This is only an attempt to keep in pace with the changes in Law. Keeping in mind the varied interest of individuals we have tried to cover as much as possible, however we do not holdout that this update covers all changes in the field of law affected during the period and the reader may exercise discretion in that regard.
The legal update is divided broadly into two sections:
- Important Decisions;
- New or Amendment to existing Legislation.
PART-I IMPORTANT DECISIONS
The NCLAT held that where the arbitral proceedings and counterclaim for determining the liability and quantum of claim is pending adjudication, the claim could be kept in abeyance by the Resolution Professional, and said claim sum could only be determined with certainty, after the determination of the arbitration proceedings.
The NCLAT held that IBC is a time bound process, which must be strictly adhered to whereby, the explanation pertaining to laches as given by the appellant, was held to be devoid of being substantial and was not a sufficient cause for delay.
The NCLAT held that, as there is no evidence on record, evidencing that the amount in question was lent by the Corporate Debtor to the Financial Creditor, therefore the same cannot be understood as financial debt. Thus, the NCLAT held that the appellant is at liberty to recover the dues from the sale of the properties given as security.
The Supreme Court held that an application under Order XXI Rule 97 Civil Procedure Code, 1908, is to be filed by the decree-holder (or purchaser in execution of the decree) as is embodied in the said statutory provision. On the contrary, an application under Order XXI Rule 99 is filed by a person dispossessed of immovable property, by the holder of a decree for possession. The Court further stated, that in a suit for partition, the title to a property cannot be decided in favor of the parties claiming partition qua strangers.
The Supreme Court, emphasized on the power of Section 19(4) of the Competition Act, to empower the CCI to arrive at the conclusion as to whether the enterprise enjoys a dominant position. As set out under Section 19(4)(g), the acquisition of a monopoly or a dominant position, as a result of a statute or by being a Government Company or Public Sector Undertaking, is considered as a relevant factor. Thus, it is clear that the legislator’s intent is to include government companies, public sector companies and bodies under the Statute, to fall under the ambit of the Act. The court further propounded that the exception to the definition of an ‘enterprise’ is merely a Government Department carrying on Government functions, and that a business of mining cannot be considered as a sovereign function.
The Supreme Court while analyzing Section 54 of the Transfer of Property Act, 1882, reiterated that an agreement to sell does not confer any absolute title over the said suit property. The possession of the respondent is further established by the possession memo on record, which proves that the respondent possesses rights over the suit property in part performance of the agreement to sell. The entry of the appellant over part of the suit property is simply in the capacity of a licensee of the respondent. The appellant does not occupy the property/premises in the capacity of an owner. The Court further held, that the power of attorney executed by the appellant, is inconsequential, as neither the sale deed has been executed, nor any action has been undertaken by the power of attorney holder, that may confer title over the respondent. Therefore, the non-execution of any document by the general power of attorney holder consequentially, renders the general power of attorney useless. The Court concluded, by stating that the will being executed by the appellant was meaningless as the will has no force till the testator or the person making it dies. In that manner, the will shall not be conferring any right upon the respondent. Thus, the court stated that the practice, of considering power of attorney and will as documents of title or documents conferring right in any immovable property is in violation of statutory law. Thus, any such practice would not override the specific provisions of law which require execution of a document of title or transfer and its registration to confer right and title in an immovable property.
The Delhi High Court held that an arbitration clause contained in an agreement which is void ab initio cannot be enforced as the contract itself never legally came into existence. It further stated, that a validly executed contract can also be extinguished by a subsequent agreement between the parties. If the original contract remains in existence, for the purposes of disputes in connection with issues of repudiation, frustration, breach, etc., the arbitration clause contained therein continues to operate for those purposes. The Court thus, opined that the arbitrator’s conclusion that the MOU amounted as a novation of the contract was unimpeachable within the limited jurisdiction of the Court under Section 34 of the Act. If a contract is superseded by another, the arbitration clause, being a component part of the earlier contract, falls with it. Where the new contract constitutes a wholesale novation of the original contract, the arbitration clause would also stand extinguished by virtue of the new agreement.
1. SEBI LODR Regulations The SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR” Regulations”)
have been amended and notified, to come into force on the on June 14, 2023. The proposed key changes are as under:
- A vacancy in the office of a listed entity is now required to be filled at the earliest, within 3 months from the date of vacancy, for the following positions: (i) Compliance Officer; (ii) Chief Executive
- Officer [“CEO”); (iii) Managing Director (“MD”); (iv) Whole Time Director; (v) Manager; (vi) Chief Financial Officer; and (vii) Director.
- In the event of a sale, lease or disposal, of whole or substantially whole of any undertaking of the listed entity, a special resolution is required to be passed by the shareholders, and the majority of public shareholders are required to vote in favour of the resolution. The said principle is not applicable in case of a wholly owned subsidiary of the listed entity, subject to certain conditions.
- Subsisting from April 1, 2024, for a director to continue in the capacity of a director, a listed entity must take the approval of the shareholders, once every 5 years, counted from the date of their appointment or reappointment, as applicable.
- As on March 31, 2024, for a director of a listed entity to continue acting in the capacity of a director without having derived shareholder approval over the last 5 years, must do so in the 1st general meeting held after March 31, 2024 positively.
- The exceptions herein, are in case:
- the director is appointed pursuant to a court or tribunal order;
- the matter pertains to reappointment of directors liable to retire by rotation under the Companies Act;
- the matter involves a Nominee director of the government of India, or a financial regulator, or a regulated financial institution, or a debenture trustee under a subscription agreement for debentures, as issued by the listed entity.
- In the quarterly compliance report on corporate governance, the listed entities must disclose details of the cyber security incidents, breaches, loss of data and documents that may have occurred.
- The materiality threshold for determination of events/information disclosed by a listed entity to the stock exchanges have now been prescribed by SEBI, to include omission of an event or information, whose value or the expected impact exceeds the lower threshold of the following: (Materiality Threshold) :
- 2% if turnover as per last audited consolidated financial statements
- 2% of net worth as per last audited consolidated financial statements, except when net worth is negative
- 5% of the average of absolute value of profit or loss after tax, as per last 3 audited consolidated financial statements.
- Any continuing event or information that may now qualify as material as per the said thresholds, shall be disclosed within 30 days from the Effective Date.
- The policy for determination of materiality to be approved by the board of directors shall be as per the materiality thresholds and shall provide a mechanisms for assisting the employees in identifying any potential material event/information and reporting the same to the relevant key managerial personnel.
- Special rights granted to shareholders of listed entities need to be approved in a general meeting by way of special resolution, once in every 5 years from the date of grant of such special right. The exception thereby, is in case special rights are granted to the shareholder, in a regulated financial institution pursuant to a lending arrangement of the listed entity, and debenture trustee under a subscription agreement for the debentures issued by the listed entity.
- The listed entities are now required to disclose the material events or information to the stock exchanges in terms of LODR Regulations, within the following timelines:
- 30 minutes from the closure of the board meeting where decision pertaining to the event/information has been taken;
- 12 hours from occurrence of any event or information emanating from within the listed entity
- 24 hours from occurrence of any event or information not emanating from within the listed entity.
- The listed entity is required to disclose the communication received from any regulatory, statutory, enforcement or judicial authority, coupled with any event or information, required to be disclosed by the listed entity, as per the LODR Regulations, unless the disclosure of such communication is prohibited by such authority.
- In the event that the shareholders, promoters and its group entities, related parties, directors, key managerial personnel, employees of the listed entity or its holding, subsidiary or associate company i.e. Executing Parties enter an agreement amongst themselves or in case a listed entity enters into an agreement with a third party, which impacts the management or control of the listed entity, or imposes restriction or creates liability on the listed entity, is required to be disclosed to the stock exchanges, even if the listed entity is not a party to the agreement. Such information, must be communicated within 2 working days of entering such agreement.
- Further, listed entities are required to disclose to the stock exchanges:
- any acquisitions which exceed the materiality threshold,
- sale or disposal of whole or substantially whole of any undertaking or subsidiary or listed entity,
- sale of stake in associate company, including an agreement to sell shares or voting rights in a company whereby, the company ceases to be a wholly owned subsidiary, a subsidiary or an associate company,
- where amount of sale exceeds materiality threshold,
- fraud or financial defaults by the listed entity and its management etc
- arrest of the said individuals, or resignation of said individuals which has to be communicated within 7 days of the letter of resignation
- Voluntary revision of financial statements or board report.
2. . RBI Guidelines on Default Loss Guarantees (DLG) in Digital Lending
The Reserve Bank of India (“RBI”) had, basis the recommendations of the Working Group on ‘digital lending including lending through online platforms and mobile apps’ (“Working Group Report”), issued a press release on August 10, 2022 (“Press Release”) followed by the “Guidelines on Digital Lending” on September 2, 2022 (the “DL Guidelines”).
One of the key changes introduced in the DL Guidelines was the restriction imposed on Regulated Entities (“REs”) with respect to the acceptance of first loss default guarantees by REs, commonly known as ‘FLDG’ and to adhere to the provisions of Master Direction – Reserve Bank of India (Securitization of Standard Assets) Directions, 2021 dated September 24, 2021, especially, synthetic securitization contained in Para (6)(c). This had created a lot of concerns owing to the prevalent nature of use of FLDGs issued by business correspondents to REs.
On June 8, 2023, the RBI issued Guidelines on Default Loss Guarantees (“DLG”) in Digital Lending, covering the implications and restrictions set out by the recommendations being implemented immediately. The guidelines are applicable, on all DLG arrangements entered in relation to Digital Lending Operations undertaken by all commercial banks, primary urban cooperative banks, state cooperative banks, district central cooperative banks, non-banking financial companies, including housing finance companies. These guidelines shall come into force from June 8, 2023.
- Key Points:
- DLG would mean a contractual arrangement between an RE and any entity whereby such entity guarantees to compensate the RE for any loss due to default up to a certain percentage of the loan portfolio of the RE, which is specified upfront. This includes any implicit guarantee of a similar nature, linked to performance of the loan portfolio of the RE and specified upfront.
- The RE can enter into DLG arrangements only with their outsourcing partners, whether Loan Service Providers (“LSPs”) or REs. The LSP who is providing a DLG would need to be incorporated as a company under the Companies Act, 2013.
- An RE can accept DLG in the form of:
- Cash deposited with RE;
- Fixed deposits maintained with a scheduled commercial bank with a lien marked in favour of RE;
- Bank Guarantee in favour of RE.
- The total amount of DLG cover on any outstanding portfolio which is specified upfront should not exceed 5% of the amount of that loan portfolio. For implicit guarantee arrangements, the DLG provided should not bear performance risk of more than 5% of the loan portfolio. The time period for the DLG shall be no less than the longest tenor of the loans in the underlying loan portfolio.
- The guidelines require that all DLG structures be backed with explicit legally enforceable contract, which contains certain specific details such as extent of DLG cover, form in which DLG cover is required to be maintained, timeline for DLG invocation and necessary disclosures as set out in the Guidelines.
- The RE can invoke the DLG within a maximum overdue period of 120 days, unless made good by the borrower prior to such date. The amount of DLG that can be invoked cannot be set off against underlying individual loans. In case of recovery by RE of any amounts of the underlying loans which have been invoked and realised, such amounts can be shared with the DLG provided, basis the DLG arrangement.
- The Non Performing Asset (“NPA”) classification and consequent provisioning would continue to be the responsibility of the RE as per the relevant RBI regulations. The intent of this is not clear as to whether the underlying loan classification and provisioning obligation shall continue irrespective of invocation of DLG.
- The RE would be required to ensure that the LSP published on their website, the total number of portfolios and amounts of each portfolio on which DLG has been offered. The RE would need to have a board approved policy which should include eligibility criteria, nature and extent of DLG cover, process of monitoring and reviewing of the DLG arrangement, and details of fees payable to said DLG provider. This policy is required to be in place before entering any DLG arrangement.
- RE should ensure that when a DLG arrangement is being entered into or renewed, the RE obtains adequate information to satisfy themselves on the ability of the DLG provider to honour the same. For the said purpose, the RE must obtain a declaration from the DLG provider, duly certified by the statutory auditor regarding the aggregate DLG amount that is outstanding, number of REs and number of portfolios against which the DLG has been provided, and past default rates on similar portfolios.
- The guidelines further clarify, that availing DLG cover by REs would not be construed as a substitute for credit appraisal requirements and credit underwriting standards, which requirements need to be continued in compliance with the REs. Also, the capital computation on individual loan assets in the portfolio, would continue to be governed by existing RBI norms.
3. Ministry of Finance, Expenditure Department Office Memorandum
Vide Office Memorandum dated June 2, 2023, the Ministry of Finance’s Expenditure Department granted a one-month extension, upto July 31, for Micro, Small, and Medium Enterprises (MSMEs) to submit refund claims for performance or bid security forfeited and liquidated damages deducted during the Covid-19 period. The government seeks to alleviate the burden on MSMEs by offering relief through the ‘Vivad Se VishwasI’ scheme, announced in the 2023-24 Budget by the Union Minister for Finance and Corporate Affairs, Smt. Nirmala Sitharaman.
- KEY POINTS:
- The scheme ensures that in cases where MSMEs were unable to fulfil contracts during the Covid-19 period, 95% of the performance security, bid security, and liquidated damages that were forfeited or deducted from MSME firms will be refunded by the government and government undertakings. Effective from April 17, 2023, the scheme was initially set to have a claim submission deadline of June 30. However, the same has been extended to July 31.
- Additionally, certain relief has been granted to MSMEs that faced debarment due to contract execution defaults during the Covid-19 period, extending until March 31, 2022. Contractors or suppliers registered as MSMEs with the Ministry of MSME as of March 31, 2022, are eligible to claim a refund for forfeited amounts related to contracts with an original delivery or completion period between February 19, 2020,
- and March 31, 2022.
- The office memorandum also specifies the amendments made with respect to the eligibility requirements. Firstly, it is clarified that all procurements would be covered under the scheme and not merely those pertaining to procurement of goods and services. Secondly, to be eligible under the scheme, an MSME may be registered for any category, and not necessarily a category of goods and services.
- To facilitate the implementation of this scheme, the Government e-Marketplace (GeM) has established a dedicated web page. Only eligible claims will be processed through GeM, and it applies to all contracts for procurement entered into by Central Government procurement entities including ministries, departments, attached or subordinate offices, autonomous bodies, Central Public Sector Enterprises (CPSEs), Central Public Sector Banks, financial institutions, etc. with MSMEs.
4. Electricity (Rights of Consumers) Amendment Rules, 2023
The Ministry of Power issued the Electricity (Rights of Consumers) Amendment Rules, 2023, specifying the rights and obligations of electricity consumers and standards of service, metering, and payment of bills. The amended Rules mandate the introduction of time-of-day tariffs, i.e., tariffs that vary based on the time of day) and provide a mechanism for the calculation of bills in case the demand exceeds the sanctioned load.
- Key Points:
- The amendments mandate introduction of time-of-day tariffs for retail consumers except for agricultural consumers. This will be effective from: (i) April 1, 2024, for industrial and commercial consumers with maximum demand of up to 10 kilowatts, and (ii) April 1, 2025, for other consumers. For consumers with smart meters, it will be applicable immediately.
- Time-of-day tariffs will apply to the energy charges. The time-of-day tariff must not be less than: (i) 1.2 times the normal tariff for industrial and commercial consumers, and (ii) 1.1 times for other consumers. During solar hours, the tariff should be less than the normal tariff by at least 20%. Peak hours must not be longer than solar hours.
- The 2020 Rules mandate the installation of meters. The amendments specify that on the installation of a smart meter, no penalty will be levied in case the actual recorded maximum demand is more than the sanctioned load. For billing, the actual recorded maximum demand will be treated as the sanctioned load. A higher sanctioned load may attract a higher tariff slab.
- If the monthly maximum demand exceeds the sanctioned load at least three times in a financial year, the sanctioned load will be revised by the distribution company. The new sanctioned load will be the lowest of the monthly maximum demand. Accordingly, the distribution company may revise the sanctioned load down if the maximum load decreases.