Recent Legal and Regulatory Changes Impacting Debt Transactions

In March 2020, there have been several changes in the Indian legal and regulatory landscape that will have an impact on debt transactions. Many of these changes have been precipitated due to the nationwide lock-down imposed as a result of COVID-19. The key changes are summarised below.

1. Insolvency regime

• Increase in default threshold: The threshold for initiating the corporate insolvency resolution process (“CIRP”) under section 4 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) has been increased from Rs. 100,000 to Rs. 10,000,000. This move will benefit various companies, especially medium and small enterprises, who may be unable to repay their debts in a timely manner and be forced into insolvency due to COVID-19.
  
  
• Extension of CIRP timelines: The period of lockdown (i.e. March 24, 2020 to April 15, 2020) in relation to COVID-19 will be excluded for the purpose of calculating the 330-day period for completion of the CIRP. This will be applicable for all cases where the CIRP has been initiated and pending before any bench of the National Company Law Tribunal (“NCLT”) or in appeal before the National Company Law Appellate Tribunal (“NCLAT”).
  
  
• Extension of timelines due to lockdown: The Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (“CIRP Regulations”) were amended to provide that if any activity in relation to the CIRP cannot be completed during the lockdown period imposed by the Government due to COVID-19, then such lockdown period will not be counted for the purposes of any timeline within which such activity has to be completed under the CIRP Regulations. This will provide a breather to many resolution professionals who were struggling to complete certain activities given the nationwide lockdown.
  
  
• Priority financing: The Central Government has sponsored the Special Window for Affordable and Middle-Income Housing Investment Fund I for providing priority debt financing for completion of stalled housing projects that are in the affordable and middle-income housing sector. Any debt availed from such fund will be treated as “interim financing” under the IBC and will receive priority in repayment under the CIRP or liquidation of the corporate debtor.
  
  
• Special GST process: Corporate debtors undergoing CIRP have to obtain a new GST registration in each state and union territory where they are carrying on business. The same must be obtained within 30 days of appointment of the interim resolution professional or resolution professional. Where any CIRP is ongoing on March 21, 2020 (the date of the notification), then the new registration has to be obtained within 30 days of such notification. The process set out in the notification has to be followed for filing returns and availing input tax credit.
  
  
• Applicability to Jammu & Kashmir: The application of the IBC has been extended to the Union Territory of Jammu and Kashmir with effect from March 18, 2020 pursuant to the Jammu and Kashmir Reorganisation (Adaptation of Central Laws) Order, 2020.
  
  
• December 2019 Ordinance codified by an IBC amendment: Various amendments that were introduced to the IBC pursuant to an ordinance in December 2019 were codified pursuant to a formal amendment to the IBC on March 13, 2020. These amendments are effective from December 28, 2019 (the date of the ordinance). The key changes brought about pursuant to the ordinance and this amendment include the following:
  
  (i) Restrictions on governmental authorities and regulators from suspending or terminating any license, quota, concession, clearance or similar right granted to the corporate debtor;(ii) No interruption of supply of goods and services to the corporate debtor which are critical to preserve the value and manage the operations of the corporate debtor
  
  (iii) Protection to the corporate debtor its assets from offences committed prior to the CIRP period by the erstwhile management and promoters of the corporate debtor; and
  
  (iv) Minimum number or percentage of applicants required to initiate CIRP proceedings by certain classes of creditors.

 

2. Moratorium permitted by the Reserve Bank of India (“RBI”)

On March 27, 2020, the RBI announced certain regulatory measures to ease the burden of debt servicing brought about by disruptions on account of COVID-19. The measures were aimed at ensuring continuity of viable businesses. One of the measures was to provide a moratorium to borrowers.

• Moratorium on Term loans: The RBI permitted all commercial banks (including regional rural banks, small finance banks and local area banks), co-operative banks, all-India Financial Institutions, and non-banking financial companies (including housing finance companies) (“lending institutions”) to grant a moratorium in respect of term loans (including agricultural term loans, retail and crop loans), of three months on payment of all “instalments” falling due between March 1, 2020 and May 31, 2020. The “instalments” will include (i) principal and/or interest components, (ii) bullet repayments, (iii) equated monthly instalments, and (iv) credit card dues. The repayment schedule for such loans as also the residual tenor, will be shifted across the board by three months after the moratorium period. However, interest will continue to accrue on the outstanding portion of the term loans during the moratorium period. It is noteworthy that the moratorium related provisions are not applicable to foreign lenders, foreign portfolio investors (“FPIs”), mutual funds or alternative investment funds that have extended any debt to Indian borrowers.
  
  
• Deferment of interest on Working capital facilities: In relation to working capital facilities sanctioned in the form of cash credit/overdraft (“CC/OD”), lending institutions have been permitted by RBI to defer the recovery of interest applied in respect of all such facilities during the period from March 1, 2020 upto May 31, 2020 (“deferment”). The accumulated accrued interest will be recovered immediately after the completion of this period.
  
  
• Recalculation of Drawing power: Lending institutions can also recalculate the drawing power of borrowers facing stress due to COVID-19 in relation to CC/OD facilities sanctioned to them. The recalculation can be by reducing the margins and/or by reassessing the working capital cycle. This relief is available in respect of all such changes effected up to May 31, 2020 and contingent on the lending institutions being satisfied that the change is necessitated due to a fallout of COVID-19.
  
  
• Asset classification: Any moratorium / deferment / recalculation of drawing power will not be treated as a concession or change in terms and conditions of loan agreements due to financial difficulty of the borrower under the RBI (Prudential Framework for Resolution of Stressed Assets) Directions, 2019 dated June 7, 2019. Therefore, such measure itself will not result in a downgrade of asset classification. The asset classification of term loans which are granted any relief mentioned above will be determined based on the revised due dates and the revised repayment schedule. Further, for working capital facilities where relief is provided, the special mention account status and the out of order status will be evaluated considering the application of accumulated interest immediately after the completion of the deferment period as well as the revised terms.
  
  
• No adverse impact on credit history: Any rescheduling of payments, including interest, will not qualify as a default for the purposes of supervisory reporting and reporting to credit information companies (“CICs”) by the lending institutions. CICs shall ensure that the actions taken by lending institutions pursuant to the above announcements do not adversely impact the credit history of the beneficiaries.
  
  
• Board approved policy: The board of each lending institution must frame appropriate policies to deal with the above measures. The policies must set out objective criteria for considering the abovementioned reliefs and must also be made available in the public domain.

 

 

3. Increased corporate bond limits

The RBI has increased the limit for FPI investment in corporate bonds to 15% of the outstanding stock for the financial year April 1, 2020 to March 31, 2021. The revised limits for FPI investment in corporate bonds are as follows:

FPI Investment limit in corporate bonds for FY 2020-2021	Rs. (crores)
Current limit	3,17,000
Revised limit: April 1, 2020 to September 2020	429,244
Revised limit: October 2020 to March 2021	541,488

 

4. Time periods for creating reserves extended

• Under the Companies Act, 2013, certain type of companies that have issued secured debentures are required to invest at least 15% of the value of debentures maturing in the next financial year into certain prescribed form of investments by April 30. The timeline to make such prescribed investments has now been extended to June 30 for this financial year.
  
  
• Under the Companies Act, companies which have accepted deposits from the public or its members have to deposit an amount equal to 20% of the deposits maturing in the following financial year in a separate deposit repayment reserve account with a scheduled bank. Such deposit has to be made by April 30 each year. The timeline for this deposit has now been extended to June 30 for this financial year.

 

 

5. Certain relaxations under the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR Regulations”)

• Financial information: Companies that propose to issue non-convertible debentures, non-convertible preference shares or commercial paper which are to be listed can now provide audited financial information for the period ending September 30, 2019 for all issuances upto May 31, 2020 (instead of issuances upto March 31, 2020).
  
  
• Extension of timelines for filings/disclosures: Timelines for certain filings and disclosures that need to be made in relation to listed non-convertible debentures, non-convertible preference shares or commercial paper have been extended. These include the following: (i) The timeline for initial disclosures for large corporates have been extended by 45 days upto June 30, 2020; (ii) The timeline for annual disclosures for large corporates have been extended by 60 days upto June 30, 2020; (iii) The timeline for declaration of half-yearly financial results has been extended by 45 days to June 30, 2020; and (iv) The timeline for declaration of annual financial results has been extended by 30 days to June 30, 2020.

 

 

6. Encumbrances on units of Real Estate Investment Trusts (“REITs”)

• Creation of encumbrance: On March 23, 2020, the Securities and Exchange Board of India (“SEBI”) has, by way of a circular, permitted sponsors and sponsor group entities holding any units under the SEBI (Real Estate Investment Trusts) Regulations, 2014 (“REIT Regulations”) during the mandatory holding period to create an encumbrance on such units. The encumbrance will include a pledge, lien, negative lien, non-disposal undertaking etc. or any other covenant, transaction, condition or arrangement in the nature of encumbrance. Any agreement in relation to the encumbrance shall include the conditions for creation and invocation of encumbrance under the SEBI circular.

• Invocation of encumbrance: Any encumbrance cannot be invoked during the holding period prescribed under the REIT Regulations unless the following conditions are fulfilled: (i) the person(s) invoking the encumbrance (whether directly or through any trustee or agent acting on its behalf) shall get itself or its nominee to become re-designated sponsor upon compliance with the terms and conditions for re-designation of sponsor as specified under REIT Regulations; however this condition is not applicable in case the person invoking the encumbrance is already a member of the sponsor group; and (ii) the re-designated sponsor has to fulfil the obligations specified for sponsor under REIT Regulations.

• Disclosures of encumbrance to the REIT manager: The sponsor(s) and sponsor group entity creating any encumbrance on the REIT units held by them has to provide details of the encumbrance to the manager of the REIT within two working days from the date of creation of such encumbrance in a prescribed format. Further, they must also notify the manager of any change in the above information pursuant to release or invocation of encumbrance, or in any other manner, within two working days from the date of such event.

• Disclosures to stock exchanges: Within two working days from the receipt of encumbrance related details mentioned above, the REIT must disclose such information to every stock exchange where units of the REIT are listed. The disclosure has to be in a prescribed format.

 

 

7. Encumbrances on units of Infrastructure Investment Trusts (“INVITs”)

• Creation of encumbrance: On March 23, 2020, the SEBI has, by way of a circular, permitted sponsors and sponsor group entities holding any units under the SEBI (Infrastructure Investment Trusts) Regulations, 2014 (“INVIT Regulations”) during the mandatory holding period to create an encumbrance on such units. The encumbrance will include a pledge, lien, negative lien, non-disposal undertaking etc. or any other covenant, transaction, condition or arrangement in the nature of encumbrance. Any agreement in relation to the encumbrance shall include the conditions for creation and invocation of encumbrance under the SEBI circular.
  
  

• Invocation of encumbrance: Any encumbrance cannot be invoked during the holding period prescribed under the INVIT Regulatio
  
  
• Disclosures of encumbrance to the INVIT manager: The sponsors creating any encumbrance on the INVIT units held by them has to provide details of the encumbrance to the manager of the INVIT within two working days from the date of creation of such encumbrance in a prescribed format. Further, they must also notify the manager of any change in the above information pursuant to release or invocation of encumbrance, or in any other manner, within two working days from the date of such event.
  
  
• Disclosures to stock exchanges: Within two working days from the receipt of encumbrance related details mentioned above, the INVIT must disclose such information to every stock exchange where units of the INVIT are listed. The disclosure has to be in a prescribed format.

 

 

8. Extension of amendments to stamp duty on Debentures

• Pursuant to certain amendments that were made to the stamp duty law, the stamp duty rate on the debentures was modified from a maximum of 0.25% or Rs. 25 lacs, whichever was lower, to an ad valorem rate of 0.005% of the value of the debentures. These new stamp duty rates were to come into effect from April 1, 2020. However, they are now proposed to come into effect from July 1, 2020.