- July 17, 2016
- Posted by: suvanlaw
- Category: RBI
- RBI Introduces New Instrument for Start-ups
RBI vide its notification dated 10 January, 2017 (“Notification”) has made certain amendments to Foreign Exchange Management (Transfer of Issue of Security by a Person Resident Outside India) Regulations, 2000 (“TISPRO Regulations”). The Notification is a move in furtherance to Government’s Start-up India initiative as it introduces a new instrument in case of start-ups. Following are the noteworthy points of the Notification:
- This instrument is initially treated as debt, which is repayable at the option of the holder, or which is convertible into such number of equity shares of such startup company, within a period not exceeding five years from the date of issue of the CN, upon occurrence of specified events as per the other terms and conditions agreed to and indicated in the instrument.
- A person resident outside India may purchase CNs issued by an Indian startup company for an amount of twenty five lakh rupees or more in a single tranche.
- A startup company engaged in a sector where foreign investment requires Government approval may issue CNs to a non-resident only with approval of the Government.
- NRIs may acquire convertible notes on non-repatriation basis in accordance with Schedule 4 of the TISPRO Regulations.
- A person resident outside India may acquire or transfer, by way of sale, convertible notes, from or to, a person resident in or outside India, in accordance with the pricing guidelines as prescribed by RBI.
- Reporting requirement to be complied with as prescribed by RBI.
- Ordinance Giving RBI Power to Tackle Bad Debt
The Ministry of Law and Justice vide ordinance dated May 04, 2017 inserted Section 35AA and 35AB in Banking Regulation Act, 1949 giving wide-ranging legislative powers to the Reserve Bank of India (RBI) to issue directions to Banking Companies to initiate insolvency proceedings for the default or recovery of bad loans and also empowered RBI to issue directions to banks for resolution of stressed assets respectively. Subsequently, the Central Government vide an Order dated May 5, 2017 by the Ministry of Finance re-affirmed these powers and authorized RBI to issue such directions to any banking company(s) which may be considered necessary to initiate insolvency resolution process in respect of a default, under the provisions of the Insolvency and Bankruptcy Code, 2016.
- RBI empowered to initiate insolvency proceedings under IBC
RBI vide its press release dated 13.6.2017 had decided to initiate insolvency proceedings against the companies which have outstanding debt with more than 60% Non-Performing Assets (“NPAs”) for more than a year beyond Rs. 5,000 Crores including Essar. This decision of RBI was challenged before the Gujarat High Court by Essar.
The Hon’ble Gujarat High Court in its order dated July 17, 017, rejected Essar’s primary contention that the criteria chosen by RBI to refer the case of Essar to the NCLT under the Insolvency and Bankruptcy Code 2016 (“IB Code”) is unfair and unjust. It ruled that there is no classification but only the time schedule given by RBI for initiation of insolvency petitions. For companies whose debt is more than Rs. 5,000 Crores insolvency proceedings need to be initiated at the earliest and for rest of the companies, if resolution plan could not be finalised within six months, then, insolvency proceedings should be initiated. It was also held that under Section 35AA of the Banking Regulation Act, RBI is empowered to issue directions to the banks in order to tackle the growing problems of NPAs in the country. Furthermore, it was held that the insolvency proceedings can be initiated by the banks irrespective of the directions of RBI as it is solely upon the lenders to choose the method by which they wish to proceed against the loan defaulters.
Besides, the court did not go into the merits of the other contentions of Essar including the appointment of Insolvency Resolution Professional and the issue of its ongoing debt restructuring plan which is still in process and which was not taken into consideration before the initiation of the insolvency proceedings against Essar. The Court noted that the substantial issues related to the insolvency proceedings should be decided by the appropriate forum under the IB Code, i.e. the NCLT.