Background

On 30 March 2017, the Central Government notified 1 April 2017 as the appointment date for implementation of, inter alia, substantive provisions of Chapter V of the Insolvency and Bankruptcy Code, 2016 (Code) relating to information utilities. Through this notification, all sections under Chapter V of the Code dealing with information utilities (IUs) have been notified (sections 209 – 216(1)) except sub-section (2) of section 216. Simultaneously, the Insolvency and Bankruptcy Board of India (Board), notified the Insolvency and Bankruptcy Board of India (Information Utilities) Regulations 2017 (Regulations) on 31 March 2017, which provide a broad framework for the registration and regulation of IUs. The Regulations seek to put in place robust information infrastructure for a sound insolvency and bankruptcy process under the Code, intended to facilitate availability of relevant information and ensure time bound completion of the insolvency and bankruptcy process.

This Ergo Newsflash provides a snapshot of the provisions of the Code and the Regulations governing the framework for registration, regulation and the functioning of IUs.

Eligibility and conditions of registration

The Code mandates a certificate of registration to be procured from the Board by any person intending to carry out the business of an IU. The Regulations read with the Code provide that only public companies with a minimum net worth of INR 50,00,00,000 are eligible to be registered as IUs. Certain other eligibility criteria have been set out in Regulation 3 which inter alia, include the following:

  • the sole object of the public company should be to provide core services (as defined in the Code);
  • not more than 49% of its total voting power or its paid up-equity capital can be held by persons resident outside India; and
  • the IU, its promoters, its directors, its key managerial persons and persons holding more than 5% of its paid-up equity share capital or its total voting power, are fit and proper persons as per the Regulations. The Regulations prescribe the following criteria to be considered by the Board for determining whether a person is ‘fit and proper’:
  • integrity, reputation and character;
  • absence of conviction by a court for an offence. However, the Regulations specify that a person may be considered fit and proper, if the person has been sentenced to imprisonment for a period of less than 6 months;
  • absence of restraint order, in force, issued by a financial sector regulator or the National Company Law Tribunal (NCLT); and
  • financial solvency.

The issuance of the certificate of registration to an IU shall be subject to certain conditions set out under Regulation 6(2) being met and a certificate of registration granted will be valid for a period of five years from the date of its issue. Any application for renewal of registration is required to be made by an IU at least six months prior to the expiry of its registration.

In-principle approval

The Regulations provide for an in-principle approval to be obtained by any person seeking to establish an IU which shall be valid for a maximum period of one year. Such in-principle approval may be granted subject to the satisfaction of the Board that the applicant is a fit and proper person and it would be able to meet the registration criteria prescribed under Regulations. During the validity of the in-principle approval, an application for obtaining a certificate of registration may be made to the Board.

Shareholding limits

The Regulations prescribe that ordinarily not more than 10% of the paid-up equity share capital of an IU shall be held directly or indirectly, by any person either by itself or together with persons acting in concert (PAC). However, certain persons such as government companies, stock exchange, depository and banks etc. are permitted to hold up to 25% of the paid-up equity share capital by themselves or with PAC. An initial shareholding of up to 51% in an IU is permitted for a period of three years from the date of registration of an IU which shall subsequently be diluted to 10% or 25%, as the case may be. These shareholding prescriptions however do not apply in case of shareholding by the Central Government or a State Government.

Composition of the Governing Board

As per the Regulations, more than 50% of the directors of the governing board of an IU are required to comprise of independent directors at the time of their appointment and at all times during their tenure as directors.

Services

IUs are required to provide core services and other services in accordance with the Code and services incidental to these services with the permission of the Board.

  • Core Services
  • Scope of Services

The scope of core services envisaged to be rendered by an IU includes:

  • accepting electronic submission of financial information in a specified form and manner;
  • safe and accurate recording of financial information;
  • authenticating and verifying the financial information submitted by a person; and
  • providing access to information stored with an IU to persons as may be specified.

This suggests that IUs must provide for submission of “financial information” by entities, storage, authentication of such information and also provide access to such stored information as and when required. The scope of “financial information” under the Code includes records pertaining to:

  • debt of a person;
  • liabilities when the person is solvent;
  • assets of a person over which security is created;
  • instances of default by a person against any debt (if any); and
  • records of the balance sheet and cash-flow statements of a person.
  • Registration of users: A person is required to be registered with an IU for submitting information to as well as for accessing information stored with an IU. IUs are required to verify the identity of each such person submitting or accessing information, grant registration to each person, and provide a unique identifier to each person and each record. Further, as per the Regulations no person can be registered with more than one IU. Each IU is required to maintain a list of registered users, unique identifiers of the registered users and records, which shall also be made available to all IUs and the Board.
  • Acceptance and receipt of information: Financial creditors and operational creditors are required to submit financial information to the IUs and in case of financial creditors, they are also required to submit information relating to the assets over which security has been created in accordance with the Regulations. The Code specifies that the IU must accept information from specified persons and not from persons unrelated to the debt transaction. The Code also provides for rectification and modification of financial information submitted to IUs, along with timelines and procedure for such rectification and modification.
  • Authentication of information: The Code specifically requires the IUs to get the information received from various persons authenticated by concerned parties before storing such information. This is to ensure that the creditor and debtor authenticate the information to avoid any challenge to the veracity of such information by any party in a court of law. The main purpose of IUs is to store accurate information safely and reliably. Thus, IUs are required to have high quality data storage systems to ensure that the information submitted is not lost.
  • Storage of information: IUs are required to store all the information received in a facility located in India and should have high quality data storage systems to avoid loss/ corruption of data.
  • Access to information: The information stored with an IU can only be accessed by certain specific categories of persons, which includes inter alia any user who submitted the information, NCLT, insolvency professionals and the Board.
  • Information of default: An IU is required to expeditiously authenticate and verify information of default on its receipt and communicate the information of default to the registered users who are creditor(s) of the defaulter or sureties to the debt in respect of which information of default has been received.
  • Services to insolvency professionals: An insolvency professional may submit reports, registers, and minutes in respect of any insolvency resolution, liquidation or bankruptcy proceedings to IUs. However, such information submitted can only be accessed by the insolvency professional himself; the Board or the NCLT and the other permitted category of persons cannot access such information. Hence, access to the information submitted by insolvency professionals is restricted to a larger extent as compared to other information received and stored by IUs.
  • Non-Core Services

In addition to core services, IUs are also required to provide certain additional and ancillary services which are essential to preserve the evidentiary value of the information stored with the IUs. These services include providing access to information stored with other IUs and enabling portability of information.

An IU may provide an option to enable users to access information stored with any other IU. An IU may also import information from such other repositories as notified by the Board from time to time as long as such importation does not conflict with any other provisions of the Code. This will aid in avoiding duplicity of submission of information which would be a time consuming and inefficient process.

Khaitan Comment

The use of the information infrastructure offered by the IUs is expected to help in creation of a financial information database of all entities availing credit in the country. This database is envisioned to facilitate better decision making by creditors and encourage discipline amongst debtors. Since the key objective of the Code is to ensure time bound and efficacious insolvency resolution process, the role of IUs is critical in saving time otherwise lost in gathering evidence of default and other financial information required for insolvency resolution. The role etched out for IUs under the Code makes them the backbone of the insolvency process and hence it is important that entities which are given license to operate as IUs are technically and administratively sound to handle the role of information repositories and are also monitored so as to ensure that the records of IUs are comprehensive, reliable and updated.