Report of the Insolvency Law Committee: The New Way Forward
Report of the Insolvency Law Committee: The New Way Forward
On November 16, 2017, the Government of India constituted a committee to undertake a comprehensive review of the Insolvency and Bankruptcy Code, 2016 (‘IBC’) in light of the experiences of various stakeholders during the past year. The Ministry of Corporate Affairs (‘MCA’) constituted the Insolvency Law Committee (‘ILC’) which comprises representatives from across the industry. Bahram N Vakil, a founding partner of AZB & Partners (‘Firm’) and a member of the Bankruptcy Law Reform Committee (the committee entrusted with drafting of the IBC in 2015) is one of the members of the ILC.
The MCA released ILC’s report on April 3, 2018 (‘Report’). The Report proposes various amendments to the IBC and the rules and regulations thereunder. The Parliament is likely to consider the Report in the near future to make the relevant legislative changes. Some of the major changes proposed by the Report are as below:
- Homebuyers upgraded
The IBC does not explicitly categorise homebuyers who have paid advances towards completion of real estate projects as financial or operational creditors in the corporate insolvency resolution process (‘CIRP’) of the real estate developer.The ILC took the view that advances paid by homebuyers are effectively used by real estate developers as working capital to finance the completion of projects thereby giving it the commercial effect of a borrowing and has proposed that homebuyers be treated as financial creditors. Note that their secured status depends on the nature of their contract with the developer and the bank providing the home loan. The ILC has also proposed that a large block of creditors be allowed to participate in meetings of the committee of creditors (‘CoC’) through an authorised representative.
- Interest clock on interim finance extended
Under the IBC, interim finance and any interest on it is classified as insolvency resolution process cost which receives the highest priority on any payout under a resolution plan. However, in the event of liquidation, though the principal amount of interim finance still retains its highest priority, the interest stops accruing from the date of the liquidation order.The ILC felt that the clog on accrual of interest in liquidation was affecting liquidity and raising the coupon on interim finance. The ILC has proposed that interest on interim finance shall continue to accrue for up to one year from the liquidation commencement date. Note that the Insolvency and Bankruptcy Board of India (‘IBBI’) has already made necessary changes to this effect in the IBBI (Liquidation Process) Regulations, 2016.
- Disqualification for bidders – revisited again
Section 29A of the IBC was introduced to address concerns that persons who by their conduct had contributed to the financial distress of the corporate debtor or are otherwise deemed not to be fit and proper to gain control over distressed assets, should be disqualified from being resolution applicants. However, the market felt that the range of disqualifications and the affected persons was too large. To address this issue, the ILC has made several proposals, some of which are set out below:
i. Section 29A of the IBC lays down eligibility criteria vis-à-vis the resolution applicant as well as any person acting jointly or in concert with the applicant. The term ‘acting jointly or in concert’ is not defined in the IBC and causes market participants to rely on the definition contained in the Securities and Exchange Board of India (‘SEBI’) (Substantial Acquisition of Shares and Takeovers) Regulations, 2011. This results in inclusion of an extremely broad range of persons, including even those who are involved in the resolution plan in an ancillary way. The ILC proposes to restrict the eligibility test only to the applicant and its connected persons. Additionally, any person acting with a common objective of acquiring voting rights or control over the company would also have to pass the eligibility test.
ii. Section 29A(c) of the IBC bars persons who have been in control of a non-performing asset (‘NPA’) for more than one year. However, this provision effectively disqualified several ‘pure play’ financial investors who are in the business of investing in companies across the credit spectrum. For instance, asset reconstruction companies, private equity and distressed debt funds are quite likely to have some distressed assets in their portfolios. The ILC has proposed that the test under Section 29A(c) of the IBC should not apply to such pure play financial entities.
iii. Section 29(A)(d) of the IBC bars persons who have been convicted of a criminal offence punishable with imprisonment for more than two years. This disqualification was thought to be very expansive and would disqualify applicants for offences, the commission of which have no nexus to the ability of the person to run the corporate debtor successfully. The ILC has proposed that the nature of offences, the commission of which will incur the disqualification should be economic in nature and a schedule listing such specific crimes be provided. Additionally, the disqualification should also not apply in case a stay against the conviction has been obtained from a higher court.
iv. Section 29A(h) of the IBC disqualifies persons who have executed an enforceable guarantee in favour of a corporate debtor currently undergoing CIRP. The ILC felt that the scope of the disqualification is overreaching since it bars guarantors solely on account of issuing an enforceable guarantee. The ILC has proposed that the disqualification should only apply against guarantors against whom the underlying guarantee has been invoked by the creditor and remains unpaid.
- Curious case of guarantors’ liability – now resolved
Section 14 of the IBC imposes a stay on any recovery action against the corporate debtor and the enforcement of any security interest created by a corporate debtor over its assets during the CIRP period. However, a few recent judicial pronouncements have suggested that the moratorium in an ongoing CIRP will also stay enforcement of guarantees or security interest from promoters and group companies of the corporate debtor since it is not feasible to determine the liability of the relevant third party until the CIRP is concluded.The committee felt that the scope of the moratorium is very clear and should not be interpreted broadly. The intent of law could not have been to deprive creditors of contractually negotiated remedies against third parties as long as the corporate debtor’s assets remain unaffected. The ILC proposes that an explanation be added to Section 14 of the IBC to clarify that the moratorium does not apply to any recovery action that does not impact the assets of the corporate debtor.
- CoC voting thresholds reduced
The IBC provides that all decisions by the CoC be taken by vote of 75% of the CoC, by value. The ILC felt that effectively granting minority lenders constituting 25% of the CoC a veto right to any proposed resolution plan could cause many companies to be liquidated. To ensure that there is a higher likelihood of resolving a distressed company as a going concern under the IBC, the ILC has proposed that the voting threshold for important matters during the CIRP including voting on resolution plans be reduced to 66% of the CoC. Additionally, for other routine decisions that the CoC is required to take during the CIRP, the voting threshold should be reduced to 51% to assist the resolution professional in ease of conducting day to day operations.
- IBC trigger threshold now ten times
To keep debt recovery actions from small operational creditors at bay, the ILC recommended that the minimum amount to trigger the IBC be raised to Rs. 10 lakh (approx. US$ 15,000). This may reduce pressure on the NCLT – as statistics suggest that many small creditors used the IBC to coerce recovery. But what of the small creditor? Back to the long queues in the debt recovery tribunals? Perhaps small creditors can accumulate their debt and then trigger IBC.
- In and out with ninety percent
Currently, once an IBC case is admitted, the law does not permit withdrawal of the same without the consent of all creditors. This is consistent with the philosophy that this is a collective and representative process for all creditors and settlement with the ‘filing creditor’ should not permit withdrawal. The Supreme Court has thought otherwise and has permitted withdrawal post admission. The ILC reiterated the aforesaid philosophy but saw merit in permitting withdrawal post admission if 90% of the committee of creditors deem fit. Would this have been of use in the Binani Cement saga?
- Regulatory approvals window
An immediate issue for acquirers in the IBC process is obtaining governmental and regulatory consents, dispensations and permits. Should the bidders bear this risk or the CoC live with the uncertainty? Today, negotiations resolve this tug-of-war to some extent while bidders draft their resolution plans treating the NCLT as a single window clearance. The ILC observed that single window clearance was not the intent of the IBC. This is a critical observation for bidders. Some solutions were debated but a comprehensive solution remained elusive. Instead, the ILC has recommended that a requirement be placed to obtain consents, dispensations and permits within a maximum of one year. It’s unclear how this will impact the fine balance currently trying to be achieved in practice by bidders.
- Competition approval fast tracked
In a welcome development, the ILC has been informed that the Competition Commission of India will clear notifications for combinations arising out of the IBC within 30 days, with an extension of 30 days for exceptional cases. This is already being borne out in practice and echoes the collaborative effort being taken by Indian regulators to make the IBC work.
- Liquidation waterfall and priority of security
Concerns had been raised that the language in the IBC liquidation waterfall may override inter se ranking of security amongst creditors; i.e., in liquidation, a secured creditor with a first charge over an asset may receive the same amount as another with a second charge over such asset. After reviewing the language, related laws and relevant case law, the ILC felt confident that any such interpretation would be incorrect and valid subordination agreements should not be disregarded by the IBC and so no change has been proposed.
- MSME promoters get a breather
Micro, small and medium enterprises are thought to be the bed rock of the Indian economy. When such companies go through the IBC process, keeping their incumbent promoters out of the bidding process has raised concerns of mass liquidation of such companies leading to potentially significant job losses. The ILC has recommended that promoters of such companies be permitted to bid for their companies in the IBC process (despite Section 29A disqualifications) unless they are willful defaulters. In balancing the opposing forces involved, this seems to be the socially appropriate decision.
- Limitation now uncomplicated
Lenders benefited from judicial decisions which indicated that the Indian limitation legislation did not apply to an application under the IBC (although doctrine of laches might still apply). But this was yet to be confirmed by the Supreme Court, which had declined to comment on this issue in one matter. The ILC has recommended that limitation should apply to IBC applications other than those made by a corporate debtor itself.
- No man’s land now occupied
A resolution plan is approved by the CoC and submitted to the NCLT for confirmation. At this stage, the role of the resolution professional ends and the CoC ceases to exist. But the NCLT order may take weeks or months. Who runs the company during this time and what duties, powers and protections apply to such person? The ILC has recommended that the resolution professional be statutorily required to continue during this period, presumably with the same duties, powers and protections as during the CIRP.
For queries, please email firstname.lastname@example.org, email@example.com, firstname.lastname@example.org, email@example.com or firstname.lastname@example.org. Bahram N Vakil, one of the founding partners of the Firm, leads the Restructuring and IBC Practice Group at the Firm. Ashwin Ramanathan, Piyush Mishra and Nilang Desai are partners and Suharsh Sinha is a senior associate in the Restructuring and IBC Practice Group at the Firm.
Major Amendments introduced to the Insolvency and Bankruptcy Code
Major Amendments introduced to the Insolvency and Bankruptcy Code
The President of India promulgated the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018 (‘Ordinance’), which has become effective from June 6, 2018. Pursuant to the Ordinance, many of the amendments suggested by the Insolvency Law Committee (‘ILC’), which included our founding partner Mr. Bahram N Vakil, have now been implemented. The major changes introduced by the Ordinance have been summarised below:
- Homebuyers Upgraded as ‘Financial Creditors’
Prior to the Ordinance, the Insolvency and Bankruptcy Code, 2016 (‘IBC’) did not recognise persons who had paid advances towards completion of real estate projects as either ‘financial creditors’ or ‘operational creditors’. The Ordinance now provides that any amount raised from an allottee under a real estate project shall be considered a financial debt under the IBC. Since the number of such allottees could be numerous and their participation in a committee of creditors (‘CoC’) could be unwieldy, the Ordinance provides that allottees may appoint authorised representatives to attend CoC meetings on their behalf, with prior instructions on voting matters.
- Amendments to Eligibility Criteria for a Resolution Applicant
Section 29A sets out ineligibility criteria for potential bidders in a corporate insolvency resolution process (“CIRP”). The ambit of Section 29A may have been in some instances too wide and could have unintentionally disqualified some sophisticated bidders on technical grounds. The Ordinance has, therefore, introduced the following amendments to Section 29A :
i. Section 29A(c): NPA Related disqualification
(a) Section 29A(c) provides that persons controlling accounts which have remained non-performing assets (‘NPA’) in excess of one year are barred from acting as resolution applicants in an ongoing CIRP. However, no clarification had been provided on whether the one-year period would be determined from: (i) insolvency commencement date of the corporate debtor; or (ii) the time at which the bid was submitted in the ongoing corporate insolvency resolution process (‘CIRP’) of the corporate debtor. The Ordinance has clarified that the relevant date should be the latter.
(b) The Ordinance provides that the disqualification under Section 29A(c) shall not apply to a ‘financial entity’ (scope of which is discussed under Paragraph iii below).
(c) Successful resolution applicants acquiring companies under the CIRP end up being in control or management of accounts which have turned NPA. Such acquirers would, as a result, fall foul of Section 29A(c) and would be estopped from making any further bids for any other company undergoing CIRP. In order to rectify this anomaly, the Ordinance provides for a grace period of three years in favour of a resolution applicant, calculated from the date of acquisition of such corporate debtors with NPAs during which the acquirer will not be disqualified from bidding for other companies undergoing CIRP. A similar carve-out has also been granted under Section 29(A)(g) of the IBC, to successful bidders, who have acquired companies in CIRP where certain avoidable transactions may be been undertaken by the previous promoters or officers.
ii. Section 29A(d): Disqualification on account of Criminal Convictions
(a) Section 29A(d) of the IBC disqualified a resolution applicant if it or any of its ‘connected persons’ had been convicted for an offence punishable with imprisonment for two years or more. It was argued that there must be a rational nexus between the underlying offence and the ability of the bidder to successfully restructure the corporate debtor.
(b) This sub-section has been amended to provide that: (i) conviction for two years or more is a bar only if the offence relates to certain statutes prescribed in the newly introduced Twelfth Schedule to the IBC; and (ii) conviction for seven years or more would be a bar irrespective of which statute the offence fell under.
(c) A list of twenty-five laws is specifically mentioned in the Twelfth Schedule covering areas such as money laundering, foreign exchange, pollution control norms, tax, anti-corruption and securities market regulations. The Twelfth Schedule only covers Indian statutes and an interpretation may be taken that similar violation by the bidder or its connected persons under foreign laws may not attract the disqualification. However, the disqualification relating to conviction for seven years or more would apply under Indian as well as foreign laws.
(d) The Ordinance provides that the bar under Section 29A(d) will not apply if more than two years have elapsed from the date of release from imprisonment (rather than a bar in perpetuity).
iii. Explanation to Section 29A(i) : Reducing the Scope of ‘Connected Person’
(a) Part (iii) of the definition of ‘connected person’ under Section 29A(i) of the IBC, is extremely broad and includes the holding company, subsidiary company, associate company or any related party of the proposed acquirer, its promoters, the acquirer’s board as well as the proposed management of the corporate debtor or its promoters. By virtue of their business model, it was inevitable that several pure play financial entities would have connected persons through their investee companies in India or abroad which suffered from the disqualifications (especially relating to NPAs) listed in Section 29A. The IBC was amended late last year to create a carve-out from part (iii) of the definition for scheduled banks, asset reconstruction companies and alternate investment funds registered with the Securities and Exchange Board of India (‘SEBI’) – however this exemption did not benefit foreign private equity players, venture capital and distressed assets funds.
(b) Pursuant to the Ordinance, relaxation has now been provided to foreign financial investors. The definition of ‘financial entities’ now includes the following additional classes of entities: (i) any entity regulated by a foreign central bank or any other financial sector regulator of a jurisdiction outside India; and (ii) any investment vehicle, registered foreign institutional investor, registered foreign portfolio investor or a foreign venture capital investor as defined in regulation 2 of the Foreign Exchange Management (Transfer of Issue of Security by a Person Resident Outside India) Regulations, 2017.
iv. Section 29A(d): Disqualification on account of Criminal Convictions
(a) The impact of Section 29A of the IBC was such that in many cases, it would force a change of control of the erstwhile promoter under a resolution plan or in liquidation. There was a concern that there may not be enough interest from third party buyers in companies under IBC, which are of a comparatively smaller size. A ‘one size fits all’ approach could hamper recoveries where there is little scope for turnaround of smaller companies unless the promoters submit a resolution plan. Recognizing this, the Ordinance provides for limited exemptions from the provisions of Section 29A of the IBC for Micro, Small and Medium Sector Enterprises (‘MSMEs’).
(b) However, the statutory thresholds for recognizing MSMEs under the Micro, Small and Medium Enterprises Development Act, 2006 (‘MSME Act’) are low. For instance, for companies engaged in manufacturing, the thresholds for classification as MSMEs are investment in plant and machinery ranging from less than INR 25,00,000 (approximately USD 37,000) to INR 10,00,00,000 (approximately USD 1.5 million). The Central Government had approved an amendment to the MSME Act on February 7, 2018 providing that the thresholds in the MSME Act be redefined. The proposal is to re-align the definition of MSMEs on the basis of annual turnover ranging from less than INR 5,00,00,000 (approximately USD 750,000) to INR 250,00,00,000 (approximately USD 37 million). Once the proposed amendment to MSME Act is notified, it will provide significant relief to promoters of a large number of small companies facing financial distress.
- Withdrawal of an Ongoing CIRP Proceeding
Once an application filed under the IBC is admitted, it can either lead to a successful resolution plan or liquidation. Under the IBC, a company undergoing the CIRP process did not have the power to arrive at a settlement or compromise by which the ongoing CIRP proceedings could be withdrawn. However, in a few cases, the courts had gone beyond the purview of the IBC and allowed settlement of the claims of a creditor, bilaterally leading to withdrawal of the matter.
The Ordinance clarifies that withdrawal of a CIRP proceeding will be permissible if 90% of the CoC approves it. However, such withdrawal will be permissible only prior to the resolution professional formally inviting resolution plans from interested bidders.
- CoC voting thresholds reduced
The IBC provided that all decisions by the CoC be taken by a vote of 75% of the CoC by value. The Ordinance has reduced the voting threshold from 75% to 66% for major decisions such as: (i) applying for an extension for the CIRP period from 180 to 270 days; (ii) replacement of an interim resolution professional or resolution professional; and (iii) approving a resolution plan. For other routine decisions, the voting threshold has been reduced to 51%.
- Role of shareholders of the corporate debtor in approving resolution plans
The consent of shareholders of the corporate debtor is generally required for significant corporate actions. The Ministry of Corporate Affairs (‘MCA’) released a clarification last year to the effect that approval of shareholders of the company for any corporate action in the resolution plan (otherwise required under any law) is deemed to have been given on its approval by the NCLT. The Ordinance specifically amends the IBC to incorporate the clarification proposed by the MCA.
- Resolution professional responsible for ongoing legal compliances by the corporate debtor
Under Section 17 of the IBC, on insolvency commencement date, the board of the company is suspended and an insolvency professional takes control over management control. However, several laws including many provisions of the Companies Act, 2013, regulations issued by SEBI, Factories Act, impose obligations on the board of the company. The Ordinance clarifies that insolvency professionals shall be responsible for complying with the requirements under all applicable laws on behalf of the corporate debtor.
- Participation of ‘related party’ financial creditors in the CoC
The IBC provided that financial creditors which were related to the corporate debtor would not be allowed to participate, attend or vote in CoC meetings. Financial institutions which had converted their debt into substantial equity stakes in the corporate debtor under any previous restructuring, were deemed ‘related’ to the corporate debtor and were thereby precluded from attending or voting in CoC meetings. The Ordinance provides an exemption from this prohibition for such financial creditors provided they are regulated by a financial sector regulator.
- Grace period for fulfilling statutory obligations
A critical issue for acquirers in the IBC process is obtaining governmental and regulatory consents, dispensations and permits. Currently, acquirers tend to draft their resolution plans treating National Company Law Tribunal (‘NCLT’) as a single window clearance for all such approvals. But this approach is susceptible to legal challenge. The Ordinance provides for a one year grace period for the successful resolution applicant to fulfill various statutory obligations required under various laws to implement the resolution plan.
- Issue of guarantors’ liability resolved
Section 14 of the IBC imposes a stay on any recovery action against the corporate debtor and the enforcement of any security interest created by a corporate debtor over its assets during the CIRP period. However, in a few cases, courts had taken the view that the moratorium in an ongoing CIRP will also stay enforcement of guarantees or security interest from promoters and group companies of the corporate debtor. The Ordinance states that the moratorium under Section 14 will not apply to the enforcement of guarantees granted by promoter guarantors or other group companies which are not undergoing a CIRP.
- Further regulations to govern the bidding process
In most CIRP proceedings, the CoC formulates a process memorandum which governs the timelines for receiving bids, procedure for rebidding, grounds for rejection of bids etc. Such provisions and their application have been subject to several legal challenges at the NCLT by unsuccessful bidders. In a press release accompanying the Ordinance, the government has indicated that the regulations will govern issues such as non entertainment of late bids, bar on negotiations with late bidders and a standardised process for maximization of value of the corporate debtor.
- Triggering CIRP by a company voluntarily
The IBC provided that a company may initiate its own CIRP and that the persons eligible to initiate a voluntary CIRP were: (i) the corporate debtor itself; (ii) a shareholder of the company specifically authorised to do so under the articles; (iii) director and key employees; and (iv) the chief financial officer. The Ordinance now makes a special resolution of shareholders mandatory for filing for its CIRP. It remains to be seen if a special resolution will be possible in closely held companies where promoters have a dominant stake. But directors and officers will need to be mindful of provisions in the IBC which impose civil and criminal sanctions on erstwhile directors and officers of the company for wrongful trading.
- Limitation Act to apply to IBC
Lenders have benefited from judicial decisions which indicated that the Indian limitation legislation did not apply to an application under the IBC (although the doctrine of laches might still apply). However this has not been confirmed by the Supreme Court till date, as it had declined to comment on this issue. The Ordinance now provides that the law of limitation will apply to IBC applications.
SEBI Permits FPIs to Invest in Unlisted Debt Securities and Securitized Debt Instruments
SEBI has, by way of a notification dated February 27, 2017, amended the provisions of the SEBI (Foreign Portfolio Investors) Regulations, 2014 to permit registered FPIs to invest in (i) unlisted non-convertible debentures (‘NCDs’)/bonds issued by an Indian company subject to the guidelines issued by the Ministry of Corporate Affairs and (ii) securitized debt instruments, including certificates/instruments issued by special purpose vehicles set up for securitization of assets with banks, financial institutions or non-banking financial companies (‘NBFCs’) as originators, and certain listed securitized debt instruments. Additionally, SEBI has specified by its circular dated February 28, 2017, that investment by FPIs in unlisted corporate debt securities in the form of NCDs/bonds will be subject to minimum residual maturity of three years along with an end use-restriction on investments in ‘real estate business’, capital market and purchase of land. SEBI has also clarified that investment by FPIs in securitized debt instruments will not be subject to the minimum three-year residual maturity requirement. SEBI has also specified that investments in unlisted corporate debt securities and securitized debt instruments will be permitted up to an aggregate of Rs. 35,000 crores (approximately US$ 5.4 billion) within the existing investment limits prescribed for corporate debt from time to time (presently, Rs. 244,323 crores (approximately US$ 38 billion)).
RBI had earlier, by way of a notification dated October 24, 2016, introduced corresponding amendments to FEMA 20 and prescribed similar conditions for such investments by an FPI by way of a circular dated November 17, 2016. A summary of these RBI notifications has been captured in our January 2017 edition of Inter Alia.
Further, SEBI has also amended the definition of ‘offshore derivative instrument’ to permit FPIs to issue instruments with the underlying being unlisted debt securities or securitized debt instruments held by such FPI.
Amendment to SEBI (Real Estate Investment Trusts) Regulations, 2014 and SEBI (Infrastructure Investment Trusts) Regulations, 2014
Pursuant to the meeting of the SEBI board held on September 23, 2016, SEBI has amended the SEBI (Real Estate Investment Trusts) Regulations, 2014 and the SEBI (Infrastructure Investment Trusts) Regulations, 2014. Some of the key amendments include:
i. The minimum holding of the mandatory sponsor in the infrastructure investment trust (‘InvIT’) has been reduced from 25% to 15%;
ii. The existing limit of three sponsors has been removed from both regulations;
iii. The permissible investment limit for investment by real estate investment trusts (‘REIT’) in ‘under construction’ assets has been increased from 10% to 20%; and
iv. InvITs and REITs are allowed to invest in a two-level SPV holding structure, through a holding company.
The Maharashtra Land Revenue Code, 1966
The Maharashtra Land Revenue Code, 1966 (‘MLRC’) has been amended on August 22, 2016 with retrospective effect from August 15, 1967, i.e., the date on which the MLRC came into force. Pursuant to the amendment, all leases granted by the State Government or the Collector in respect of any land or foreshore vested in the State Government, which have been in existence on or before August 15, 1967 or were granted thereafter, will, notwithstanding the terms and conditions of such leases, be also subject to the following terms:
i. the leasehold rights in such land may be further assigned or transferred only with the prior permission of the Collector on payment of such premium on account of unearned income and transfer fees; and
ii. in the event of contravention of the above condition, the lessee / transferor of such leasehold rights will be subject to pay penalty in addition to such premium and transfer fees at rates to be specified by the Government.
Draft Maharashtra Real Estate (Regulation and Development) (Registration of Real Estate Projects, Registration of Real Estate Agents, Rates of Interest and Disclosures on Website) Rules, 2016
Pursuant to the Real Estate (Regulation and Development) Act, 2016 (‘RERA’), the State Government of Maharashtra published the draft of the Maharashtra Real Estate (Regulation and Development) (Registration of Real Estate Projects, Registration of Real Estate Agents, Rates of Interest and Disclosures on Website) Rules, 2016 (the ‘Draft Rules’) to invite comments from the general public. The Draft Rules and the comments will be taken into consideration by the Maharashtra Government on or after December 23, 2016. The Draft Rules provide for registration fees payable by the promoters for registration of their projects as well as the fee payable by real estate agents who are also required to be registered under the RERA. While the Draft Rules continue to provide for the retention of 70% of the amounts realized from allottees in relation to a specific project in a separate bank account, it has provided further detail and clarity as to what constitutes construction costs and land costs for a particular project and the amounts that may be withdrawn by the promoter at various stages of construction. The Draft Rules have clarified that the construction costs would include the principal sums and interest, paid or payable to any financial institutions including scheduled banks or NBFCs etc., or money-lenders for the relevant project. Mr. Gautam Chatterjee, IAS, Officer on Special Duty to the Chief Minister, has been appointed as the special officer under the RERA for the State of Maharashtra pursuant to the Government Resolution dated December 26, 2016.
Meeting of the SEBI Board
The SEBI Board met on September 23, 2016 and took the following decisions:
i. Currently, FPIs are required to transact in securities through stock brokers registered with SEBI, while domestic institutions such as banks, insurance companies, pension funds etc. are permitted to access the bond market directly (i.e. without brokers). SEBI has decided to extend this privilege to Category I and Category II FPIs.
ii. In order to facilitate the growth of Investment Trusts (“InvIT”) and Real Estate Investment Trusts (“REIT”), SEBI has decided to amend the SEBI (Infrastructure Investment Trusts) Regulations, 2014 and the SEBI (Real Estate Investment Trusts) Regulations, 2014 (“REIT Regulations”). The key amendments will include:
a. InvITs and REITs will be allowed to invest in the two level SPV structure through the holding company subject to sufficient shareholding in the holding company and other prescribed safeguards. The holding company would have to distribute 100% cash flows realised from the underlying SPVs and at least 90% of the remaining cash flows.
b. The minimum holding of the mandatory sponsor in the InvIT has been reduced to 15%.
c. REITs have been permitted to invest upto 20% in under construction assets.
d. The limit on the number of sponsors has been removed under the REIT Regulations.
iii. The SEBI Board has approved amendments to the SEBI (Portfolio Managers) Regulations, 1993, to provide a framework for the registration of fund managers for overseas funds, pursuant to the introduction of section 9A in the Income Tax, 1961.
iv. The SEBI Board has decided to grant permanent registration to the following categories of intermediaries: merchant bankers, bankers to an issue, registrar to an issue & share transfer, underwriters, credit rating agency, debenture trustee, depository participant, KYC registration agency, portfolio managers, investment advisers and research analysts.
v. The Securities Contracts (Regulation) (Stock Exchanges and Cleaning Corporations) Regulations, 2012 have been amended to increase the upper limit of shareholding of foreign institutional investors mentioned in the Indian stock exchanges from 5% to 15% and to allow an FPI to acquire shares of an unlisted stock exchange through transactions outside of recognised stock exchange including allotment.
Foreign Investment in Units Issued by REITs, InvITs and AIFs
Salient features of foreign investment permitted by RBI, pursuant to its circular dated April 21, 2016, in the units of investment vehicles for real estate and infrastructure registered with the SEBI or any other competent authority are as under:
i. A person resident outside India (including a Registered Foreign Portfolio Investor (‘RFPI’) and NRIs may invest in units of real estate investment trusts (‘REITs’);
ii. A person resident outside India who has acquired or purchased units in accordance with the regulations may sell or transfer in any manner or redeem the units as per regulations framed by SEBI or directions issued by RBI;
iii. An Alternative Investment Fund Category III with foreign investment can make portfolio investment in only those securities or instruments in which a RFPI is allowed to invest; and
iv. Foreign investment in units of REITs registered with SEBI will not be included in ‘real estate business’.
Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations, 2018
The RBI has, by way of a notification dated March 26, 2018, issued the Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations, 2018 (‘2018 Regulations’) that replaces the erstwhile Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations, 2000 (‘2000 Regulations’). Some of the key changes introduced by way of the 2018 Regulations are set out below:
i. The 2018 Regulations has replaced the concepts of ‘a person resident outside India who is a citizen of India’ and ‘a person of Indian origin’ under the 2000 Immovable Property Regulations with ‘Non-Resident Indian’ (‘NRI’) and ‘Overseas Citizen of India (‘OCI’), respectively and treats NRIs and OCIs at par with respect to their capacity to hold and / or transfer immovable property in India.
ii. An NRI or an OCI is generally permitted to acquire any immovable property, other than agricultural land/ farm house / plantation property in India, by way of a sale or gift from a person resident India or another NRI or OCI, who is a ‘relative’ (as defined under Section 2(77) of the Companies Act, 2013). While the 2000 Regulations were silent on this aspect, the 2018 Regulations provide that a person resident outside India, not being an NRI or OCI but whose spouse is an NRI or an OCI, may acquire one such immovable property, jointly with the NRI / OCI spouse.
iii. Any person being a citizen of Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal or Bhutan, or persons of Hong Kong, Macau or Democratic People’s Republic of Korea, and including persons from aforesaid countries having a place of business in India in a manner permissible under FEMA, will not be permitted to acquire or transfer any immovable property in India in their individual capacity, without the prior approval of the RBI, other than on lease not exceeding five years. However, such restriction would not apply where such person is an OCI.
iv. Under the 2018 Regulations, a person resident in India under a long term visa, who is a citizen of Afghanistan, Bangladesh or Pakistan and belongs to minority communities in those countries (namely, Hindus, Sikhs, Buddhists, Jains, Parsis and Christians), may purchase only (a) one residential immovable property for self-occupation and (b) one immovable property for carrying out self-employment activities, inter alia subject to such immovable property not being in / around any restricted / protected areas and cantonment areas. This dispensation was not provided for under the 2000 Regulations.
v. The 2018 Regulations do not have retrospective application on any existing holding of immovable property by a person resident outside India, which was acquired under the 2000 Regulations.
 Section 2 (77) of the Companies Act, 2013 states: “relative”, with reference to any person, means any one who is related to another, if— (i) they are members of a Hindu Undivided Family; (ii) they are husband and wife; or (iii) one person is related to the other in such manner as may be prescribed.
Participation by Strategic Investor(s) in InvITs and REITs
Pursuant to SEBI’s circular dated January 18, 2018 (‘SEBI Circular’), a Real Estate Investment Trust (‘REIT’) / Infrastructure Investment Trust (‘InvIT’) may invite subscriptions from strategic investors subject to inter alia the following:
i. The strategic investors can, either jointly or severally, invest not less than 5% and not more than 25% of the total offer size.
ii. The investment manager or manager is required to enter into a binding unit subscription agreement with the strategic investors proposing to invest in the public issue, which agreement cannot be terminated except if the issue fails to collect minimum subscription.
iii. The entire subscription price has to be deposited in a special escrow account prior to opening of the public issue.
iv. The price at which the strategic investors have agreed to buy units of the InvIT/ REIT should not be less than the public issue price. In case of a lower price, the strategic investors should bring in the additional amounts within two working days of the determination of the public issue price, and in case of a higher price, the excess amount will not be refunded and the strategic investors will be bound by the price agreed in the unit subscription agreement.
v. The draft offer document or offer document, as applicable, will disclose details of the unit subscription agreement, including the name of each strategic investor, the number of units proposed to be subscribed etc.
vi. Units subscribed by strategic investors, pursuant to the unit subscription agreement, will be locked-in for a period of 180 days from the date of listing in the public issue.
Maharashtra Rules Notified under Real Estate (Regulation and Development) Act, 2016
The Government of Maharashtra has by way of notification no. 23 dated March 8, 2017 established Maharashtra Real Estate Regulatory Authority (‘MahaRERA’), for regulation and promotion of the real estate sector in the State of Maharashtra. Additionally, the Housing Department, Maharashtra also released the Maharashtra Real Estate (Regulation and Development) (Registration of Real Estate Projects, Registration of Real Estate Agents, rates of interest and disclosures on websites) Rules, 2017 dated April 20, 2017, which came into effect on May 1, 2017 (‘Rules’). The Rules inter alia set out (i) information required to be furnished by promoters for registration of a real estate project, (ii) parameters for ascertaining land cost; and (iii) the model form of the agreement for sale to be entered into with the allottees. Further, in the case of a termination or cancellation of the registration of a project (i.e. either by MahaRERA or by the association of allottees) the authority is required to take measures to protect the interests of lenders having a mortgage or investors, as disclosed by the promoter and the Rules require that an opportunity be given to such party.
Guidelines for Issuance of Debt Securities by REITs and INVITs
SEBI had recently permitted Real Estate Investment Trusts (‘REITs’) and Infrastructure Investment Trusts (‘InvITs’) to issue debt securities by amending the SEBI (REIT) Regulations, 2014 (‘REIT Regulations’) and the SEBI (INVIT) Regulations, 2014 (‘InvIT Regulations’). SEBI has issued guidelines for issuance of such debt securities by REITs and InvITs by its circular dated April 13, 2018 (‘Circular’) which provides that REITs and InvITs issuing debt securities must follow the provisions of SEBI (Issue and Listing of Debt Securities Regulations), 2008 (‘ILDS Regulations’) in the following manner:
i. Restriction in Regulation 4(5) of the ILDS Regulations on issue of debt securities for providing loan to or acquisition of shares of any person, who is party of the same group or under the same management and the requirement for creation of a debenture redemption reserve, will not apply to issue of debt securities by REITs and InvITs;
ii. Compliances to be made under Companies Act in terms of the ILDS Regulations, will not apply to REITs / InvITs for issuance of debt securities, unless specifically provided in the Circular.
For the issuance of debt securities, REITs / InvITs will appoint one or more SEBI registered debenture trustees, other than the trustee to the REIT / InvIT issuing such debt securities. Further, the securities will be secured by the creation of a charge on the assets of the REIT / InvIT or holding company or SPV, having a value which is sufficient for the repayment of the amount of such debt securities and interest thereon. The Circular also provided for certain additional disclosure and compliance requirements.
Establishment of an Appellate Tribunal for the State of Maharashtra under RERA
The Real Estate (Regulation and Development) Act, 2016 (‘RERA’) provides for appeals to be preferred to the appellate tribunals of the respective States against the orders passed by the regulatory authorities of such States. For the State of Maharashtra, the Maharashtra Revenue Tribunal (“MahaRT”) was designated as a temporary appellate tribunal for hearing appeals from the orders passed by the Maharashtra Real Estate Regulatory Authority (‘MahaRERA’) till the constitution of the appellate tribunal as required under RERA. The Government of Maharashtra has, on May 8, 2018 constituted the Maharashtra Real Estate Appellate Tribunal (‘Appellate Tribunal’), as the permanent appellate tribunal under RERA for the State of Maharashtra, to hear appeals from the orders passed by MahaRERA. All matters pending with MahaRT now stand transferred to the Appellate Tribunal.