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January 25, 2017

Financial Sector Reforms – Developments and Opportunities

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In past one year the Government has put in motion a number of reforms with the intent to attract more foreign direct investment in India and simplify ease of doing business in India. As the year draws to a close, we look back upon the pivotal developments in financial laws effected or proposed during the year. Although there are several areas which could be discussed, such as, change in securities law, land bill, etc; in this article we have covered a brief overview of the developments in (i) corporate bankruptcy laws, (ii) debt restructuring and (iii) foreign direct investment policy.

Corporate Bankruptcy Laws

The corporate insolvency procedure is presently covered under the Recovery of Debt Due to Banks and Financial Institutions Act, 1993, Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI) 2002, the Companies Act 2013 and Sick Industrial Companies (Special Provisions) Act (SICA), 1985.  Under different laws, different forums, such as, debt recovery tribunals (DRTs), Board of Industrial and Financial Reconstruction (BIFR), the proposed National Company Law Tribunal (“NCLT”) have jurisdiction. This fragmented framework leads to ambiguity in determining jurisdiction. Most of the times the forum is not equipped to handle bankruptcy cases, which leads to inordinate delays.  Keeping in mind these difficulties, the Government has placed before the Parliament the Insolvency and Bankruptcy Bill, 2015 (the “Bill”) with the intent to introduce swift time bound bankruptcy resolution process which simultaneously helps in preserving economic value of the creditors. Some of the significant features of the Bill are as follows:

  • Adjudicating Authority: In case of default in payment of debt by the corporate debtor, the NCLT has the authority to adjudicate the insolvency resolution process, with the appellate authority being entrusted with the National Company Law Appellate Tribunal (NCLAT).
  • Time bound Process: The corporate debtor is provided with 10 (ten) days to make payment of undisputed debts or to provide a proof of dispute to the creditors as opposed to 21 days as presently required. Other than in exceptional circumstances like on account of complexity of the matter or pursuant to approval by the committee of creditors and shareholders, the adjudicating authority is required to complete the insolvency resolution process within 180 days of date of admission of the application.
  • Preservation of Economic Value  Once the application has been admitted and moratorium has been declared by the Adjudicating Authority, the secured creditors cannot enforce their security, the corporate debtor which is subject to insolvency cannot alienate any of the It’s assets and suspension of delivery of essential goods cannot be put into effect. However, if the Adjudicating Authority has approved a resolution plan or the committee of the creditors has resolved to liquidate the corporate debtor, the moratorium ceases to have effect. Significant powers have been given to committee of creditors to decide the best suited course of action.
  • Interim Resolution Professional: During insolvency resolution process, the management of the corporate debtors is placed in the hands of interim resolution professional and powers of the directors are suspended. Such interim resolution professional is entrusted with preserving the value of the corporate debtor. They are also given wide powers to ensure that assets are not stolen from the company and also examine check of the transactions of the company for the last two years to look for illegal diversion of assets. Such diversion of assets would induce criminal charges. The proposal would go a long way in curbing asset stripping by promoters.
  • Fast-track insolvency resolution: The fast-track insolvency resolution process envisages completion of insolvency process of eligible corporate debtors within 90 days of the commencement date. 

Private equity industry especially the start-ups and companies laden by heavy debt has often seen that the current bankruptcy regime has not proved effective to protect the investors interest nor provide effective liquidation in a time bound manner. With the changes proposed in the Bill it is expected to address these two concerns and also consolidate the bankruptcy laws.

Debt Restructuring

With the intent to strengthen the debt-restructuring framework in the country, the Reserve Bank of India, on June 8, 2015, notified the “Strategic Debt Restructuring Scheme” (“SDR Scheme”).  The SDR Scheme enables the lenders to convert the whole or part of their outstanding loan and interest into equity. The SDR Scheme requires the banks to take over control of the borrower, which gives the banks more control in recovering their debts.  The SDR Scheme stipulates the pricing formula of conversion. 

Upon conversion of debt into equity, such lenders are required to divest, as soon as practical, their shareholding in the borrower to a “new promoter” who is not a part of the existing promoter group of the borrower. Once the lenders have divested their holdings, the asset classification of the account may be upgraded to “standard” and the loan may be refinanced. However, the recent newspaper reports suggest that those lenders who have converted their debt into equity under the SDR Scheme may be staring at the possibility of significant write-offs in their effort to sell the equity to a new promoter. 

Going by the stock exchange notifications, the lenders of Gammon India Limited, IVRCL Limited, Monnet Ispat and Energy Limited, Electrosteel Steels Limited, VISA Steel Limited, and Jyoti Structures Limited appear to have decided to convert their debt to equity of the borrowing company. However it appears that not the entire amount of debt is converted into equity. In case of Gammon India Limited, the lenders have decided to convert debt worth 245 crores out of the entire outstanding debt of 3500 crore in 60.1% of equity capital of the borrower. Keeping in mind such large amount of debt still remaining outstanding, the “new promoter” acquiring the equity stake is likely ask for a haircut from the lenders. The Reserve Bank of India is presently seeking feedback from the banks and is likely to tweak the SDR Scheme to make it more viable for the banks. 

The above could potentially lead to opportunities for private equity funds looking for possibilities of investing in special situation assets. Although such a market in India is very nascent, with possibility of getting substantial control and effective management in such companies does create a new area of investment opportunities. 

FDI Reforms

With the objective of attracting more foreign direct investment in India, the government has liberalized the foreign direct investment (FDI) policy.  These reforms broadly fall in the category of (i) increase in sectoral caps, (ii) relaxation of conditions, and (iii) FDI permitted in new sectors. 

We have discussed below some of the key reforms which will be play a significant role in attracting FDI in the country:

  • FDI in Limited Liability Partnerships (LLPs):  Earlier FDI in LLPs was not permitted without the prior approval of the Government. With the introduction of new reforms, FDI is LLPs is permitted without the Government approval if the LLP is engaged in the sectors where 100% FDI is permitted under the automatic route and no FDI-linked performance conditions are prescribed (the “Permitted Sectors”).
  • Downstream Investment by LLPs: LLPs with FDI can also make downward investment in companies or other LLPs which are engaged in Permitted Sectors.
  • FDI in Construction Sector: Earlier, to procure FDI, the companies engaged in construction and development sector were required to comply with a number of conditions, including the minimum area of development, requirement to remain invested till completion of the project, which are now are done away with.  After the reforms, foreign investor can exit the company before the completion of the project if the lock-in period of 3 years from each tranche of investment is completed.  The companies receiving FDI can now also engage in the business of leasing properties. These positive steps by the Government will pave the way to attract investment in Real Estate Investment Trusts and Infrastructure Investment Trusts.  FDI compliant entities would now also be able to engage in property leasing business.
  • Swap of Shares: Earlier swap of shares between a resident and a non-resident entity required an approval from the Government. After the reforms the shares of two companies can be swapped without any approval, provided both companies are engaged in sectors in which FDI is permitted under the automatic route. However, for sectors under the Government approval route, investment by way of swap of shares will still need the approval of the Government. In case of a distressed sale, the foreign investor can seek to obtain shares of the purchaser with the prospect of getting an upside at a later date without seeking any Government approval.
  • Liberalised sectors: 100% FDI under the automatic route is now permitted in sectors such as non- scheduled air transport service, ground handling services, teleports, Up-linking of Non-‘News & Current Affairs’ TV Channels / Down-linking of TV Channels, credit information companies and duty free shops. 
The Government has certainly taken a number of steps in the right direction and we will hopefully get to see the positive impact of these reforms in the coming year.  The above could only get better with the “Startup India” initiative of the Government, which is expected to give investment push to start-up sector in India and potentially create more opportunities for venture and angel funds.

Darshan Upadhyay and Amruta Kelkar are Partner and Associate Manager at Economic Laws Practice (ELP), Advocates & Solicitors. They can be reached at and  for any comment or query. 

The information provided in the article is intended for informational purposes only and does not constitute legal opinion or advice. Readers are requested to seek formal legal advice prior to acting upon any of the information provided herein.