Tag Archives: novojuris

REGULATORY UPDATE: MCA ISSUED NOTICE INVITING COMMENTS/SUGGESTIONS ON INTEGRATION OF NAME RESERVATION WITH SPICE E-FORM UNDER COMPANIES ACT, 2013

The MCA in view of simplifying the process of name reservation for the Companies, it has issued the Consultation Paper on the integration of Name reservation with SPICE e-form under the Companies Act, 2013. In this regard, it has invited the stakeholders to send their suggestions for further simplification of processes of name reservation with SPICE e-form under the Companies Act, 2013 intended at simplification of company incorporation processes in order to bring more clarity and simplicity in ease of doing the business process.

The suggestions/comments on the Consultation Paper along with justification, in brief, may be filed online at comments.nameintegration@mca.gov.in on or before 5 November 2017.

Advertisements

ARRESTS IN CONNECTION WITH INVESTIGATION BY SERIOUS FRAUD INVESTIGATION OFFICE

NOTIFICATION OF THE COMPANIES (ARRESTS IN CONNECTION WITH INVESTIGATION BY SERIOUS FRAUD INVESTIGATION OFFICE) RULES, 2017.

The MCA vide its notification dated 24 August 2017 has notified the Companies (Arrest in connection with Investigation by Serious Fraud Investigation Office) Rules, 2017 which stands effective from 24 August 2017.

Key highlights:

  • Where the Director, AdditionalDirector or Assistant Director of the Serious Fraud Investigation Office (herein after referred to as SFIO) investigating into the affairs of a company other than a Government company or foreign company has, on the basis of material in his possession, reason to believe (the reason for such belief to be recordedin writing) that any person has been guilty of any offence punishable under section 212of the Act, he may arrest such person; Provided that in case of an arrest being made by Additional Director or Assistant Director, the prior written approval of the Director SFIO shall be obtained.
  • The Director SFIO shall be the competent authority for all decisions pertaining to arrest.
  • An arrest register shall be maintained in the office of Director, SFIO and the Director or any officer nominated by Director shall ensure that entries with regard to particulars of the arrestee, date and time of arrest and other relevant information pertaining to the arrest are made in the arrest register in respect of all arrests made by the arresting officers
  • The provisions of the Code of Criminal Procedure, 1973 (2 of 1974), relating to arrest shall be applied mutatis mutandis to every arrest made under this Act.

Source: http://www.mca.gov.in/Ministry/pdf/companiesArrestsconnectionSFIORule_25082017.pdf

 

NOTIFICATION OF THE NATIONAL COMPANY LAW APPELLATE TRIBUNAL (AMENDMENT) RULES 2017.

NOTIFICATION OF THE NATIONAL COMPANY LAW APPELLATE TRIBUNAL (AMENDMENT) RULES 2017.

The MCA vide its notification dated 23 August 2017 has amended Rule 63 of National Company Law Appellate Tribunal Rules 2016  notified on 21 July 2016 regarding Appearance by Authorised Representative, as under:

  • Subject to provisions of section 432 (Right to Legal Representation) of the Companies Act 2013, a party to any proceedings or appeal before the Appellate Tribunal may either appear in person or authorise one or more chartered accountants or company secretaries or cost accountants or legal practitioners or any other person to present his case before the Appellate Tribunal.
  • The Central Government, the Regional Director or the Registrar of Companies or Official Liquidator may authorise an officer or an Advocate to represent in the proceedings before the Appellate Tribunal.
  • The officer authorised by the Central Government or the Regional Director or the Registrar of Companies or the Official Liquidator shall be an officer not below the rank of Junior Time Scale or company

Source: http://www.mca.gov.in/Ministry/pdf/NCLATAmendmentRules2017_25082017.pdf

CLARIFICATION ON DEFINITION OF “JOINT VENTURE”

MINISTRY OF CORPORATE AFFAIRS (MCA)

CLARIFICATION ON DEFINITION OF “JOINT VENTURE” FOR THE PURPOSE OF EXEMPTION FROM APPOINTMENT OF INDEPENDENT DIRECTORS BY CERTAIN UNLISTED PUBLIC COMPANIES

The MCA vide its notification dated 5 July 2017 had inserted Rule 4(2) and amending Rule 4 of the Companies (Appointment and Qualification of Directors) Rules, 2014 to exempt the unlisted public company which is a joint venture, a wholly owned subsidiary or a dormant company from appointing independent directors.

Further for the purpose of availing exemption under Rule 4(2) as such a term is not defined in the Companies Act, 2013, stakeholders and other professional institutes had sought for clarifications with regard to the meaning of “Joint Venture”.

In view of the above, MCA vide its circular dated 05 September 2017 has clarified that the term “Joint venture” would mean a joint arrangement, entered into in writing, whereby parties that have joint control of the arrangement, have rights to the net assets of the arrangements. The usage of the term is similar to that under the Accounting Standards.

Source: http://www.mca.gov.in/Ministry/pdf/GeneralCircular_05092017.pdf

Insolvency & Bankruptcy Code- Protection FROM Creditor or Protection FOR Creditor

Background

The Insolvency and Bankruptcy Code, 2016 (“Code”) was notified effective 28 May 2016 with an aim amongst many others, to complete insolvency resolution process in time bound manner, to revive the entity and to ensure/safeguard the value of creditors (specifically unsecured creditors) and to protect the entity itself from coercive action of creditors (with an introduction of moratorium period). This legislation is very much needed, along with the rigour that it propounds.

The Code gives powers to creditors (both operational creditor & financial creditor) to drag the corporate debtor to the National Company Law Tribunal (the Adjudicating Authority) for insolvency resolution process in cases of default of payment. However, in the absence of specific opportunity to the corporate debtor to address the very reason for such default, the intent of the Code appears to below-sided towards creditors.

Should the corporate debtors be given an opportunity to be heard?

Position of Corporate Debtor under the Code

The existing procedure under the Code in case of operational creditor being an applicant involve a notice of dispute being issued against the corporate debtor, following which a time period for response is given to the corporate debtor to prove the existence of a dispute. After the mandated time period of 10 days has been exhausted, the operational creditor files an application. Following the filing of an application, there is a limited period of 14 days, following which the same has to be admitted by the NCLT.In case of financial creditor being an applicant to the insolvency process, an application would be made to Adjudicating Authority and a copy of such application would be sent to the corporate debtor.

Upon application being accepted by the Adjudicating Authority, there is a time period of 30 days within which the insolvency resolution professional is appointed by the creditors to put together all the relevant material in this regard and call for a meeting of various creditors.

The insolvency resolution professional (IRP)  is the individual who is proposed by the resolution applicant (i.e. creditor) and appointed by the Adjudicating Authority. A corporate debtor does not and cannot have any role in such appointment. IRP works to protect the interest of creditors and provides for a revival plan to protect the interest of the creditors.

Upon IRP being appointed, the IRP takes charge of the running of the business. The corporate debtor cannot make any management decisions.The resolution plan is then placed before the committee of creditors, and if more than 75 percent of the creditors approve, then the plan is approved. If not approved, the company goes into liquidation.

It may be noted that once an application is filed by the creditor, the Code rides excessively on the word of the corporate creditor.While there are few judicial precedents in which the Court has ruled that the Adjudicating Authority has to adhere to the principle of natural justice while deciding applications, the point of emphasis remains that the Code by itself does not provide any recourse for the corporate debtor to raise the grievance. It is for the Adjudicatory Authority to make ways for the corporate debtor to represent himself. Moreover, there is no structured procedure laid down for a fair hearing to be given to the corporate debtor.

Possible Remedies for safeguarding the rights of the corporate debtors against the frivolous threats of the creditors.

A corporate debtor who has intimate knowledge of the business, technical and professional experience of running the business should also be heard in appointing an IRP. An IRP who is not experienced in running a particular business or does not have the intimate knowledge required of the industry may cause damage, which perhaps can be evaluated prior to appointing the IRP.

Considering principles of natural justice, a right must be provided to the corporate debtor to be heard and present its side of the facts. It would be essential to have a provision in the Code to provide that opportunity to the debtor. With the rise of frivolous threats from many stakeholders a business has – employees, small value (amount) vendors, it helps in stopping frivolous threats.

Author: Ashwin Bhat

P2P LENDING IN INDIA: OLD ROADS NEW RULES

P2P LENDING IN INDIA: OLD ROADS NEW RULES

Introduction

Peer to Peer (“P2P”) lending platforms (the “Platforms”) aims to provide individuals and entities with an alternative source for fulfilling their capital requirements. Whether it is for obtaining capital to run a business, financing to complete a personal project, or to obtain a loan for any other purpose, these Platforms allow borrowers and lenders to meet and transact on mutually acceptable terms.The Platform itself typically assists the process by listing lenders and their terms and conditions, verifying the identity and initial creditworthiness of the borrowers, disbursing the loans/tranches, collecting loan repayments etc.For these services, both the borrowers and lenders pay the Platform a commission.

Most Platforms follow a ‘reverse auction model’, where the lenders bid with their own terms and conditions for a borrower’s loan proposal, and the borrower has the freedom to choose between the various bids.This gives borrowers who would typically struggle to get loans from banks/NBFCs with a variety of options. Further, the other advantage of the Platforms is that borrowers can now stay away from money lenders/the unorganized sector, as the Platform verifies all lenders and provides a streamlined and regulated process for obtaining loans. Finally, in most cases, the interest rates on loans obtained on the Platforms is also lower than what individual money lenders would usually charge.

Since the popularity of P2P Platforms in India has grown in the recent past, they remained unregulated till recently. However, with the growth of the fintech industry and the multiple use cases/benefits of these Platforms, the RBI released a consultation paper on regulating P2P Platforms, in 2016. On receipt of feedback and comments from the public and all stakeholders, the RBI released its Master Direction –Non-Banking Financial Company – Peer to Peer Lending Platform (Reserve Bank) Directions, 2017 (the “Directions”)– recently to officially regulate and monitor P2P Platforms. Thus, it is pertinent to understand and analyse the regulations laid down by the Directions:

Registration

The Directions provide that only corporate entities registered as a ‘company’can operate and engage in the business of P2P lending. Companies operating existing Platforms will have to obtain a certificate of Registration (“CoR”) from the RBI within a period of 3 months from the date of publication of the Directions.Additionally, the Directions provide for minimum capitalisation requirements, which need to be met before obtaining registration. This requirement is INR 2,00,00,000 (Rupees Two crore only), which is in line with the requirement for all NBFC’s in accordance with Section 45-IA of the Reserve Bank of India Act, 1934.

The Directions also provide the criteria on which registration will be determined.This includes ensuring that the Platform has the necessary technological and managerial resources, a robust IT system, fit and proper directors, a viable business plan etc. On being satisfied with an application, the RBI will first give an in-principle approval for setting up and operating a prospective NBFC-P2P platform. Within 12 months from the in-principle approval, the company must develop its technology platform as per the RBIs satisfaction, and also submit all other legal documentation as may be requested.

For a platform acting as a mere marketplace for the meeting of lenders and borrowers (one that does not provide any of the additional services described above), the capitalisation requirements contained in the Directions seem a little harsh. Additionally, the requirement may prevent start-ups from entering this space entirely, which will adversely affect innovation in this space.We recommend that the threshold should be revised downwards and can be made incremental with each year of an entity’s operations, to ensure that only companies that are growing continue to retain their license/registration.

Permitted Activities

As per the Directions, the Platforms can perform the following activities/services:

  1. Mere Aggregator

The Platform can act as a mere aggregator, intermediary or marketplace to facilitate the meeting of lenders and borrowers. While they can participate in the lending/borrowing process in certain ways (described below), and cannot raise deposits in any capacity.

  1. Principle, Return and Guarantees

The Platform cannot guarantee the return of a loan to any lender or provide guarantees of no loss. This will ensure that all lenders signing up on the Platform do so at their own risk, and will hopefully bring about transparency by reducing instances of false advertisement/lending in the name of the Platform.

  1. Nature of the Loan

The Platform can allow lenders to offer only unsecured loans. This was the original idea behind P2P Platforms, and it allows customers with little/no security to avail of loans as well.

  1. Associated Businesses

The Platform shall not cross-sell any product except for loan specific insurance products.

  1. Financial don’ts for the Platform
  • The Platform cannot hold, on its own balance sheet, funds received from lenders for lending, or funds received from borrowers for servicing loans. This ensures that no money from any of the transaction on the Platform can be compromised by the Platform provider’s own financial standing as an entity;
  • The Platform cannot permit the international flow of funds. With this restriction, foreign lenders and/or borrowers have been excluded from participating directly on the Platforms in India, unless they hold a bank account within India.
  1. Duties of the Platform
  • The Platforms are required to conduct a due-diligence on all participants in the Platform. This includes a credit risk assessment and risk profiling of all borrowers registering on the Platform. This information is also required to be disclosed to the lenders, and it helps in creating a transparent environment on the Platform;
  • Platforms can render services for recovery of loans originated on the Platform;
  • Platforms can undertake the documentation of loan agreements; and
  • Platforms can provide assistance in disbursement and repayments of loans.

Prudential Requirements

  1. Permissible Thresholds of Lending and Borrowing

Any registered lender or borrower cannot lend or borrow more than INR 10,00,000/- (Rupees Ten Lakhs only) across all registered and authorised P2P Platforms. Further, no single lender can lend more than INR 50,000/- (Rupees Fifty Thousand only) to any single borrower across all Platforms. While these thresholds may seem conservative at first, considering the nascent stage of the P2P lending industry we believe that these limits are appropriate. The Platforms were anyway meant to facilitate small, unsecured loans from individual lenders, and if demand rises the limits can be revised in the future.

  1. Maturity Period: No loan provided via a Platform can have a maturity period of more than 36 (thirty-six) months. This seems apt, given the loan value is also capped at a number that is not very high.

Operational Guidelines

The Platform is required to have and implement a policy approved by the Board of Directors of the Company (the “Board”) regarding the eligibility criteria for participants, pricing of their services, and detailed rules for matching lenders with borrowers on an equitable and non-discriminatory manner, and other matters concerning the operation of the Platform. Additionally, any and all liabilities regarding the collection, storage and protection of personal data by the Platform will have to be borne by the Platform itself, even if any of these functions are outsourced to third-party service providers.

The Platforms are also required to maintain 2 escrow accounts for the transfer of funds – one for funds from lenders and the other one for funds collected from borrowers.Cash transactions are prohibited, which will help in accounting for all money being transacted via a particular Platform.

Enhanced Transparency and Disclosure Requirements

Previously, the scant availability of information regarding a borrowers’ credit history and defaults made the sheltering of defaulters easy. The Directions are aimed at rectifying this situation.They seek to introduce transparency and information symmetry between the borrowers and lenders, while simultaneously protecting the privacy of the data belonging to both parties.

  1. Disclosure to the Lenders:

Prior to accepting any loan arrangement on a Platform, the lenders should be made aware of the personal identity of the borrower, the loan amount, the credit score determined by the Platform and other details regarding the borrower.This ensures that the lenders can be made an informed decision regarding engaging with any borrower.

  1. Disclosure to the Borrower:

Borrowers are made aware of fewer details than the lender – they are informed about the lender’s proposal, repayment terms and interest rate, but are not informed of the lender’s personal identity, contact information and other personal information. This seems logical, as the borrower’s decision regarding the lender’s proposal should be based purely on the commercial terms offered, and not on the details of the particular lender.

  1. Public Disclosures:

The Platform is required to publish on its website the overview of the credit assessment methodology and factors considered; data protection and privacy measures; dispute settlement mechanism; portfolio performance including a share of non-performing assets monthly and segregation by age; and its broad business model.This is intended to give any individual/entity looking to register on the Platform the opportunity to make an informed decision.

Data Security and IT Framework

Considering the volume of personal data collected, stored and analysed on the Platform, ensuring a robust IT and data security framework is one of the foremost necessities. In light of this, the Directions lay down some robust standards:

  1. All Platforms are required to have “adequate safeguards” in their IT systems to protect against unauthorized access, destruction, modification, utilization etc. of the data. While the Directions do not lay down any specific minimum standard for maintaining these safeguards since the Platforms deal with personal data it can be assumed that they fall within the stipulations of the IT Reasonable Security Practice Rules, 2011;
  2. All Platforms are required to have a Board approved Business Continuity Plan in place for safekeeping of information and documents and servicing of loans for full tenure in case of closure of the Platform;
  3. The Platform has to carry out a yearly information system audit, as well adhere to all requirements under the Master Direction on Information Technology Framework for the NBFC Sector, June 8, 2017.

Conclusion

With India marching towards the aim of being a paperless, cashless and consent-secured data sharing economy, these Directions are expected to open up new avenues for obtaining capital for individuals and small businesses, while simultaneously maintaining transparency and accountability in the process.Perhaps the only clause missing from the Directions is one on penalties, describing the repercussions if a Platform fails to adhere to any of the given guidelines. Yet overall, the Directions seem to be apt for P2P Platforms and well-thought through, especially considering that the industry around such Platforms is still nascent in India. As these Platforms gain more prominence the Directions can be modified accordingly, but for now, they seem to be a good starting point.

 

Author: Ayushi Singh; Reviewed by Madhav Rangrass

Estonia: The ‘Smart’ Country

Estonia: The ‘Smart’ Country

We had an opportunity to visitTallin, the capital city of Estonia and what a rich experience it was, as we went from exploring the Enterprise Estonia showroom and the e-Residency opportunities to having interesting discussions with legal partners and witnessing the high energy, high technology ambience of Tallinn Science Park, Tehnopol.We have been connected to the Estonian innovation eco-system earlier but witnessing that in person and at close quarters was indeed a great experience

Enterprise Estonia

Enterprise Estonia showroom, where Media Team Member FredericoPlantera took us through the pulse of Enterprise Estonia – a short presentation (enter e-Estonia) on how with just a population of about 1.3 million the country is managing to be in the top tiers of theWorld Bank, OECD and other similar ratings. With 99% of services being online (excluding a few like divorce, marriage and buying and selling real estate), the country boasts of having recognised Internet as a social right, providing smart ID cards to all its residents (not citizens) and having 7% of its GDP coming from the Information, Communication and Technology (ICT) sector. Innovation is digital-by-default and incorporation of a company is a matter of 18 minutes in this country; add to that the facilities of e-taxation and e-residency (see our post on e-residency here); and there is a high potential of having a magical combination.

We also got a glimpse into how X-Road, the ‘highway of e-Estonia’, works. X-Road is basically the infrastructure and backbone of e-Estonia that connects various databases, ERPs, tax boards, state portals, banks, telecom companies, population registers, et al. across the country, thereby facilitating over millions of transactions per year. We are told that the technology of X-Road is largely similar to and a predecessor of today’s block-chain technology (having been in existence since 2001). It is also being exported and there are talks of exporting this technology to other EU countries like Finland, Netherlands, with the creation of a digitised EU market being the ultimate goal.

Amongst other things, Enterprise Estonia also provides ‘Start-up grant’ of up to €15,000, subject to certain terms and conditions. It is also the focal point for receiving various other grants and funding, made available through the Ministry of Economic Affairs under the Organisation of Research and Development Act, which is an enabling legislation for baseline funding, research grants.

Legal framework and taxation: We had the opportunity of meeting some of the top law firms in Tallin with detailed discussions on legal structure and taxation. You’ll be glad that there isno corporate income tax in Estonia on retained and reinvested profits; 20% corporate income tax on distributed profits (actual and deemed); dividends paid to non-residents being not subject to any withholding tax; DTAA between India and Estonia; 20% value added tax rate; no mandatory auditing for private limited companies below certain thresholds; easy foreign direct investment in Estonia; minimum share capital requirement (for private limited) of €2500, but the company can be established so that the share capital is paid later on; etc.

Incubation space: We also had the opportunity of visiting the incubation space of Tallinn Science Park, Tehnopol, which has supported companies such as Skype, GuardTime (the block-chain service provider to the Estonian government).Tehnopol is one of the biggest tech hubs in the Baltic region and works extensively with companies in the green technology, ICT and health technology sector, often times providing supports to companies, even at prototyping phases. The average incubation period is up to 2 years and till a company raises capital/generates the first sale. It invests up to € 10 000worth of expertise to start-up companies to find the first seed investment or reach export markets, providing access to 30+ business coaches working hands-on with start-ups, 70+ trainings, investor panels, sales, pitching and networking events annually, co-working center, and last but not the least, access to € 300,000prototyping fund PROTOTRON (prototron.ee). (For more details, see here).

So there, if you as an Indian enterprise wish to expand to EU, perhaps Estonia can be your landing place.