Mridul Pateriya, Gujarat National Law University
Shikhar Nigam, Gujarat National Law University
With the advent of COVID-19 in the world, the economic cost of the pandemic has kept increasing, resulting in stagnation, unemployment, supply chain stress, revenue loss, and consumer demand reduction. Moreover, according to ICRA, India’s economy is likely to see a decline of 5% due to lockdown in the nation. Amid this situation, the government has made necessary commercial reforms to revive the economy and to make India self-reliant(Atma Nirbhar Bharat). In this article, we are analysing those commercial policy changes and their subsequent plausible positive or negative long-term effects
Reforms in Micro Small and Medium Enterprises
On 13 May 2020, the Ministry of Finance introduced a reform under the self-reliant India mission in the MSME sector, under which the definition of MSME will be revised by raising the investment limit. The reason behind the move for changing the said definition is due to the low threshold of investment which results in fear in the enterprises of graduating out of the benefits and thereby killing their urge to grow. Furthermore, injunctions upon global competitors have been introduced for limiting the (investment /involvement, etc. of) foreign companies, as Indians enterprises have often faced unfair competition from them.
Moreover, Global tenders will be disallowed in government procurement up to Rs 200 crores and collateral-free automatic loans will be provided with a tenure of 4 years accompanied by a 12-month moratorium on the principal repayment with a 100% guarantee cover to banks and NBFCs on principal and interest. Additionally, there have been funds worth 50,000 crores which will be established for providing equity funding to MSMEs with growth potential.
Due to COVID-19, MSMEs are adversely affected and are in the dire need of additional funding to meet their operational liabilities such as that of, paying for their labour, built up, raw material, etc. Therefore, the collateral-free loan is likely to solve their problems, and the aforementioned fund made by the government, would solve the shortage of equity with new capital, so that MSMEs can also focus on expansion and capacity building.
In the long term, these policy decisions may result in a simple and efficient business environment for MSMEs to prosper without facing a major financial and policy difficulty. However, restraining access to foreign companies will definitely affect the FDI inflow in India. Furthermore, collateral-free loans and funds may lead to an increase in NPAs of banks and NBFCs as many of these enterprises won’t be able to survive the recession caused by this pandemic.
Reforms in Foreign Direct Investment policy
The Government of India has amended the Consolidated Foreign Direct Investment Policy, according to which any country which shares a border with India or where beneficial ownership of such investment is situated in the aforesaid country such investment can only happen via government route. This policy not only restricts investment by a citizen or an entity from the neighboring countries, but it goes on to restrict investments by such entities having beneficial owners, either situated in or a citizen, of the neighboring country. Therefore, changes like transfer of ownership of existing or future investments, resulting in beneficial ownership falling within that purview will now require government approval.
The reason for the said change as stated by the Ministry of Commerce and Industry was to curb opportunistic takeovers/acquisitions of Indian companies due to the current COVID-19 pandemic by investment from foreign countries. Since the starting of this pandemic, industries have suffered greatly due to which countries like China have started investing on a big scale in the countries which are badly hit by this pandemic. The government was reportedly alarmed by a guileful investment of 1.01% in shares of HDFC, India’s biggest mortgage bank, by the People’s Bank of China. Therefore, the countries sharing a land border with India have been specifically prohibited as the government fears such opportunistic takeover/acquisition of Indian industries by neighboring countries may lead to such countries having significant control over the Indian enterprises.
Though India has taken bold steps towards blocking any potential investment threats from its Neighboring Countries, however, this new policy may create some unintended hurdles for investors from other parts of the world as well. Therefore, it raises questions on India’s hard-earned regulatory agility that has banked on ease of doing business and single-window clearance.
Reforms in Insolvency and Bankruptcy Code
On 24 March 2020, the Ministry of Corporate Affairs amended Section 4 of the IBC (which defines “default” ) whereby, the minimum amount to initiate resolution was increased from 1 lakh to 1 crore rupees. In addition, The government intends to limit the initiation of “fresh” insolvency cases thereby exempting all COVID-related debt from the definition of “default” under the IBC and has suspended any fresh initiation of insolvency proceedings for up to a year.
The revision in the definition of “default” and suspension of “fresh initiation” of insolvency proceedings is based on the corona-virus disease (COVID-19) -related defaults and disallowing the admission of cases corresponding to such defaults relating to the pandemic.
The one-year suspension for filing new cases under the IBC and the default holiday taken for loans to deal with this pandemic will probably force RBI to soften its restructuring and provisioning norms so as to deal with stressed assets. Previously, banks had only 180 days to restructure loans, however, now by extending the payment period, the number of installments and reducing interest rates RBI will have to take bold steps to ensure that NPAs do not pile up post the end of the one-year timeline. Since the banks have to take risks of supporting these companies and the same may not pay off, the RBI has to rethink its provisioning and risk weight norms to ensure that investment does not lead to NPAs.
Reforms in Companies Act
In furtherance of making India self-reliant, some amendments were announced for decriminalizing defaults such as shortfalls in CSR report, inadequacies in board report, filing default, etc. Moreover, the majority of the compoundable offences will be shifted to internal adjudication mechanisms (IAM). Now, the power of the regional director has been increased in regard to the compounding of offences and further, seven of the compoundable offences are altogether dropped and five will be dealt under an alternative framework. (clarity needed if these are separate 5 or part of ones dropped as mentioned above)
Latest reforms in Companies act to decriminalise minor procedural infractions and to shift many compoundable offences to internal adjudication mechanism will help Indian companies especially startups in multiple ways, including that of untwining them from procedural hurdles, which in turn will have a positive impact on their valuation and will further encourage investors by giving them greater confidence from a compliance perspective.
The recommendations of the Company Law Committee had asked for 43 provisions of the Company Law to be amended so that firms could breathe freely in an array of matters. The government’s move to decriminalize innocuous violations is consistent with said recommendations which suggested penalty rationalization as relatively minor slip-ups, such as certain deficiency in a board report, or a delay in holding an annual general meeting, should not make executives assailable to criminal prosecution.
With the country under lockdown, most business routines have been thrown out of gear and the compliance with procedural must-dos is no longer merely about being mindful of them. Entrepreneurs and executives have demanded sudden relief from business worries which they should never have had in the first place.
In light of the latest amendments and reforms, it can be deduced that the actions of the government will definitely generate considerable confidence in some of the potential investors. However, there are many loopholes in these policies that may deter investors from investing and may further cause problems in the long run.
As the latest FDI policy not only restrained investment by individuals and entities that are based in neighboring countries but also of any such foreign entities that may include its beneficial owner, belonging to such neighboring state. This raises concern over apparent ease of doing business for such potential investors since they have to take government approval. Moreover, this FDI policy is silent about investment from Special Administrative Regions like Hong Kong and Macau. (relevance or repercussions of the lack of such mention). In the IBC framework change, the government has left out on the problem of piling up of NPAs unanswered as scrutiny-free loans have more chances of turning into non-performing assets. Moreover, it has further strained the already stressed banking infrastructure of the country.
The decriminalization of offences in the Companies Act may provide possible relief with procedural compliance, but it may also jeopardise the whole deterrence factor associated with such offences. Furthermore, now the offences are to be transferred to the internal adjudication mechanism thereby, functioning becomes completely dependent on such IAMs’ efficacy only. The government has invariably tried to create a laissez-faire procedural framework and has sought to create an environment necessary for the growth of corporates and the same in turn leading to reviving the economy. However, the government has fallen a bit short in providing mechanisms beneficial for both the corporates and the society as there are many ambiguities and loopholes which will have detrimental effects.
Mridul Pateriya and Shikhar Nigam are students at Gujarat National Law University.
Photo Credits: Anindito Mukherjee/Bloomberg