Monetary Policy & Repo Rate

RBI Monetary Policy February ,2017 is what everyone is talking about today. The Newspaper’s headline today reads that -  RBI has taken a neutral stand and has kept the Repo Rate unchanged at 6.25% at its first monetary policy review of 2017. 

Now what is meant by monetary policy and Repo Rate? Well monetary policy are policies devised by the Central Bank of the country (RBI in case of India) to control the supply of money in the economy by controlling the interest rates to maintain price stability and achieve high economic growth. There are various instruments by which RBI controls the money flow and one such instrument is the Repo Rate and Reverse Repo rate. Where Repo rate is the rate at which RBI lends money to commercial banks in the event of any shortfall of funds, Reverse Repo Rate is the rate at which it pays banks for depositing surplus funds. Reduction in Repo rate helps the commercial banks to get money at a cheaper rate and increase in Repo rate discourages the commercial banks to get money as the rate increases and becomes expensive. Repo rate is also used as a tool to control inflation. In the event of inflation, RBI increases repo rate as this acts as a disincentive for banks to borrow from RBI. This ultimately reduces the money supply in the economy and thus helps in arresting inflation. The six-member Monetary Policy Committee, headed by RBI Governor, Urjit Patel, expects inflation to rise at 5% as against the targeted 4%. Thus, the have kept the interest rates unchanged, signalling a possible end to the downward interest cycle. Though the announcement came as a big surprise and have dashed the hopes of many of a rate cut , the rupee ended 0.32% stronger against dollar.

To read the full document of Sixth Bi-monthly Monetary Policy Statement, 2016-17 kindly visit RBI’s website.

References:

-RBI

-The Economic Times 9^th February 2017

-Monetary policy of India - Wikipedia

(This is a personal blog. Any views or opinions represented in this blog are personal and belong solely to the blog owner and do not represent those of people, institutions or organizations that the owner may or may not be associated with in professional or personal capacity unless explicitly stated. Any views or opinions are not intended to malign any religion, ethnic group, club, organization, company, or individual. All content provided on this blog is for informational purposes only. The owner of this blog makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site. The owner will not be liable for any errors or omissions in this information nor for the availability of this information. The owner will not be liable for any losses, injuries, or damages from the display or use of this information.)

Decoding Insolvency and Bankruptcy Code – Part II

(Insolvency Resolution and Liquidation for Corporate Persons)

Part II of the Insolvency & Bankruptcy Code deals with Insolvency Resolution and Liquidation for Corporate Persons, which are covered under Section 4 – Section 32.

Corporate Persons means

•           a company as defined in clause (20) of section 2 of the Companies Act, 2013,
•           a limited liability partnership, as defined in clause (n) of sub-section (1) of section 2 of the Limited Liability Partnership Act, 2008, or
•           any other person incorporated with limited liability under any law for the time being in force but shall not include any financial service provider;

Section 4 deals with the applicability of this part & states that Part II will be applicable to matters relating to the insolvency and liquidation of corporate debtors where the minimum amount of the default is one lakh rupees. Although CG may notify minimum or higher amount which shall not be more than 1 crore rupees.

Section 6 identifies the persons that can initiate the Corporate Insolvency Resolution Process (CIRP). These are the financial creditor, an operational creditor or the corporate debtor itself.

Here “Creditor” means any person to whom a debt is owed and includes:

•           a financial creditor,
•          an operational creditor,
•          a secured creditor,
•          an unsecured creditor and
•     a decree holder

The code has identified operational creditor and given him the power to initiate CIRP. “Operational Creditor” basically is a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred. Whereas “Operational Debt” means a claim in respect of the provision of goods or services including employment or a debt in respect of the repayment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority.

“Corporate Applicant” means—

(a) corporate debtor; or

(b) a member or partner of the corporate debtor who is authorized to make an application under the constitutional document of the corporate debtor; or

(c) an individual who is in charge of managing the operations and resources of the corporate debtor; or

(d) a person who has the control and supervision over the financial affairs

of the corporate debtor;

For the purposes of this Part, Adjudicating Authority means National Company Law Tribunal constituted under section 408 of the Companies Act, 2013

A new term “Information Utilities” have also come up in this Code which is basically the depositories of financial information. It will collect, collate, authenticate and disseminate financial information from listed companies and financial and operational creditors of companies. An individual insolvency database is also proposed to be set up with the goal of providing information on insolvency status of individuals.

Initiation of CIRP

Initiator	Financial creditor	Operational Creditor		Corporate Debtor
Section	7	8&9		10
Demand Notice	Not required	on the occurrence of a default, operational creditor will deliver a demand notice demanding payment the corporate debtor shall, within a period of ten days bring to the notice either, the existence of a dispute, if any or repayment of unpaid operational debt		Not Required
Filing Application	File application to Adjudicating Authority (AA)	After the expiry of the period of ten days, file application to AA		a corporate applicant may file an application to AA
Other Required Documents	-          record of the default recorded with the information utility -          the name of the resolution professional proposed to act as an interim resolution professional -          any other information	-          a copy of the invoice demanding payment or demand notice -          an affidavit to the effect that there is no notice given by the corporate debtor -          a copy of the certificate from the financial institutions maintaining accounts of the operational creditor -          such other information -          may propose a resolution professional to act as an interim resolution professional		-          its books of account and such other documents -          the resolution professional proposed to be appointed as an interim resolution professional.
Existence of Default	Adjudicating Authority within 14 days of the receipt of the application ascertain the existence of a default
Accept / Reject	Accept if -          a default has occurred -          the application is complete, -          there are no disciplinary proceedings pending against the proposed resolution professional Reject if -          default has not occurred -          the application is incomplete or -          any disciplinary proceeding is pending against the proposed resolution professional		Accept if -          Application is complete -          no repayment of the unpaid operational debt -          the invoice or notice for payment to the corporate debtor has been delivered by the operational creditor; -          no notice of dispute has been received or no record of dispute in the information utility -          no disciplinary proceeding pending against any resolution professional Reject if -          Application is incomplete -          there has been repayment of the unpaid operational debt -          the creditor has not delivered the invoice or notice for payment -          notice of dispute has been received by the operational creditor -          any disciplinary proceeding is pending against any proposed resolution professional		Accept, if Application is complete; or Reject if the application, is incomplete
	notice to the applicant by AA to rectify the defects in his application within seven days from the date of receipt of such notice
Commencement Period	CIRP shall commence from the date of admission of the application
Communication of the order	Within seven days of admission or rejection of such application

List of persons not entitled to make application.

1. a corporate debtor undergoing a corporate insolvency resolution process; or 
2. a corporate debtor having completed corporate insolvency resolution process twelve months preceding the date of making of the application; or
3. a corporate debtor or a financial creditor who has violated any of the terms of resolution plan which was approved twelve months before the date of making of an application under this Chapter; or
4.   a corporate debtor in respect of whom a liquidation order has been made. 

   

Time Frame

The CIRP shall be completed within a period of 180 days from the date of admission of the application to initiate such process. Although if a resolution is passed at a meeting of the committee of creditors by a vote of 75% of the voting shares the period can be extended up to but not exceeding 90 days. It is important to note that the extension of the period shall not be granted more than once.

Declaration of Moratorium & Public Announcement of CIRP

After admission of the application the AA shall, by an order, declare a moratorium & make a public announcement of CIRP. Moratorium is a temporary prohibition of an activity. A list of such prohibition is stated in Section 14 of the Code. It is specifically stated that where at any time during the CIRP, if the Adjudicating Authority approves the resolution plan or passes an order for liquidation of corporate debtor under section 33, the moratorium shall cease to have effect from the date of such approval or liquidation order, as the case may be.

It is important to note that during the period of moratorium the supply of essential goods or services to the corporate debtor as may be specified shall not be terminated or suspended or interrupted

In my next blog, I will discuss about appointment, tenure, duties of an Interim Resolution Professionals, Committee of creditors & appointment of Resolution professionals and their duties

References:

-Insolvency and Bankruptcy Code

- http://www.arthapedia.in/index.php?title=Insolvency_and_Bankruptcy_Code,_2016#ref4

(This is a personal blog. Any views or opinions represented in this blog are personal and belong solely to the blog owner and do not represent those of people, institutions or organizations that the owner may or may not be associated with in professional or personal capacity, unless explicitly stated. Any views or opinions are not intended to malign any religion, ethnic group, club, organization, company, or individual. All content provided on this blog is for informational purposes only. The owner of this blog makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site. The owner will not be liable for any errors or omissions in this information nor for the availability of this information. The owner will not be liable for any losses, injuries, or damages from the display or use of this information.)

Decoding Insolvency and Bankruptcy Code 2016 – Part I

(Introduction)

Insolvency and Bankruptcy code is very much in vogue these days. A new era of insolvency resolution has arrived and soon the Code shall be fully operational with its complete institutional infrastructure in place. The scope of Company Secretaries has increased manifold after the enactment of this code, as we have been recognized as Insolvency Professionals and can be appointed to conduct the corporate insolvency resolution process. Since the Law is new and at its inception, many of us have very little knowledge about it. I, through my blog, intend to explore the code and share my knowledge with professionals, stakeholders and people who want to know more about it.

Law of Insolvency owes its origin to the English law. Before the British came to India, there was no indigenous Law of Insolvency in the country. Its need was first felt in the Presidency towns, which were, Calcutta, Madras and Bombay. Presidency-Town’s Insolvency Act, 1909 and Provisional Insolvency Act 1920 dealt with insolvency of an individual and unincorporated entities and Companies Act and SICA were the acts which dealt with Corporate insolvency. But even though there were various acts that dealt with insolvency, many difficulties had to be faced by the corporates and individuals during the process of insolvency. It was found that there were a lot of hindrances in revival or quick disposal of companies due to multiplicity of litigation at different forums. On 31^st October, 2015, total 5141 winding up petitions were pending of which 1479 were more than 2 decades old. India though ranked at 130 out of 189 countries in ease of doing business, it stands at 136 for resolving insolvency, according to the world bank index report. There was a need of a uniform & comprehensive insolvency legislation. Various Committees such as Tandon Committee, Tiwari Committee, Goswami `Committee, Eradi Committee & J.J Irani Committee had earlier recommended creative restructuring, quick disposal, rehabilitation & revival and formation of Insolvency Tribunal. Owing to the need of a single insolvency framework The Code received the assent of the President of India on 28 May 2016. After the enactment of The Code, Presidency-Town’s Insolvency Act, 1909, Provisional Insolvency Act 1920 & SICA has been repealed. Further 11 legislations have been amended to fall in line with the Insolvency and Bankruptcy Code.  Much of the code has come into operation at present due to the fast release of notification & rules in the last quarter of 2016. The last legs of the institutional framework for insolvency resolution and liquidation of corporate persons are under process and the Insolvency and Bankruptcy Board of India (IBBI) has invited public comments on draft regulations on IUs (Information utilities – which we will study later) by February 7, 2017. “The code will help improve the ease of doing business as well as develop the debt market” - says IBBI chairperson M.S. Sahoo, a Company Secretary himself.

The Insolvency & Bankruptcy law aims to consolidate the existing laws into a single framework to facilitate reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner.

Usually, Insolvency and Bankruptcy are used interchangeably but there is a thin line differentiating the two. Insolvency, in legal terms, means a situation where the liabilities of a person or firm exceed its assets. It is a situation where an organization or an individual is unable to pay their debts to the lender(s). Whereas Bankruptcy is when the individual/organization is declared incapable of paying their dues and payable bills. It is interesting how the word Bankruptcy originated. In Italy, there was a famous medieval bridge over the Arno, where different merchants used to display their goods on a table. When a merchant could not pay his debts, their table (the "Banca") was physically broken ("rotta") by soldiers and thus the word Bankruptcy came into origin. Insolvency if handled correctly can prevent the debtor from becoming bankrupt. This is also the primary objective of IBL, to address the insolvency in a timely manner so as to provide the debtor with rehabilitation if possible.

The Code contains 255 sections (where section 245-255 relates to amendments to the various act) 5 parts, 7 chapters & 11 schedules. The 5 parts of the code are divided as follows:

Part I	Preliminary
Part II	Insolvency Resolution and Liquidation for Corporate Persons
Part III	Insolvency Resolution and Bankruptcy for Individuals and Partnership Firms
Part IV	Regulation of Insolvency Professionals, Agencies and Information Utilities
Part V	Miscellaneous

IBBI is the Regulatory body . NCLT/NCLAT is the Adjudicating Authority which will deal with the insolvency of Corporates whereas DRT/DRAT is the Adjudicating Authority which will deal with the insolvency of individuals and unlimited partnership. Insolvency agency, Insolvency Professionals and Information Utilities are the regulators in the code. (It is to be noted that the financial services sector are excluded in the code)

As corporate professionals, the important concept which we need to understand in detail is “Insolvency Resolution and Liquidation for Corporate Persons”. In my next blog, we will discuss more about it and some important definitions.

References:

-Webinar by ICSI

-Mondaq (Commencement Of A New Era Of Corporate Insolvency Resolution- The Insolvency And Bankruptcy Code, 2016 Close To Being Fully Implemented)

(This is a personal blog. Any views or opinions represented in this blog are personal and belong solely to the blog owner and do not represent those of people, institutions or organizations that the owner may or may not be associated with in professional or personal capacity, unless explicitly stated. Any views or opinions are not intended to malign any religion, ethnic group, club, organization, company, or individual. All content provided on this blog is for informational purposes only. The owner of this blog makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site. The owner will not be liable for any errors or omissions in this information nor for the availability of this information. The owner will not be liable for any losses, injuries, or damages from the display or use of this information.)

Corporate Social Responsibility and Role of Company Secretaries

Corporate social responsibility, often abbreviated "CSR," is a corporation’s initiatives to assess and take responsibility for the company's effects on environmental and social wellbeing. It is the commitment of businesses to contribute to sustainable economic development by working with employees, their families, the local community and society at large, to improve their lives in ways that are good for business and for development. The concept of CSR rests on the ideology of give and take. Companies take resources in the form of raw materials, human resources etc. from the society. By performing the task of CSR activities, the companies are giving something back to the society.

Among other countries, India has one of the oldest traditions of CSR. In the pre-industrialization period, which lasted till 1850, wealthy merchants shared a part of their wealth with the wider society by way of setting up temples for a religious cause. Moreover, these merchants helped the society in getting over phases of famine and epidemics by providing food from their godowns and money and thus securing an integral position in the society. With the arrival of colonial rule in India from the 1850s onwards, the approach towards CSR changed. The industrial families of the 19th century such as Tata, Godrej, Bajaj, Modi, Birla were strongly inclined towards economic as well as social considerations. However, it has been observed that their efforts towards social as well as industrial development were not only driven by selfless and religious motives but also influenced by caste groups and political objectives. During the independence movement, there was increased stress on Indian Industrialists to demonstrate their dedication towards the progress of the society. This was when Mahatma Gandhi introduced the notion of "trusteeship", according to which the industry leaders had to manage their wealth so as to benefit the common man. The emergence of the mixed economy saw the private sector taking a back seat while the public sector was seen as the prime mover of development. But, the public sector was effective only to a certain limited extent. This led to shifting of expectation from the public to the private sector and their active involvement in the socio-economic development of the country became absolutely necessary. In the 1990s the first initiation towards globalization and economic liberalization were undertaken. Controls and licensing system were partly done away with which gave a boost to the economy the signs of which are very evident today. Increased growth momentum of the economy helped Indian companies grow rapidly and this made them more willing and able to contribute towards a social cause. CSR has now become the need of growing business. Big corporates like Reliance Industries, Tata Group, Aditya Birla Group, The Coca-Cola Company, and Indian Oil Corporation are involved in serving the community. Many other organizations too have been doing their part for the society through donations and charity events. Today, CSR in India has gone beyond merely charity, donations and is approached in a more organized fashion.

At present, section 135 of companies act 2013 requires registered company with:

 (1) a net worth of `500 crores or more; or

 (2) a turnover of `1000 crore or more; or

 (3) a net profit of `5 crores or more in any fiscal year,

to constitute a Corporate Social Responsibility Committee of the Board and to contribute at least 2% of the average net profits of the company during the three immediately preceding financial years towards CSR activities as listed out in Schedule VII to the said Act. It is important to note that the words “three immediately preceding financial years” seems to indicate that only consistent profit making entities would be bound by the CSR mandate. Further, the law requires that the CSR committee will consist of three or more directors, out of which at least one director shall be an independent director. There are few exceptions for a private company. It is specified that a private company which is not required to appoint an independent director on the board, shall have CSR committee without an independent director. Also, if the private company has only two directors the CSR committee can be constituted with such two directors. The CSR Committee needs to formulate and recommend Corporate Social Responsibility Policy which will indicate the activity or activities to be undertaken by the company as specified in Schedule VII and the amount of expenditure to be incurred on the CSR activities. Where the company fails to spend such amount, the Board shall in its report specify the reasons for not spending the amount. The Company shall give preference to local areas where it operates, for spending amount earmarked for CSR activities.

The CSR works on the principle of – Comply or Explain. And Although there is no penal provision for noncompliance under section 135, penalties can be levied under section 134(3)(o) & section 134(8). Section 134 which deals with Board’s Report, sub section (3)(o) states that Board’s report should include details about the policy developed and implemented by the company on CSR initiates taken during the year. Not discharging the above mention duties will attract penalties as specified in section 134(8) which are Fine, not less than fifty thousand rupees, may extend to twenty-five lakh rupees; and Every officer of the company in default shall be: punishable with imprisonment for a term which may extend to three years; or with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees, or with both.

An assessment of CSR expenditure of 7,334 companies for 2014-15 showed that 4,195 companies did not incur any CSR expenditure. Collectively, 3,139 companies have spent a total of Rs 8,803 crore on various CSR initiatives. Recently it was in the news that “ 530 companies violated the CSR norm as instances of “non-compliance” as well as “non-disclosure” and have been detected for the 2014-15 fiscal –which was also the first year of implementation of the norm.

What is the reason of such violation? 
Some experts say that there is an acute shortage of CSR trained manpower or company officials do not get adequate time to look at CSR functions as they do not think it is a priority over business.  Some companies claim that they do not find suitable NGO for implementation of the project and such other lame excuses. The companies need to understand the main purpose of CSR. A company does business and earns profits only when there is a society around consisting customers, employees, vendors who help the company in producing and selling goods and services.  The company also uses natural resources like air, water, minerals, oil, energy etc. for producing goods.  The process of manufacturing certainly causes some damage to the planet by way of pollution.  It is, therefore, the responsibility of the company to compensate for such losses to the planet and should voluntarily carry out social activities under CSR irrespective of the law. 

As Company secretaries are often described as the ‘conscience of the company’ we as Company Secretary owe something to the Society on behalf of the Company in which we work. A company secretary, being a vital employee, holds office based on the concept of trust, reflecting the confidentiality of the role. They are considered as the direct nexus to the board of directors, and therefore is suited to playing a significant role in CSR formulation and implementation. Shareholders expect the board of directors to manage the board in their best interests as a primary responsibility. The company secretary has a duty to act on behalf of the stakeholders for any unethical behavior. We as Governance professionals should ensure that effective CSR program is implemented and supported by corporate levels, oversight mechanisms, training programs and accountability measures.

ICSA guidelines state that:

“The company secretary should share responsibility with relevant specialist functions for ensuring that the board is aware of current guidelines in this area and that it identifies and takes account of the significance of corporate responsibility issues in its stewardship and oversight of the company”.

Let us as Corporate legal advisors explore the immense opportunity involved in CSR implementation by becoming the guiding light to corporates and ensuring sustainable development of our very own society and our Nation at large.

References:

Chartered Secretary April 2015 (An Insight into the Corporate Social Responsibility – by Dr. B. P. Srivastava)

Chartered Secretary Nov 2015 (Corporate Social Responsibility and Swachh Bharat Abhiyan Sathyanarayana Reddy P & Dr. V. Balachandran)

http://indianexpress.com/article/business/companies/over-530-companies-may-face-action-for-csr-norm-violations-4497321/

http://www.csrtimes.com/community-articles/csr-first-year-in-retrospect/ERJdtjXqAY

http://www.investopedia.com/terms/c/corp-social-responsibility.asp

https://en.wikipedia.org/wiki/Evolution_of_corporate_social_responsibility_in_India

http://www.corplaw.ie/blog/bid/397854/The-Company-Secretary-Corporate-Social-Responsibility

https://www.linkedin.com/pulse/penalty-non-compliance-csr-provisions-under-companies-rohit-goyal

(This is a personal blog. Any views or opinions represented in this blog are personal and belong solely to the blog owner and do not represent those of people, institutions or organizations that the owner may or may not be associated with in professional or personal capacity, unless explicitly stated. Any views or opinions are not intended to malign any religion, ethnic group, club, organization, company, or individual. All content provided on this blog is for informational purposes only. The owner of this blog makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site. The owner will not be liable for any errors or omissions in this information nor for the availability of this information. The owner will not be liable for any losses, injuries, or damages from the display or use of this information.)