COVID-19 Update – Recent Reforms Announced by the Finance Minister

The Finance Minister of India has, from May 13 to May 17, 2020, made certain announcements highlighting the Government’s economic stimulus package in light of COVID-19. Some of the key announcements are set out below:

A.     STRUCTURAL REFORMS

1.     Coal: Measures to be implemented to increase coal production efficiency, competition and private sector participation through, inter alia:

(a)    Introduction of coal-block auction under revenue-sharing mechanism instead of currently prevailing fixed / reserve price regime.

This should reduce market risk for bidders, given that the coal block mining leases are of a long term nature.

(b)    Where any coal gasification / liquefaction is also undertaken in the coal block, it will be incentivized through a rebate in revenue share.

(c)     Removal of eligibility conditions required for bidding for blocks.

(d)  Introduction of ‘exploration-cum-production’ regime for partially explored blocks (until now, only fully explored blocks were being auctioned).

(e)     Auction of coal bed methane extraction rights from Coal India’s mines.

Simplification of mining plan related provisions has also been announced towards ‘ease of doing business’. This will allow for an automatic 40% increase in annual production.

It remains to be seen how this will tie in with permitted capacities under other statutory/ regulatory approvals (such as environmental clearances).

2.      Other Minerals:

(a)    Mining Lease Transfers: The distinction between captive and non-captive mines is proposed to be removed for the purposes of permitting the transfer of mining leases and sale of surplus minerals by mines.

Current statutory regime prohibits transfers of non-auction non-captive mining leases. Consequently, if mining lessees are desisting from selling surplus minerals, then the proposed removal of this restriction will encourage sale of surplus minerals. Further, the terms of existing grants of mining leases may restrict the lessees to sell surplus minerals. Accordingly, this announcement may need to be implemented in a manner that such existing restrictions are specifically superseded by the proposed relaxation. Besides, the non-auction captive mines currently enjoy a right of first refusal when such mine is auctioned upon its expiry. The Government may need to modify this qualification as well to achieve the aim of sale of surplus minerals by captive mines.

(b)   Joint Auction: Joint auction of bauxite and coal blocks for aluminum industry has been announced to enhance competitiveness of the Indian aluminum industry, as co-grant of coal block will help it reduce electricity costs.

(c)     Composite License: It is also proposed to introduce a seamless ‘composite exploration-cum-mining-cum-production’ regime for minerals.

The current statutory regime already provides for granting prospecting licenses cum-mining-leases. Therefore, further clarity is needed on what is envisaged here.

3.     Defence: Several important announcements have been made to give an impetus to the ‘Make in India’ model in manufacturing of defence products and to attract foreign investments in defence manufacturing, as follows:

(a)    A list of weapons / platforms will be notified for ban on import with year wise timelines to support indigenisation of imported spares.

(b)    Ordinance Factory Board will be corporatised to bring in efficiencies and accountability.

(c)    Measures introduced to make the Defence Procurement Process efficient with faster decision-making.

(d)    FDI limit in defence manufacturing under automatic route raised from 49% to 74%, subject to clearances and approvals.

4.      Civil Aviation:

(a)   Current restrictions on utilization of Indian air space will be eased to, inter alia, increase cost and time efficiency of civil aviation and optimal use of available air space. Currently only 60% of air space is available for flying which requires airline to undertake longer routes. Easing of restrictions will bolster the existing system and help airlines to increase cost efficiency.

(b)    6 airports have been identified for offering their O&M contracts on PPP basis under the second round of bidding and another 6 airports will be put up for auction in the third round of bidding.

(c)    Boosting of MRO hub status by rationalisation of tax regime and convergence of civil and defence MROs for economies of scale. Currently, most airlines conduct their aircraft and engine maintenance through MRO facilities outside India on USD based payment system and incur expenses on carriage and storage charges. Indian MROs will make maintenance cost efficient and will create investment opportunities. This is in line with the National Civil Aviation Policy, 2016.

5.     Power: Issuance of a new tariff policy has been announced which, inter alia, will provide for:

(a)    Progressive reduction in cross subsidies.

This has also been included in the draft of the Electricity (Amendment) Bill, 2020.

(b)    Grant of open access to consumers in a time-bound manner.

(c)    Competitive selection of generation and transmission project developers.

As such, many transmission projects and power procurement from generators have been, in the last few years, implemented through auction route.

Further, to improve sustainability, the new tariff policy would also include: (a) provisions on there being no regulatory assets; and (b) direct transfer of subsidies by the State Governments to targeted end-consumers.

6.    Other Sectors & Measures: Certain measures have also been announced in relation to the social infrastructure, atomic energy (for medical purposes) and space sectors. For example, in the social infrastructure sector, quantum of Viability Gap Funding (VGF) will be increased up to 30% of the total project cost to be provided by the Central Government and an equal amount by the State Government / Statutory Bodies.

7.     Banking & Finance: Some of the key announcements related to the Banking & Finance sector, covering Micro, Small & Medium Enterprises (‘MSMEs’), non-banking financial companies (‘NBFCs’), housing finance companies (‘HFCs’) and micro finance institutions (‘MFIs’), are set out below:

(a)    Collateral-Free Automatic Loans for MSMEs: MSMEs, with standard accounts, outstanding loans of up to INR 25 Crore and a turnover of INR 100 Crore, will be eligible for an emergency credit line aggregating INR 3 Lakh Crore from banks and NBFCs for up to 20% of their entire outstanding credit as on February 29, 2020. Such credit line will be available on concessional terms and can be availed of by MSMEs until October 31, 2020.

(b)    Subordinate Debt for Stressed MSMEs: Stressed MSMEs and/or MSMEs whose accounts have been declared as a non-performing asset, will be eligible for subordinate debt aggregating INR 20,000 Crore. The debt in the form of loans will be provided by banks to promoters of MSMEs, which will then be infused by the promoter as equity in the unit. It is proposed that the Government will also provide INR 4000 Crore to Credit Guarantee Fund Trust for Micro and Small Enterprises (CGFTMSE) which will offer partial guarantee support to banks for lending to MSMEs.

(c)    Special Liquidity Scheme for NBFCs / HFCs / MFIs: With a view to provide liquidity support, a special liquidity scheme aggregating INR 30,000 Crore is proposed, under which, investment will be made in both primary and secondary market transactions in investment-grade debt papers of NBFCs/HFIs/MFIs. These securities will be fully backed by a guarantee from the Government.

(d)    Partial Credit Guarantee Scheme 2.0: The existing ‘partial credit guarantee scheme’ has been extended to cover borrowings, such as primary issuances of bonds / commercial papers of NBFCs, HFCs and MFIs with low credit rating, wherein the first 20% of loss will be borne by the Government in the form of a guarantee. It was clarified that ‘AA’ rated papers and below, including unrated papers, will be eligible for investment. It is estimated that the scheme will result in liquidity of INR 45,000 Crore.

(e)   Liquidity for Power Distribution Companies: Power Finance Corporation / Rural Electrification Corporations will infuse amounts aggregating INR 90,000 Crore in distribution companies (‘DISCOMs’) against the receivables of such DISCOMs. These loans will be backed by State guarantees for the exclusive purpose of discharging liabilities of DISCOMs to power generating companies.

(f)    MUDRA Shishu Loans: The Government will provide interest subvention of 2% for prompt payees of ‘Micro Units Development and Refinance Agency Limited (‘MUDRA’) Shishu Loans’ for a period of 12 months. Loan of up to a maximum of INR 50,000 is provided under the MUDRA Shishu Loan.

(g)    Special Credit Facility to Street Vendors: The Government will launch a special scheme to facilitate easy access of credit to street vendors under which an initial working capital of up to INR 10,000 each will be provided.

(h)    Additional Emergency Working Capital Funding: The National Bank for Agriculture & Rural Development (NABARD) will extend additional refinance support of INR 30,000 Crore for crop loan requirements of Rural Co-Operative Banks and Regional Rural Banks.

(i)     Concessional Loans for Farmers: Concessional credit will be provided to farmers (being beneficiaries of the ‘Pradhan Mantri Kisan Samman Nidhi’ (PM-KISAN) Scheme) through ‘Kisan credit cards’. It was clarified that the benefit will also extend to fishermen and animal husbandry farmers.

B.     Reliefs under IBC

1.     Regulations will be introduced to exclude certain Covid-19 related debt from triggering insolvency proceedings under the Insolvency and Bankruptcy Code, 2016 (‘IBC’).

It has not been clarified as to what would be included within the purview of ‘Covid-19 related debt’. It remains to be seen in the regulations to be introduced whether there would be some linkage to the financial stress faced due to the pandemic.

2.    The provisions for initiation of fresh insolvency proceedings for defaults may be suspended for a period which may be up to 1 year (depending on how the pandemic plays out in India).

Whether this will be for all proceedings or with nuances and carve-outs remains to be seen in the implementation of this policy statement.

3.    A separate framework for insolvency resolution of MSMEs is proposed to be notified. This is in addition to increase of the minimum pecuniary threshold for filing insolvency applications to INR 1 Crore (from the previous threshold of INR 1 lakh), which was aimed to insulate MSMEs.

4.     Other reliefs include power to create additional / specialized benches for National Company Law Appellate Tribunal (‘NCLAT’) (this is further to the additional NCLATs already created recently to ramp up capacities).

C.     Corporate Law Reforms

The Finance Minister emphasized certain recent reforms in corporate law, such as enabling companies to hold extraordinary general meetings and annual general meetings through video conferencing and other audio visual means. The Finance Minister thereafter announced further measures, set out below, to enable ease of doing business:

1.    Decriminalization of defaults under Companies Act: (i) violations involving minor technical and procedural defaults (shortcomings in corporate social responsibility reporting, inadequacies in board report, filing defaults, delay in holding annual general meetings) to be decriminalized; (ii) majority of the Sections under the Companies Act dealing with compoundable offences to be shifted to internal adjudication mechanism (‘IAM’) and powers of Regional Directors for compounding to be enhanced (58 Sections of Companies Act to be dealt with under IAM as compared to 18 previously); and (iii) 7 compoundable offences to be dropped and 5 to be dealt with under alternative framework.

2.     Lower penalties for all defaults for small companies, one-person companies, producer companies and start-ups.

3.     Direct listing of securities by Indian public companies in permissible foreign jurisdictions.

4.     Private companies which list non-convertible debentures on stock exchanges not to be regarded as listed companies.

5.     Power to create additional / specialized benches for NCLAT.

6.     Notifying and making effective the relevant provision under the Companies Act such that Part IXA (Producer Companies) of Companies Act, 1956 is applicable mutatis mutandis to a producer company under the Companies Act.

The implementation of all of the above announcements will require changes in the relevant laws and issue of detailed policies, directives and notifications.

Date: May 20, 2020