Some key amendments to the e-commerce policy, Companies Act 2013 and the Insolvency and Bankruptcy Code were introduced in 2018. This update summarises some of the key developments in the past year and gives a brief overview of what can be expected in 2019.
THE YEAR THAT WAS
The year 2018 witnessed changes in key legislations including the Insolvency and Bankruptcy Code, 2016 (IBC) and Companies Act, 2013, aimed at streamlining processes and liberalizing restrictions which were viewed as bottlenecks. Towards the end of the year, tweaks to the e-commerce policy became a major talking point because of their potentially widespread ramifications on major e-commerce players and investments in the sector in general.
MAJOR DEVELOPMENTS IN 2018
1. Revisions to the Companies Act, 2013
(a) Significant Beneficial Ownership Rules
On 14 June 2018, the Ministry of Corporate Affairs (MCA) introduced rules placing disclosure obligations on the ultimate owners of beneficial interest in Indian companies. Given the ambiguity as to the scope and impact of these rules - specifically on disclosure requirements in case of structures involving multiple levels of intermediate corporate shareholding, compliance requirements under these rules were kept in abeyance pending further clarifications/amendments from the MCA.
(b) Other Changes
Certain provisions of the Companies (Amendment) Act, 2017 came into force in 2018. The key changes include:
- Relaxation of restriction on loans to interested entities: Previously, there was a complete prohibition on inter-corporate loans amongst companies having common directors (with certain exceptions like inter-corporate loans between holding companies and wholly owned subsidiaries). This prohibition has now been relaxed to permit the grant of such loans for funding principal business activities of the borrower, subject to receipt of shareholders' approval by the lender.
- Issuance of shares at a discount: Previously, issuance of shares at a discount from face value was prohibited. In the context of financially distressed companies, there were concerns that the diminished equity value of such companies would not justify conversion of loans to shares at face value. With the amendment, companies can issue shares at a discount to its creditors when its debt is converted into shares pursuant to any statutory resolution plan or debt restructuring scheme.
2. FDI in E-Commerce
Amid significant backlash from various trader associations and allegations of illegal business models in the e-commerce sector, the Department of Industrial Policy and Promotion (DIPP) issued Press Note 2 on 26 December 2018, seeking to plug certain loopholes in the existing FDI policy for e-commerce. This was closely followed by a clarification on 3 January 2019, outlining some of its policy objectives and responding to media criticism. Key requirements of Press Note 2 include:
- Equity participation: Marketplace entities are prohibited from selling products of sellers in which such marketplace entities or their group companies have an equity interest.
- Inventory ownership and control: In addition to the existing restriction preventing marketplace entities from owning inventory, the policy now also prevents such marketplace entities from having any control over such inventory. If more than 25% of a seller's inventory is purchased from a marketplace entity or its group companies then such marketplace entity will be deemed to have control over the inventory sold by such seller.
- Level playing field for all sellers: Services provided by marketplace entities (such as warehousing, logistics, order fulfilment, advertising, marketing, payments, financing, etc.) are now to be provided on an arm's length basis and in a fair and non-discriminatory manner to all sellers.
The above requirements come into effect from 1 February 2019. E-commerce marketplaces are required to submit to the Reserve Bank of India a compliance certificate, together with a report of its statutory auditor, by 30 September of each year evidencing compliance with these requirements for the preceding financial year.
3. Revisions to IBC
Some important changes that were introduced are:
- Recognition of Homebuyers as Financial Creditors: Homebuyers have been explicitly categorized as financial creditors under the IBC. This will give them the right to initiate insolvency against builders in case of default as well as a seat in the committee of creditors through an authorized representative.
- Reduced Voting Thresholds for decisions by Committee of Creditors: Prior to the amendment, there was just one voting threshold for decisions of the committee of creditors i.e. 75% of the voting share. To ease decision making and facilitate resolution, the amendment has introduced two voting thresholds: (i) 66% for important matters such as approval of a resolution plan, decision to liquidate, and appointment of a resolution professional; and (ii) 51% for other routine matters.
4. The Specific Relief (Amendment), 2018
The Specific Relief (Amendment Act), 2018 radically amends the Specific Relief Act, 1963 to make specific performance the default remedy for most contractual disputes. This aims to limit the traditional common law rule of monetary damages being the primary recourse. Further, the amendment seeks to reduce the discretion involved in grant of relief of specific performance. This should have a positive impact on enforceability of contracts in India, which has remained a longstanding complaint against the Indian business environment in general.
It would be interesting to track the impact of some of the changes introduced in 2018 on the general business environment and ease of doing business in India.
Amendments have been recently introduced to the significant beneficial ownership rules and more clarity is expected on FDI in e-commerce. The DIPP has already issued certain clarifications regarding Press Note 2. In addition, a full-fledged national e-commerce policy is also expected to be introduced shortly.
The IBC faces a significant test, with the efficacy of the legislation hinging on the swift resolution of high-profile insolvency matters some of which continue to drag on.