The Government of India has recently implemented several amendments to the Insolvency and Bankruptcy Code (IBC) and the Companies Act, 2013. The reason for these adjustments was to enhance the ease of doing business in India. As part of the Atmanirbhar Bharat Abhiyan economic stimulus package, these changes are being made to improve India’s ranking in the World Bank’s ease of doing business report, which currently sits at 63rd out of 190 countries.
Amendments to Insolvency and Bankruptcy Code (IBC)
The government has instituted several key alterations to the IBC. For one, the minimum threshold to initiate insolvency proceedings has been raised from Rs.1 lakh to Rs.1 crore. This significant change will primarily affect Micro, Small and Medium Enterprises (MSMEs), making them less vulnerable to insolvency proceedings.
Further, there has been a suspension of fresh initiation of insolvency proceedings for up to a year, subject to the pandemic’s progression. Additionally, the Central Government has been empowered to exclude Covid-19 related debt from the definition of “default” under the IBC for triggering insolvency proceedings.
Decriminalisation under Companies Act, 2013
Several decriminalisation measures have also been introduced under the Companies Act, 2013. The goal here is to remove criminal penalties from all sections of the Act, barring those dealing with fraudulent conduct. Offences now decriminalised include administrative ones, such as failing to file Corporate Social Responsibility (CSR) reports on time or not rectifying the register of members following orders from the National Company Law Tribunal (NCLT).
Certain offences previously classified as compoundable will no longer carry the threat of imprisonment. Compoundable offences are those punishable either by fines or incarceration. Some offences under the Act have been entirely removed, while others have been transferred from NCLT’s jurisdiction to an in-house adjudication mechanism overseen by the Registrar of Companies (RoC), which is authorised to determine penalties for offences under the Act.
Fostering Fundraising Opportunities for Companies
Further changes to support companies’ fundraising capacities include permitting direct listing of securities by Indian public companies in allowable foreign jurisdictions and not considering private companies which only want to list Non-Convertible Debentures (NCDs) on stock exchanges as listed companies. This provides additional funding sources for companies not wishing to adhere to listed company regulations.
Rationale Behind the Amendments
The decriminalisation efforts aim to retract regulations implemented in 2014 to increase corporate compliance. Now that compliance levels have more or less improved, the government found it necessary to enhance the ease of doing business and is starting to relax criminal provisions accordingly.
These changes are expected to alleviate company woes by letting them focus on business revival rather than stressing over defaults and compliance. In particular, firms and especially MSMEs, who have been significantly affected by the Covid-19 crisis, will find their financial situation eased.
These amendments contribute towards a three-fold goal: reducing the burden on company courts, securing investor interests, and facilitating ease of doing business. The move could also potentially incentivise domestic and global investments, especially in the post-Covid-19 world.
Potential Issues Arising from the Amendments
Despite the promising advantages, the amendments might bring about some issues as well. For one, these changes could hinder the recovery proceedings of financial institutions, leading to an increase in non-performing assets. The insolvency initiation suspension for up to a year may shield promoters from losing control over their companies but it doesn’t prevent creditors from pursuing recoveries through other methods. Furthermore, the decriminalisation of certain provisions in the Companies Act does not directly relate to Covid-19 and had been announced before the lockdown as part of previously planned reforms.