Government to exempt coronavirus-related debt of companies from insolvency law ambit – The Economic Times

Clipped from: https://economictimes.indiatimes.com

Procedural violations under the Companies Act, such as shortcomings in corporate social responsibility reporting, inadequacies in board reports, filing defaults and delay in holding annual general meetings will be decriminalised.

The government excluded any debt arising out of circumstances created by Covid-19 from the definition of default for companies under the Insolvency and Bankruptcy Code (IBC).

Further, the Centre will decriminalise most of the sections of the Companies Act, where violations are technical or procedural in nature.

These and other other changes to the IBC and Companies Act, will be brought through ordinances so that companies can benefit immediately, said finance minister Nirmala Sitharaman, while presenting the final tranche of the Atmanirbhar Bharat package on Sunday.

“Of course we will go back to the parliament, once the parliament commences to have it passed as an act,” she added.

Procedural violations under the Companies Act, such as shortcomings in corporate social responsibility reporting, inadequacies in board reports, filing defaults and delay in holding annual general meetings will be decriminalised.

This would help unclog criminal and company law courts as the government has allowed settlement of some of these offences at the local level. “Compoundable offences, where there are, they can now be tried under internal adjudicating mechanism. This way, it becomes simpler, it can be sorted out at the internal adjudicating mechanism route rather than go to the courts,” Sitharaman said.

The minister also extended the suspension on initiating insolvency proceedings under the IBC for a year because “whether the lockdown gets lifted immediately you’re not sure how much business will get restored,” she said, adding, “For MSMEs, a special insolvency framework will be notified under section 240A of the IBC.”

Together, these moves bring great relief to companies as they can focus on business revival rather than worry about defaults and compliance.

“These measures will prove to be instrumental in easing the financial situation of firms especially, MSMEs who have been one of the biggest victims of this pandemic crisis,” said Chandrajit Banerjee, director general of the Confederation of Indian Industry.

Clarifications Required
Experts highlighted certain ambiguities in the relaxations such as what constitutes Covid-19 related debt and whether the suspension covered existing insolvency cases referred to the National Company Law Tribunal (NCLT) but were not taken up due to the lockdown.

“If you see the language, until there is a clarification, it has two meanings. Any industry which is badly affected by Covid-19 due to the nature of its business such as aviation and tourism, such loan defaults will not be treated as a default under the IBC,” said Pavan Kumar Vijay, founder of Corporate Professionals.

“The other interpretation could be that default on loans taken under the Covid-19 relief measures will not be counted as default,” he added, saying that if the former is true, it could imply extension of the suspension of fresh insolvency proceedings beyond a year.

On the suspension, Sanjeev Krishan Partner at PwC India said, “The words used are ‘fresh initiation’, and clarification would be required on whether existing cases which have been referred to NCLT can be admitted.”

Sitharaman said clarifications regarding the definition and the applicable period of Covid-19 related debt would be provided by the forthcoming notification from the corporate affairs ministry.

According to Kumar, the special insolvency framework for MSMEs meant additional relaxations for the sector. “They may extend the suspension for more than one year. They could provide additional flexibility on who can and cannot participate in the insolvency proceedings in terms of willful defaulters, existing promoters and others.”

Fundraising
In a step to improve the ease of doing business and to widen the scope of fundraising, the government allowed direct listing in foreign jurisdictions for Indian companies. Earlier, these companies were required to list on Indian exchanges before accessing international exchanges.

“If they did not want to list in India first, such Indian companies had to externalise by setting up overseas holding companies in order to list overseas directly which was a cumbersome and inefficient process. This move will give access to Indian companies to overseas funding,” said Vikram Doshi, partner at PwC India.

This would provide Indian companies with better valuations but it would also mean they would have to comply with the high standards of international governance and accounting. “In the longer run, cross-listings on international exchanges would increase the competitiveness of Indian corporates by offering better valuations and cross-border alliances,” said Sandeep Jhunjhunwala, director at Nangia Andersen LLP.

Additionally, the government has said a company will not be considered as a listed company if they just want to list non-convertible debentures (NCDs) on the stock exchange. The move brings additional sources of funding to companies who do not wish to comply with the regulations applicable to listed companies.

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