Bill is to “promote safe use of biotechnology”, but if we look closer it seems as if the Bill is an open door for corporations that produce genetically modified organisms (GMO’s). It empowers a panel of about five scientists to work on the inspection and clearance of these technologies patented by these corporations. In short, these five scientists have the responsibility to decide what the whole of India should be eating.

The Bill also curbs the role of the individual state governments to merely advisory, in the form of the State Advisory Biotechnology Regulatory Committee, setup under Clause (35) of the Bill. The states do not even possess the authority of rejecting the introduction of GMO crops in their territory. It takes away the authority of the states to make choices about what crops should be grown. This seems to be against the powers granted to the states by the Indian Constitution[4]. The objection to Bt brinjal by states like Andhra Pradesh, Bihar, Kerala, Tamil Nadu, Gujarat and West Bengal, is a proof that not all state governments are happy with the introduction of these modified crops.

The provisions that the Bill has for liabilities and penalties seems insufficient. As per the Bill, imprisonment of up to three months and a fine of up to rupees five lakhs is the penalty for providing false information, conducting unapproved field trials and obstructing an officer of the BRAI. One of the problems that arise with respect to the liabilities is that there is no express provision dealing with liabilities in case of any negative impact of these modified organisms. There should be provisions for absolute liability or no fault liability to ensure that the interests of the people are not at stake. Instead, this Bill leaves the subject of liability on the courts to see on a case by case basis. India despite being a signatory of the Nagoya Protocol,[5] which states that the countries should have a mechanism of dealing with liabilities either by the civil law of the land or a specific law dealing with biotechnology, has failed to make such provisions in the Bill.

As for dispute redressal the BRAI proposes to setup an independent Appellate Tribunal hence taking away the authority from the civil courts. Section 56 states “the Appellate Tribunal shall have the jurisdiction over all civil cases where a substantial question relating to modern biotechnology is involved”. A specific Tribunal just to deal with these provisions seems like an unwanted waste of time and money, and it looks like an attempt to corner poor farmers who would not stand a chance in front of the multinationals and biotechnology goliaths.[6] Would this mean that the BRAI is trying its best to protect and uphold the interests of these corporations over the health of Indian citizens?

This article might seem like a critique of this Bill. To be fair I would like to say that yes, the Bill is an attempt to solve the problem of growling bellies of the teaming millions and to make food security a reality. Yes! The production of food may increase and bring about a huge boost to the economy, and the introduction of foreign biotechnological giants may be a blessing in disguise. But the cons out-weigh the pros. When countries are waking up to the disaster called “GMO” crops India must be cautious enough to look at its long-term effects on the present and future populations. One can only hope that the price we pay for cheaper food does not cost us dearly in the future.

[1] bacillus thuringiensis,

[2]http://www.rediff.com/money/slide-show/slide-show-1-all-about-bt-brinjal/20100127.htm

[3]https://www.cbd.int/doc/legal/cartagena-protocol-en.pdf

[4]http://www.navdanya.org/blog/?p=683

[5] Nagoya – Kuala Lumpur Supplementary Protocol on Liability and Redress to the Cartagena Protocol on Biosafety, United Nations, adopted October 15, 2010, https://bch.cbd.int/protocol/NKL_text.shtml. India is a signatory to the Protocol; it is yet to come into force

[6]http://www.navdanya.org/blog/?p=683

Land Bill Decoded

The Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement (Amendment) Bill, 2015 was introduced in the Lok Sabha on February 24, 2015.  The Bill amends the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 (LARR Act).[1] The 2015 Bill aims to alter the LARR Act, 2013 as it was criticised for strangling economic growth by making it difficult for the industries to acquire agricultural land.[2]

This Bill introduced some changes in the old Act but was passed by the Lok Sabha with some changes. The first major change that was introduced was regarding the consent required. The LARR Act, 2013 stated that consent of 80% of land owners was required for private projects, consent of 70% of land owners is required for public-private partnerships and no consent is required for government projects. The 2015 Bill exempted 5 types of projects from seeking consent and they are:

  • Defence
  • Rural infrastructure
  • Affordable housing
  • Industrial corridors
  • Infrastructure and social infrastructure including Public Private Partnership where the government owns the land.

The Lok Sabha passed this consent provision by excluding social infrastructure from the exempted category of projects. It also defined industrial corridors as those set up by the government/government undertakings, up to 1 km on the either side of the road/railway corridor.[3]

The second important point was the Social Impact Assessment (SIA). The LARR Act 2013 provides that SIA is mandatory for all projects except in cases of urgency or in cases of irrigation where an environment impact assessment is required. The Bill states that the government can exempt all those five categories mentioned in the consent clause from this provision as well by issuing a notification in the Official Gazette. Lok Sabha passed this provision with an addition that the government before issuing a notification should ensure that the land being acquired is being kept within the land required.[4]

The third important aspect is regarding the Irrigated multi cropped land. The LARR Act 2013 provided that the irrigated multi cropped land cannot be acquired without the limit specified by the government. The Bill allows the government to exempt projects falling under the five categories mentioned in the consent clause from this provision as well by issuing a notification to that effect. The Bill was passed by making the same addition as made in the SIA provision.[5]

The fourth important provision is regarding the compensation and rehabilitation & resettlement provisions of 13 other laws which govern land acquisition. The LARR Act 2013 excluded 13 other Acts from its ambit and also required that the compensation and rehabilitation & resettlement provisions given under these 13 Acts be brought in consonance with the LARR Act. The Bill does not bring about any changes with regard to this provision.

The fifth important aspect is regarding the retrospective application of the Act. The LARR Act 2013 provided that the Land Acquisition Act, 1894 would continue to apply in those cases where an award has been passed under the 1894 Act. However, if the award was made five years or more before the enactment of the 2013 Act, and the possession of land has not been taken or compensation had not been paid, the 2013 Act would apply. The Bill states that in calculating this time period, the following will not be included: (i) any period during which the process of acquisition was held up due to an order of a court; (ii) a period specified by a Tribunal for taking possession; and (iii) any period where possession was taken but the compensation was lying deposited in a court/designated account. This provision was passed unchanged.[6]

The sixth change was regarding the definition of ‘private company’ which was altered to private entity in the 2015 Bill. The LARR Act was applicable for the acquisition of land for private companies. The Bill changed this to acquisition for private entities. A private entity is defined as an entity other than a government entity, and could include a proprietorship, partnership, company, corporation, non-profit organisation, or another entity under any other law. This provision was also passed unchanged.[7]

The last change is regarding the provision of Offences by the government. The LARR Act 2013 had provided that if an offence was committed by a government department then the head of that department would be deemed guilty unless he can show that he had exercised due diligence to prevent the commission of the offence. The Bill deleted this provision and was passed as it is by the Lok Sabha.[8]

With these changes the Bill was passed by the Lok Sabha but the government was forced to refer this controversial land acquisition Bill to the Parliamentary Committee because of the opposition from other political parties. The government is open to all kind of suggestions and is sticking to its stand that it is a pro-farmer Bill.[9]

Ii is in fact a blessing in disguise that the land acquisition Bill is progressing slowly, since passing the Bill in haste harmful. There is no denying the fact that having a difficult procedure to acquire land makes it difficult for the industries to grow but the farmer’s interest is also to be kept in mind in a country like ours where the major population of the country is in the rural belt and is dependent on agriculture, animal husbandry and the like. The government should ensure that a balance is maintained between the interests of the industries and farmers. That is to say if the country hopes to become industrially sound and is aiming at the expansion of the industrial sector then land should be given to the industries but the farmers should also be adequately compensated for giving away their lands and not be left empty handed. One can hope that the government delivers what it promises, while the country awaits the Ache Din…!!

[1] The Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement (Amendment) Bill, 2015, available at www.prsindia.org (last visited on 25 May 2015)

[2] Land Bill reintroduced in Lok Sabha, opposition walks out, Live Mint May 11, 2015, available at www.livemint.com (last visited on 27 May 2015)

[3] LARR (Amendment) Bill, 2015 as passed by Lok Sabha, available at www.prsindia.org (last visited on 25 May 2015)

[4] Supra note 3

[5] Supra note 3

[6] Bill Summary – The Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement (Amendment) Bill, 2015, available at www.prsindia.org (last visited on 25 May 2015)

[7] Supra note 6

[8] Supra note 3

[9] Land bill referred to joint panel, Live Mint May 13, 2015, available at www.livemint.com (last visited on 27 May 2015)

By Arushi Malik