A Look at Recent Developments Having an Impact on India’s Legal Services Sector

  • April 11, 2023
  • Shuva Mandal

India’s economic growth is a spontaneous generator of business for law firms and the country seems to have regained its mojo despite the impact of the pandemic, continuing global geopolitical tensions and high inflation. We are expected to be one of the fastest-growing large economies in 2023, by various estimates.

Apart from the inherent attractiveness of India’s domestic market, the implementation or tweaking of various policies (e.g., the Production Linked Incentive scheme, the opening of the space sector to the private sector and encouragement of public-private partnerships, regulations around drones, etc.) has been a major force of economic activity. There is also the fact that multiple new technologies (AI/ML, drones, 5G, IIoT, 3D printing, etc.) have matured rapidly, creating new use cases in business, healthcare, retail, defence, space, agriculture, mining, governance, etc.  In turn, these have evolved as new ventures. 

For law firms and lawyers, such a multi-faceted business expansion is a growth enabler. The slowdown in certain sectors (IT and edtech, for example) has led to the unfortunate consequence of layoffs. This trend is visible not just among newer ventures but also applies to unicorns and more-established enterprises. This too is a driver of growth for professionals in the legal sector.

Factors that will impact Indian law firms

Three specific triggers will shape the fortunes of law firms and lawyers in the next year or so, which are as follows: –

  • The operationalizing of Grievance Appellate Committees (GACs);
  • The Bar Council’s decision to allow foreign law firms/lawyers to practice in India (under certain conditions); and
  • The trend of global enterprises from different sectors establishing and growing their captives (GCCs) in India.

Grievance Appellate Committees

The Grievance Appellate Committees (GACs) were constituted under the Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules, 2021, to make the internet and social media platforms (the so-called “intermediaries”) safer and more trusted and the platform or service providers and users more accountable. 

Social media users who have complained to social media firms such as Meta, Twitter, Google etc. and have not received a satisfactory response from the firms’ designated grievance officers can appeal to the GAC which is a digital platform operational w.e.f. March 1, 2023. After due consideration of every appeal, the GAC will either uphold or overrule the decision of the social media intermediary’s grievance officer; it may also recommend that the intermediary take different actions altogether from what was recommended or taken by the grievance officers.

To comply with the new rules, social media intermediaries will need to ensure that adequate legal professionals are allocated to review user complaints, advise grievance officers and represent the social media intermediary before the GAC. This is important because non-compliance can result in significant financial liabilities (including legal costs and penalties).

Conditional permission for foreign lawyers or law firms to operate in India

The Bar Council of India recently permitted foreign lawyers and law firms to practise in India in non-litigation matters around foreign law, diverse international law and arbitration. Of course, this is subject to reciprocity i.e., Indian lawyers or firms being allowed to practice in those jurisdictions.

Although it is too early to predict the specific impact of this decision and how long it might take for these to show up, it can be said that this move will eventually affect both revenue and cost structures for Indian law firms. As foreign firms establish a presence in India, we can expect the following changes: –

  • Indian firms will see a reduction in referrals from foreign firms (a significant source of business for many firms); and
  • Some Indian legal professionals will move to foreign firms. The entry of foreign firms will also raise the general compensation level in the industry, putting further pressure on the profitability of firms that rely more on corporate advisory. Indian firms will also have to look at ways to keep their partners and staff engaged and money may not be the only avenue to do so.

But given that new laws are coming up around complex new technologies such as AI, space etc., it is a good thing that India will get access to global specialists. This will also help India’s lawmakers frame more effective legislation in the days ahead.

More Global Capability Centres in India

Given India’s large technical talent pool, many global corporations established their captive centres in India over the past decade or so. The mandate of these GCCs was to develop and support the IT needs of the enterprise. This was seen as an alternative to IT outsourcing, and a more effective way to ensure that confidential information remains within the company’s direct control.

Buoyed by the success of their captives and given that IT/Digital was becoming deeply embedded within every business, enterprises from more industries began to increase their investments to scale up their GCCs. Innovation, product design, UX, R&D, analytics, AI, etc. have all been included in the expanded mandate for GCCs.

If the parent company has a relationship with a certain law firm, then the latter may be incentivised to establish operations in India sooner than they may otherwise have planned. Therefore, this is another factor that plays a role in determining the growth of some law firms and lawyers in India.

Conclusion

It is difficult to predict how each of these trends will shape the Indian legal services sector; this depends on which force is dominant and how long it takes for their respective impact. But it is fair to say that the next few years will belong to those law firms that are prepared to adapt and respond to these and other forces shaping the industry.

Image Credits:

Photo by Sora Shimazaki: https://www.pexels.com/photo/serious-ethnic-lawyer-discussing-new-case-with-colleague-5668798/

Apart from the inherent attractiveness of India’s domestic market, the implementation or tweaking of various policies (e.g., the Production Linked Incentive scheme, the opening of the space sector to the private sector and encouragement of public-private partnerships, regulations around drones, etc.) has been a major force of economic activity. For law firms and lawyers, such a multi-faceted business expansion is a growth enabler. 

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Pending Cheque Dishonour Cases – The Way Forward

  • April 3, 2023
  • Apurupa Gundu
  • P Meghna

While cheques are preferred for their versatility of use, they often lead to defaults in payment or dishonour of cheques. The dishonour of cheques due to insufficiency of funds is dealt with under Section 138 of the Negotiable Instruments Act, 1881 (hereinafter referred to as “the Act”) which was introduced through the Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988.

Introduction

Over the last few years, a notable rise in the number of financial transactions can be observed. This has certainly increased the occurrence of defaults in payments and given way to disputes. Though cash is still the preferred mode of payment in the country, there has been an upsurge in the use of digital payments in the last few years[1].  Traditionally, cheques have been used as an alternative to cash and have been a favoured mode of payment for people wanting to make cashless payments. According to a report published by the RBI in the year 2013, cheque-based payments constitute as high as half the total non-cash payments turnover[2]. 

Issue of Pending Cheque Dishonour Cases and Judiciary’s Response

Section 138 of the Act penalizes the drawer of the cheque when the same is dishonoured due to insufficient funds or if the amount exceeds the amount arranged (with the bank) to be paid from that account. Though the Act specifically provides for the summary trial of cheque dishonour cases, the process followed by the Magistrates has proven to be lengthy and tedious. As per a report filed by the amici curiae, Adv. Sidharth Luthra and Adv. K Parameshwar before the Hon’ble Supreme Court, cheque dishonour cases account for more than 8% of the total pending criminal cases with a total of 35.16 lakh pending cheque dishonour cases. The high number of pending cases can be attributed to the conversion of summary trials to summons trials by Magistrates in the exercise of discretionary power conferred under the Act[3]. This has not only frustrated the object of the Act but has also resulted in high expenditures.

The Metropolitan Courts and Judicial Magistrates have been burdened with cases under Section 138. In this regard, the Hon’ble Supreme Court has laid down certain guidelines in Indian Banks Association v. Union of India[4]. According to these guidelines, the Magistrates were required to scrutinize the complaint, affidavit and other documents on the day of the presentation of the complaint for cognizance of the complaint. For the purpose of examination-in-chief, the Magistrates were directed to complete them within 3 months. To do so, the Court was given the discretion to conduct an examination through affidavit.

In the case of Damodar S. Prabhu v. Sayed Babalal H[5], the Hon’ble Supreme Court laid down guidelines regarding the compounding of the offence under Section 138 of the Negotiable Instruments Act, 1881. For instance, it was decided that the Hon’ble Court may allow compounding of the offence of the Accused without imposing any costs if the application for compounding of the offence was made at the first or second hearing by the accused.

In the case of Meters and Instruments Private Limited v. Kanchan Mehta[6], the Hon’ble Supreme Court held that the Magistrate can at any stage stop the proceedings against the accused if the accused has adequately compensated the complainant and on this ground, the accused should be discharged as well.

Even though numerous directions have been given by the Hon’ble Courts to tackle the high volume of cheque dishonour cases, the issue was not altogether resolved, and it became a cause for urgent attention when a cheque dishonour case amounting to ₹1,70,000/- was found to have been pending for more than 16 years. Hence, the Hon’ble Supreme Court was propelled to take suo moto cognizance of the matter in the case of In Re: Expeditious Trial of Cases under Section 138 OF N.I. ACT 1881[7]. In this case, certain guidelines were laid down to ensure a speedy trial of cheque dishonour cases. After these guidelines were set down, the Hon’ble High Court for the State of Telangana came up with its own guidelines, some of which are listed below: –

  • All the Courts are required to follow the guidelines set forth by the Hon’ble Apex Court in the case of Indian Banks Association v. UOI[8]. Further, every case under Section 138 of the Act has to be registered as a summary trial case [Summary Trial Cases – Negotiable Instruments (STC – NI)]. The personal presence of the complainant need not be insisted on for registration; the same can be done through a power of attorney unless the attorney does not have personal knowledge of the transaction.
  • Assistance of police to be taken for the purpose of serving summons and warrants to the accused.
  • The capacity of the accused to engage a counsel to represent him in the Court proceedings has to be ascertained. If the accused is not in a position to afford legal representation, the Court has to appoint a legal aid counsel to represent the accused.
  • If the Court is satisfied that there is a scope for settlement, it may direct the parties to mediation or Lok Adalat. If a settlement is arrived at, then an execution application has to be filed. However, if the case is not settled, then the matter needs to be posted for framing charges or examination under Section 251 of CrPC.
  • Till the stage of filing of the defence statement, the Court has to treat it as a summary trial and the scope of converting it to a regular summons case can be considered only after examining all aspects of the case as prescribed in the guidelines.
  • Every cheque dishonour case has to be concluded within a period of 6 months and a judgment should be pronounced within 3 days from the day of the conclusion of final arguments.

Impact and Analysis

The guidelines issued by the Hon’ble Courts have proven to be effective in filling up the lacunae in the existing procedural law, accelerating the justice delivery process, and tackling the rising cheque dishonour cases. It was noticed that in the exercise of their discretionary powers, Magistrates proceeded with the conversion of cases under Section 138 of the Act to regular summons cases without even recording reasons for the same. By mandating that the case has to be treated as a summary trial in the initial stages, the guidelines ensure that the process involves fewer expenses and is time-saving and streamlined.

The said guidelines also provide for means of settlement, which encourage the use of Alternative Dispute Resolution (ADR) mechanisms. The compounding of offence in the trial’s initial stages has been incentivized as charges are imposed if the application for compounding is filed at later stages of the trial. In instances, where the accused lives outside the Court’s territorial jurisdiction, an inquiry needs to be held after which the Magistrate would decide whether to proceed with the case or not which saves the Court’s time to a considerable extent.

Coming to the concerns not addressed yet, the guidelines issued by the Hon’ble Apex Court specify that summons are to be sent through email and other electronic means and the same can be monitored through a Nodal Agency. However, there is ambiguity regarding the agency’s creation, functions, powers and regulation. Also, the guidelines laid down by the Hon’ble High Court for the State of Telangana do not make a reference to such an agency. The Courts also have not contemplated the technicalities involved such as the time that would be spent on inquiry, the possibility of a case not getting resolved through ADR mechanisms, etc.

Conclusion

Time and again, the Hon’ble Courts have taken up the initiative and issued guidelines to deal with the pending cheque dishonour cases and to ensure a speedy trial of such cases. However, it cannot be denied that the judiciary is overburdened with cases and there is a need to establish additional Courts and improve the already established infrastructure to deal with matters under the Negotiable Instruments Act, particularly pertaining to the dishonour of cheques. It is rightly said that “justice delayed is justice denied” and an overburdened Court will not be able to serve justice within a reasonable time. Such delays inevitably lead to the public losing trust in the justice mechanism and the judiciary. Therefore, setting up a sufficient number of Courts with well-trained judicial officers and staff is the need of the hour for the timely disposal of such cases.

References:

[1] Reserve Bank of India, Concept Note on Central Bank Digital Currency (Oct. 07, 2022) https://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID=1218

[2] Reserve Bank of India, Discussion Paper on Disincentivizing Issuance and Usage of Cheque (Jan. 31, 2013) https://www.rbi.org.in/scripts/PublicationReportDetails.aspx?UrlPage=&ID=698

[3] In Re: Expeditious Trial of Cases under Section 138 OF N.I. ACT, 1881

[4] (2014) 5 SCC 590

[5] (2010) 5 SCC 663

[6] AIR 2017 SC 4594

[7] SUO MOTU WRIT PETITION (CRL.) NO.2 OF 2020

[8] Supra 4

Image Credits:

Photo by cottonbro studio: https://www.pexels.com/photo/a-person-s-hand-holding-a-cheque-6862457/

Time and again, the Hon’ble Courts have taken up the initiative and issued guidelines to deal with the pending cheque dishonour cases and to ensure a speedy trial of such cases. However, it cannot be denied that the judiciary is overburdened with cases and there is a need to establish additional Courts and improve the already established infrastructure to deal with matters under the Negotiable Instruments Act, particularly pertaining to the dishonour of cheques. It is rightly said that “justice delayed is justice denied” and an overburdened Court will not be able to serve justice within a reasonable time. Such delays inevitably lead to the public losing trust in the justice mechanism and the judiciary. Therefore, setting up a sufficient number of Courts with well-trained judicial officers and staff is the need of the hour for the timely disposal of such cases.

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BCI Allows Foreign Lawyers and Foreign Law Firms to Practice Law in India

  • March 15, 2023

The Bar Council of India (BCI) has released rules allowing the entry of foreign lawyers and law firms in India. Along with prescribing the eligibility criteria for practicing law in the country, the rules list out the matters which may be handled by foreign lawyers and foreign law firms.

  1. Introduction
  • The BCI has been empowered to list out a Foreign Lawyer’s[2] permitted area of practice, and if required, do so after consulting with the Ministry of Law and Justice of the Government of India. The Rules currently provide that Foreign Lawyers can practice in non-litigious matters (this includes practice on transactional work, corporate work such as joint ventures, mergers and acquisitions, intellectual property rights, drafting of contracts and other related matters, each on a reciprocal basis)[3] and diverse international legal issues. However, Foreign Lawyers will not be allowed to (a) appear before courts, tribunals or other statutory or regulatory authorities; or (b) be involved in any work pertaining to the conveyancing of property, title investigation or similar work.
  • The key principles under the Rules are that (a) Foreign Lawyers that propose to practice law in India are required to obtain prior registration from the BCI under these Rules; and (b) the primary qualification for Foreign Lawyers to apply for registration in India is that they have the ‘right to practice law’ in their foreign country of primary qualification. However, the Rules have one exception where Foreign Lawyers do not need to register with the BCI. This is if Foreign Lawyers practice law on a ‘fly in and fly out basis’ and: (a) provide legal advice to Indian clients on foreign law and on diverse international legal issues, (b) the Indian client procured such advice from a foreign country, (c) the Foreign Lawyer does not maintain an office in India for the purpose of such practice, and (d) such practice in India does not exceed 60 days in any period of 12 months (whether in one visit or multiple visits to India).
  1. Permitted Law Practice by Foreign Lawyers and Foreign Law Firms

The Rules provide the following inclusive list of what constitutes the practice of law in India for a Foreign Lawyer:

  • Foreign Law: doing work, transaction business, giving advice and opinions concerning the laws of the country of their primary qualification (i.e., foreign laws) and on diverse international legal issues – however, such advice cannot include representation or preparation of documents (including petitions, etc.) relating to procedures before an Indian court, tribunal or any other authority which is competent to record evidence on oath;
  • International arbitration conducted in India which may involve foreign law: as regards any international arbitration case conducted in India in which foreign law may or may not be involved, a Foreign Lawyer can provide legal expertise/ advice and appear as a lawyer for a person/ firm/ company/ corporation/ trust/ society, etc. which has an address, head office or principal office in a foreign country (“Foreign Client”);
  • Appearing before bodies that cannot take evidence for foreign law: provide legal expertise/ advice and appear as a lawyer for a Foreign Client in proceedings before bodies in India (which are not courts, tribunals, boards or statutory authorities) which are not legally entitled to take evidence on oath, and which require knowledge of foreign law of the country of the primary qualification of the Foreign Lawyer;
  • Limits on Indian lawyers at Foreign law firms in India: an Advocate registered with an Indian State Bar Council who is a partner or associate at a foreign law firm registered with the BCI under these Rules, will only be permitted to practice non-litigious matters and can only advise on issues relating to countries other than India.
  1. Registration Application and Registration Fee
  • Registration under the Rules is granted for 5 years, and any application for renewal should be submitted to the BCI 6 months before the expiry of the existing license. A Foreign Lawyer’s application (in the prescribed form) is required to be supported by various confirmations, including an NoC from its regulator in the foreign country, an NoC from the Indian Government and confirmations of their practice of law outside India and of no professional misconduct abroad.
  • Successful applicants are required to pay a registration fee equivalent to the enrollment fee in their home foreign country, but the minimum fee should at least be USD 25,000 with a security deposit of USD 15,000 for an individual foreign lawyer (with the renewal fee being USD 10,000), USD 50,000 with a security deposit/ guarantee amount of USD 40,000 for a foreign law firm (whether as a firm, private limited partnership, limited liability partnership, company or otherwise), with the renewal fee being USD 20,000.
  • A key determining factor for such applications is the principle of reciprocity. The BCI has the discretion to refuse registration of a foreign lawyer/law firm if it believes that the number of foreign lawyers/ law firms from a particular foreign country will become disproportionate to the number of Indian lawyers or Indian law firms allowed to practice in a such foreign country, to protect the interest of Indian law firms / Indian lawyers.

[1] Rule 2(vi) defines ‘foreign law’ as a law, which is or was effective, in the country of primary qualification. The latter term is defined under Rule 2(v) as a foreign country in which the foreign lawyer is entitled to practice law as per the law of that country.

[2] Rule 2(iii) defines a ‘foreign lawyer’ as a person, including a law firm, limited liability partnership, company or corporation, by whatever name called or described, who/which is entitled to practice law in a foreign country.

[3] Rule 8(2) of the Rules.

Image Credits:

Photo by Pavel Danilyuk: https://www.pexels.com/photo/professional-lawyer-writing-on-a-notebook-8112113/

The Rules currently provide that Foreign Lawyers can practice in non-litigious matters (this includes practice on transactional work, corporate work such as joint ventures, mergers and acquisitions, intellectual property rights, drafting of contracts and other related matters, each on a reciprocal basis) and diverse international legal issues. However, Foreign Lawyers will not be allowed to (a) appear before courts, tribunals or other statutory or regulatory authorities; or (b) be involved in any work pertaining to the conveyancing of property, title investigation or similar work.

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Enhancing Business Responsibility of India Inc. Through ESG Disclosures

The global community is negotiating ways to manage climate change and mitigate its impact while ensuring that there is no adverse effect on employment, food security or the living standards of the masses. Addressing climate change is one of the most urgent tasks, particularly for a developing India, which is already bearing the harsh consequences like water shortages, extreme weather events such as floods, coastal erosion, droughts, rising temperatures, anarchical expansion of unregulated industrial growth and other climate affecting events.

On top of it, what is rarely spoken about is another silent killer – fast expansion of concretization, which by itself is a by-product of uncontrolled urbanisation due to the lackadaisical approach of civic agencies. India is decades away from its peak in terms of economic growth and energy consumption, but India’s energy demand is estimated to grow faster than any other country over the next few years. India, a developing country of more than 1.3 billion people, is the world’s third-largest emitter of carbon dioxide after the US and China.

In this background, speaking at the 26th United Nations Climate Change Conference, more commonly referred to as COP26, held in Glasgow in October – November 2021, our hon’ble Prime Minister, Sri. Narendra Modi made five key pledges for how India would decarbonise over the next few decades. He had pledged that India would reach net zero-emissions by 2070.  

 

Broadly, ESG stands for Environmental, Social, and Governance and refers to the three key factors when measuring the sustainability and ethical impact of an investment in any business or industry. The term “environmental” includes carbon emissions, air and water pollution, deforestation, green energy initiatives, waste management, and water usage. The term “social” includes employee gender and diversity, customer satisfaction, corporate sexual harassment policies, human rights at home and abroad, fair labour practices, etc. The term “’governance” includes data protection, privacy, security, transparency, business ethics/values, anti-corruption and anti-bribery policies.

The Financial Times Lexicon defines ESG as “a generic term used in capital markets and used by investors to evaluate corporate behaviour and to determine the future financial performance of companies.” Broadly, the term ESG refers to the examination of a company’s environmental, social, and governance practices, their impacts on the company’s performance, ability to execute its business strategy, create long-term value, and the company’s progress against benchmarks.  

In response to this need, there has been a greater emphasis among investors and stakeholders on businesses that are responsible and sustainable in terms of the environment and society. As such, reporting on a company’s performance on sustainability-related factors has become as vital as reporting on its financial and operational performance. Modern business organisations are now being motivated by more than just profit-oriented strategies and revenue-generating objectives. Sustainability has become an integral aspect of corporate branding and shareholder expectations. ESG, used interchangeably with sustainability based on quantitative or semi-quantitative data, is about pursuing responsible and ethical business practices with attention to social and environmental equity along with economic development. The term “sustainability” is broadly used to indicate programs, initiatives and actions aimed at the preservation of a particular resource. However, it also refers to four distinct areas: human, social, economic and environmental – known as the “four pillars of sustainability”.

The policies adopted by Indian regulators over the past years also indicate that India has made an aggressive move towards decarbonisation to adopt sustainable ways of doing business. India is one of the first countries to demand ‘ethical’ commitments from corporations and industries. In 2013, Corporate Social Responsibility was mandated in India within the Companies Act of 2013, as was suggested in the National Voluntary Guidelines (NVGs) on Social, Environmental and Economic Responsibilities of Business in 2011. The Companies Act, 2013 introduced one of the first ESG disclosure requirements for companies. Section 134(m) mandates companies to include a report by their Board of Directors on conservation of energy with their financial statements and is further detailed under Rule 8(3)(A) of the Companies (Accounts) Rules, 2014, which mandates the board to provide information regarding conservation of energy.

 

SEBI’s Role in Mandating ESG Disclosures

 

There may not yet be any single, comprehensive and stringent enactment governing the entire subject with all checks and balances, but SEBI (Securities and Exchange Board of India) has taken on the role of implementing an efficient ESG policy. As far back in November 2015, SEBI issued a circular prescribing the format for the Business Responsibility Report (BRR) with respect to reporting on ESG parameters by listed entities. The top 500 listed companies in India were instructed by SEBI to disclose indicators of business responsibility and sustainability through Business Responsibility Reporting (BRR). Companies were mandated to include disclosures on opportunities, threats, risks, and concerns as part of their annual reports under Regulation 34(3) of the SEBI (Listing Obligation and Disclosure Requirements) Regulation, 2015 (LODR Regulations).

In 2017, SEBI issued a circular on ‘Disclosure Requirements for Issuance and Listing of Green Debt Securities’ (also known as Green Bonds) to introduce the regulatory framework for the issuance of green debt securities in India and enhance investor confidence. It supplements the SEBI (Issue and Listing of Debt Securities) Regulation, 2008 and envisages a list of disclosures that an issuer must make in its offer document before and after commencement of a project financed by green debt. These additional disclosure requirements have been prescribed to attract the finance reserved for ESG-compliant projects, such as renewable energy and sustainable energy, clean transportation, sustainable water management, climate change adaptation, energy efficiency, sustainable water management, sustainable land use and biodiversity conversion. 

To further strengthen the ESG disclosure regime in India, SEBI amended Regulation 34(2)(f) of the LODR Regulations and on May 10, 2021, SEBI issued another circular detailing new sustainability-related reporting requirements on ESG parameters called the Business Responsibility and Sustainability Report (BRSR) to replace the existing BRR and place India’s sustainability reporting on par with the global reporting standards. The BRSR is intended to have quantitative and standardized disclosures on ESG parameters. Such disclosures will be helpful for investors to make better investment decisions and also enable companies to engage more meaningfully with their stakeholders by encouraging them to look beyond financials and towards social and environmental impacts.

The filing of BRSR after the implementation of new norms has been stipulated as mandatory for the top 1000 listed companies (by market capitalization) for the financial year 2022-23 but voluntary for the financial year 2021-22, to provide the companies with sufficient time to get used to new reporting compliance/regulations. The BRSR seeks continuous disclosures from listed entities on their performance and is aligned with the nine principles of the ‘National Guidelines for Responsible Business Conduct’ (NGBRCs). Adoption of BRSR is yet to pick up pace because of the detailed nature of disclosures required in BRSR. To speed up the process, in a Press Release on May 6, 2022, SEBI constituted an advisory committee on ESG matters in the securities market to create faster momentum.

In respect of non-listed companies however, there is currently no law that mandates that such companies be subject to mandatory ESG disclosure or reporting requirements. However, it can be expected that once the scheme is fully implemented where it is comparatively easier to regulate, it will certainly cover other companies as well as industries in unorganised sectors.

ESG disclosures are highly significant and relevant for all prospective stakeholders involved in business for reasons briefly described as follows.

  • Investors – If a business is not conscious of sustainability, there are chances of it becoming redundant in the future due to legal and regulatory changes prohibiting certain ways of doing business or decreasing demand for business products or deteriorating services. This aspect would certainly motivate the investor’s focus while investing.
  • Businesses – ESG disclosures identify potential transition risks, assess future viability, and take the necessary steps to adapt to likely future changes. Companies that are not aware run the risk of losing profit-making capacity as well as market reputation.
  • Consumers – ESG disclosures also help conscious consumers identify responsible businesses that not only concentrate on profit maximisation but also growth in a responsible manner. Accordingly, the disclosures become part of a marketing strategy to attract more consumers.

ESG goals are a set of standards for a company’s operations that force companies to follow better governance, ethical practices, environment-friendly measures, and social responsibility. They are used by socially conscious investors to screen potential investments. Environmental criteria consider, for example, how a company performs as a steward of nature, safeguards the environment, including corporate policies addressing climate change. Companies with better ESG performance have a better track record on issues such as human rights, climate change, environmental sustainability, social responsibility, ethics, and transparency, and hence are more resilient against future risks. It has become absolutely essential for companies to have comprehensive ESG policies in place.

In conclusion, to quote our Hon’ble Prime Minister, “The decisions taken in Glasgow will safeguard the future of generations to come and give them a safe and prosperous life.”  

The policies adopted by Indian regulators over the past years also indicate that India has made an aggressive move towards decarbonisation to adopt sustainable ways of doing business. India is one of the first countries to demand ‘ethical’ commitments from corporations and industries. 

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Reasons For Failure Of Mergers & Acquisitions Deal

Mergers and Acquisitions are vital tools of business strategy to facilitate organizational and economic growth of a business. The terms are often used inter-changeably, however both offer different legal implications. Mergers mean the unification of two players into a single entity, while acquisitions are situations where one player buys out the other to combine the bought entity with itself[1]. Mergers can take place in the form of a purchase in which one business buys another, or they can be a management buyout, in which the business is bought by the management from the owner.

With reference to the legal process of initiating an M&A strategy, the businesses are required to undergo a long drawn and tedious process of sanctioning the initiation of the M&A process by the High Court. At different stages various provisions of the Companies Act, 2013 have to be complied with. Further, the involvement of the central government through the appointment of an Official Liquidator (OL) or the Regional Director of the Ministry of Company Affairs also has to be dealt with. All of the compliances should be carried out to the satisfaction of the Court, resulting in unavoidable delays that may sometimes render the M&A irrelevant or detrimental to the business by the time it is concluded.

However, the serpentine legal process is not the only factor that contributes to an unfavorable M&A. This article aims to analyze the various reasons that add to the failure of M&A deals and enable businesses to mitigate the related risks in the future.

Analysis and Reasons for Failed M&A Deals

Mergers and acquisitions gained significant popularity after 2015. Nearly 3,600 deals worth more than $310 billion were associated with mergers and acquisitions. [2] They are lengthy and complex processes, so a lot can go wrong when negotiating a deal. As per a recent article by Harvard business review, nearly 70% to 90% of the mergers and acquisition deals were deemed to be a failure.[3]

Regulatory issues

Adhering to the legal mandates of the relevant jurisdiction is necessary. There is a chance that the shareholders of an organization may cause legal difficulties by dissenting from the approval of the mergers or by disagreeing with the business’s decision to merge. This would significantly slow down the functioning of the company, forcing it to pay appraisals to the shareholders as a remedy.

Example: HDFC and Max Life Merger Deal:

HDFC Life and Max Life had announced their merger plans in August 2016 through a three-step merger process, under which Max Life would first merge with its parent company Max Financial Services, and subsequently the life insurance business would be demerged from Max Financial and would be merged into HDFC Life. This merger transaction would have led to the automatic listing of HDFC Life through a reverse merger process and would enable HDFC Life to hold a majority stake in the combined entity. The Insurance Regulatory and Development Authority of India (IRDA) denied permission for the proposed merger of Max Life Insurance Co. Ltd and HDFC Standard Life Insurance Co. Ltd (HDFC Life), and observed that the structure of the deal violates Section 35 of the Insurance Act, 1938, which barred the merger of an insurance company with a non-insurance firm.[4]

Mistakes in Negotiation and Overrated Synergies

In various mergers and acquisitions, there are cases of overpayment for the purpose of breach of agreement. Acquiring a company based on money without knowing the working format, procedure, structure of the company and going through the due diligence process will lead to a failed merger.

Mergers and acquisitions are considered significant tools for increasing revenue, reducing net working capital, and improving venture power. Overvalued synergies go hand in hand with transfer overpayment. Overvaluation of exchange synergies is often the initial stage of overpayment. While the prospect of numerous costs remaining largely equivalent between the two combined organizations is attractive, it is also decidedly harder to achieve in practice than most directors admit. Also, energy cooperative income is no less confusing. M&A practitioners would therefore be encouraged to look at the expected cooperation from the exchange through a deeply traditionalist contact point.

Lack of Due Diligence

The importance of due diligence can never be emphasized enough. One of the main problems that arise during the process is that the acquirer depends on the target company to provide information that is not always suitable for their management. This creates obvious problems with agency.

Example: Daimler-Benz and Chrysler Group

In 1998, German automaker Daimler Benz merged with Chrysler Group for $36 billion. This was seen as a win-win situation for both companies as it was essentially a merger between equals. However, after a few years, Chrysler’s value dropped to just $7.4 billion. The merger proved unsuccessful. Many reasons contributed to this, but all experts agree that Daimler Benz never did  proper due diligence before merging with Chrysler. In other words, it overestimated the value of the target company, which led to the failed merger.

Hence, even though an M&A deal may seem lucrative on paper, it is essential for the respective businesses to carry out thorough due diligence and research on predicted profitability trends and projected growth patterns of the proposed merger or acquisition.

Deficiency in Strategic Plan

A good “why” is an essential part of all successful M&A transactions. This means that without a good motive for the transaction, it is doomed from the start.

The academic M&A literature is replete with studies of managers engaged in “empire building” through M&A and research on how hubris is a common trend in M&A.

Difficulty with Integration and Swap Ratio Differences

Integration difficulties that are mostly faced by companies when a new company has to follow or accept a new set of challenges and regulations to position itself in the market. It is very difficult for society to adapt to new conditions. Various plans are created in the form of strategies to help the company adapt to the new environment. This integration sometimes becomes the reason for the failure of the merger due to insufficient effort and imprecise planning.

Example: IDFC Group and Shriram Group deal:

IDFC Group and Shriram Group called off their talks of a merger after failing to agree on a swap ratio. A swap ratio is the ratio at which the acquiring company offers its shares in exchange for the target company’s shares during a merger or acquisition.

The two parties had, on July 8, 2019, entered into a 90-day agreement to evaluate a strategic combination of their relevant financial services. Shriram Employee Trust, Piramal Group and Sanlam Group were set to become the largest shareholders in IDFC and drive the business, but the deal would have hurt the government, which owned a 16.38 per cent stake in IDFC. So due to the difficulty in integration and swap ratio differences this deal was called off. This was the reason for the failure of this deal.[5]

Lack of Involvement of Top Management:

Management involvement is a catch-all answer that also includes many of the abovementioned reasons within its ambit. 

No phase of the M&A process can successfully sustain itself without proper involvement of the management, from the search for a suitable target company to the integration of both companies into a newly created entity.

When managers consider other tasks in their company more important than successful M&A implementation, they should not be surprised when their business is ultimately considered a failure.

Lack of Adequate Communication

Proper communication is one of the most important features of any agreement or contract. If the purpose of closing the deal is unclear, the intent of the buyers and sellers is also unclear, then communication is poor. If there is a lack of synergy and the buyer and seller are unable to articulate the desired results, this is a sign of poor communication. Not only that, but poor communication can also include a lack of communication between key managers and employees. Whenever a company enters into a merger or acquisition, there should be an honest and clear disclosure of the motive and intent. All doubts should be clarified at the initial stage. All levels of society should be given the opportunity to have their say. Messages should be interpreted in a general sense and according to common sense.

Culture Mismatch

Culture mismatch is another significant factor that causes merger failures. If companies have different cultural aspects, then there is a chance of low employee productivity, which leads to lower profits. Culture includes the willingness of employees to collaborate, share, support and team together with a single motive. Company culture is shaped by company founders, but it was also influenced by company managers and employees.

Example: Facebook and WhatsApp

Facebook bought messaging platform “WhatsApp” in 2014 for $22 billion. However, companies quickly realized that the corporate cultures were clashing. There are some memorable articles about table size and toilet stall arguments, but there have been discrepancies in values. WhatsApp famously valued the privacy of its customers and employees (no wonder they had a problem with short toilet boxes), while Facebook had more of an “open door” policy when it came to privacy. Since WhatsApp had committed to using a no ads and no encryption policy for the app its customers, it was clearly not a match that would have succeeded and the founders of WhatsApp eventually left Facebook.

Therefore, while considering an M&A it is not only important to ascertain the collective vision and objectives of the businesses, but also to make sure that the culture, policies and values of the businesses stay in alignment going forward.

Human Resource Issues

Human resource issues also pose a threat to the merger. There is insecurity as people tend to leave their jobs due to sudden changes in the course of work or because of cultural or identity issues. There are many human resource related issues even in the pre-combination stage such as the acquisition of key talent etc. as those could be the major concern for the companies for acquisitions. Another critical HR issue is the selection of a leader who will actually manage the new business combination for smooth business operations. These issues may lead to a lack of direction and the postponement of major business decisions. Companies should put their best people in charge of implementing M&A deals, and seek union and community involvement to avoid the risk of deal failure.

Geographic Restrictions

Geographical barriers cannot be overlooked. These play an important role when it comes to cross-border mergers. In general, when a cross-border merger occurs, a two-layer articulation is needed due to the merger of two different companies into different countries with a different set of rules and regulations prevailing in the respective countries.

Other External Factors

External factors may include market position, competition, financing situation, and credit in the company’s lending. If all these things are against the company, there is a chance for the merger to fail.

                                                                          Source: PWC Report[6]

The Way Forward

It is expected that mergers and acquisitions will exceed $105 billion, breaking the record for the largest transactions. [7]  High-rated deals like Reliance Industries’ (RIL) potential $10 billion (Rs 76,000 crore) acquisition of European drug chain Walgreens Boots; the Adani and JSW groups, bidding for Ambuja Cements, and the HDFC twin merger are the leading big mergers and acquisitions (M&A) deals. Consolidation of all the market players has been a major driving force behind the M&A transactions. Tech Mahindra and Infosys focused on exiting entities, while Byju’s acquired Aakash Education, White Hat Junior and Topper Technologies.

According to the 2022 M&A report, despite the ongoing challenge posed by the Covid-19 pandemic and geopolitical tensions in South Asia, the market is showing strong signs of recovery. M&A volumes hit an all-time high in 2021 with more than 80 deals worth more than $75 million. The increase in investment can be partly attributed to Indian government policies such as the productivity-linked incentive program introduced under the Ease of Doing Business initiative. [8]

Thanks to the great interest of foreign buyers, the Indian market for mergers and acquisitions also did well (the US accounted for 35 percent of invested dollars). India’s economy is set for strong growth in 2022 – The IMF has forecast GDP growth of 8.2 percent in 2022, making it the fastest growing major economy and double the expected growth rate of China.

With a total of 174 deals in Q1 2022 (up 28% year-on-year), the stage is set for India’s M&A market to witness strong technology-driven performance. This would make the M&A management process more efficient and powerful. For example, sellers are seeing in real-time how artificial intelligence and machine learning are automating many of the time-consuming parts of M&A—from preparation and marketing to due diligence on both the sell-side and the buy-side. [9]

According to Data site, a leading provider of SaaS technologies to the M&A industry worldwide, deal activity from January to May 2022 shows that companies continue to invest in technology acquisitions as they undertake digital transformations accelerated by Covid-19. Trading on the Datasite platform shows that new global TMT projects rose 18 percent worldwide in the first quarter.

The median time to open and close a new deal or asset sale or merger at Data site increased five percent year-over-year this year, while deal preparation time is also increasing, up 31 percent over the same period. This means that many vendors are “ready” but have not yet launched their projects. [10]

                                                                            Source: VCC Edge[11]

If handled properly, mergers and acquisitions can be a powerful means of propelling a business to greater profitability. Businesses should be cognizant of the abovementioned factors discussed before taking the M&A leap, to ensure sustainable and stable growth projections for their future.

References:

[1] https://www.mca.gov.in/MinistryV2/mergers+and+acquisitions.html

[2]https://tradebrains.in/biggest-mergers-acquisition-india/

[3] https://hbr.org/2020/03/dont-make-this-common-ma-mistake

[4] https://www.livemint.com/Companies/CBGIbJmiwVHYNeSiSQyT8O/Irdai-denies-permission-to-proposed-Max-HDFC-Life-Insurance.html

[5] https://www.thehindubusinessline.com/money-and-banking/idfc-shriram-12-b-merger-called-off-on-differences-over-swap-ratio/article64285553.ece

[6] https://www.pwc.in/assets/pdfs/services/deals/deals-in-india-annual-review-and-outlook-for-2022.pdf

[7] https://www.business-standard.com/article/companies/blockbuster-m-as-keep-india-s-deal-street-buzzing-despite-market-volatility-122042801482_1.html

[8] https://economictimes.indiatimes.com/magazines/panache/with-174-total-deals-in-q1-2022-indian-ma-market-set-to-witness-strong-performance-reveals-datasite/articleshow/92864647.cms

[9] https://economictimes.indiatimes.com/magazines/panache/with-174-total-deals-in-q1-2022-indian-ma-market-set-to-witness-strong-performance-reveals-datasite/articleshow/92864647.cms

[10][10] https://economictimes.indiatimes.com/magazines/panache/with-174-total-deals-in-q1-2022-indian-ma-market-set-to-witness-strong-performance-reveals-datasite/articleshow/92864647.cms

[11] https://www.vccedge.com/

It can be fairly concluded that mergers and acquisitions are powerful means to propel a business to greater profitability, if dealt with properly. Businesses should be cognizant of the abovementioned factors discussed before taking the M&A leap, to ensure a sustainable and stable growth projections for their future.

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Indian Diaspora Being Chosen to Lead Global Companies is No Accident

Mr. Laxman Narasimhan, former CEO of Reckitt Benckiser, was recently appointed CEO of Starbucks Inc. A few days later, advertising and PR giant Ogilvy (part of WPP, the global marketing and communications group) announced the appointment of Ms. Devika Bulchandani as its global CEO. These two are only the latest additions to an already impressive list of Indian-origin CEOs of global business organizations. This list includes blue chip names like Microsoft, Alphabet/Google, Adobe, Deloitte, IBM, Twitter, Bata, FedEx, Arista Networks, Vertex Pharma, Chanel and many more. Leading global VC firms including Masayoshi San’s Softbank have a number of Indians at the helm.

Ms. Indira Nooyi became Pepsico’s CEO in 2006 (and remained in that powerful position till 2018). However, it’s fair to say that the currently visible trend of Indian-origin leaders being appointed CEOs of global enterprises with headquarters outside India began about a decade ago, with the appointment of Mr. Ajay Banga as CEO of Mastercard. Since then, a number of other leaders who were born/raised and studied in India (at least their undergraduate degrees) have been chosen to lead global organizations across industries. All of them qualified with advanced degrees abroad and have spent a significant chunk of time working in overseas markets; most of them are no longer Indian citizens. Nonetheless, it is a matter of pride that no other non-G7 country has contributed as many executives to C-suites across the globe. Admittedly, the technology sector has the highest number of such leaders as CEOs, but companies from other sectors too are following suit.

To me, this trend is not a fad. It is also testament to more than just the intellectual capabilities, global experience or proficiency in English that these Indian-origin executives offer. I believe this phenomenon is also an acknowledgement of the innate ability and willingness of Indians (I use the word loosely because many of these business leaders are no longer Indian citizens) to deal with adversity, crises and rapid changes- all of which are dominant characteristics of our emerging world. These are the very same elements that have shaped the first 25 years of their lives, and taught them to adapt. This point was made more than two decades ago by the late Dr. C. K. Prahalad, who pointed out that those growing up in India quickly learn to be “natural managers” because they have to deal with infrastructural inadequacies, insufficient capacities and other constraints. This helps them develop a solution mindset and think outside the box.  

Given India’s inherent cultural diversity, Indians are more used to coping with diversity in multiple spheres; this helps leaders work in multi-cultural organizations and environments. Such a complex, competitive environment imbues individuals with a certain level of humility- something that probably also has a cultural dimension. Add to all this the fact that Indians working abroad have to work extra hard to prove themselves at every step- and you have a near-perfect recipe for leadership success. Of course, I must also acknowledge the critical role played by the US and other western nations in allowing Indian-origin talent to evolve, mature and shine. Although no society has as yet achieved the perfect balance, these countries are more proactive in promoting merit and providing equal opportunities.

But it would be unfair if I paint a universally rosy picture. Not every Indian leader who has become a CEO has been successful. There will naturally be variations based on a host of factors including the company, industry, external events, timing of becoming the CEO etc. For example, Vishal Garg, CEO of Better.com did not exactly cover himself in glory when he fired 900 employees on a Zoom call. He is back in the saddle of the company he founded. A couple of months ago, Ms. Sonia Syngal resigned as the CEO of Gap Inc. But there have been claims (supposedly backed by studies) that in corporate America, women leaders typically have shorter tenures and are more likely to be forced out when things start going wrong- irrespective of what causes the unravelling and to what extent the CEO could control those factors. But that’s another topic and I must not digress.

New sectors are emerging, driven by scientific and technological innovation. Combined with India’s burgeoning ecosystem and large talent pool, and changes to our education system and shifts in operational models and organizational development paradigms, we as a nation stand at the cusp of a huge opportunity to accelerate our socio-economic progress. It is time for organizations across sectors to rethink how they engage with talent in order to create enriching work environments that remain productive and mutually beneficial at a time when mindsets and aspirations are shifting more rapidly than ever before. Only then can we ensure that home-grown enterprises too are led by committed, dynamic and visionary leaders who can propel India to the US$5 Trillion league at the earliest.

Given India’s inherent cultural diversity, Indians are more used to coping with diversity in multiple spheres; this helps leaders work in multi-cultural organizations and environments.

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Exodus of Indian HNIs: Risk to Aspirations

India’s economy continues to be on a path of sustained growth. Especially over the last decade and a half or so, several factors have contributed to this growth. These include globalization, a large domestic market, policy reforms, technology-driven disruptions, and much greater levels of entrepreneurial activity than in the past fifty years. On the back of a robust start-up ecosystem and a flow of risk capital, 44 unicorns were created in India during 2021; the first four months of 2022 have seen 14 more Indian ventures get that coveted status. This is truly a remarkable achievement in the face of the large-scale shocks the global economic system has suffered in recent times.

It is estimated that over the next decade, the number of Indian millionaires and billionaires (in terms of US dollars) will rise by over 80%. This represents a significantly higher growth rate than that which will be seen by the US, UK, Germany or France. While this is undoubtedly good news, there is also some sobering news: an estimated 8000 high-net-worth Individuals (HNIs) are likely to relocate from India in 2022 alone. In 2019, an estimated 7000 Indians left India.

At different points in time, different destinations have attracted Indian HNIs. At this time, Singapore, Australia and the UAE are the top destinations, although European nations such as Portugal and Greece are also seeing a rise in the number of Indian HNWIs relocating to their jurisdictions given the benefits of lower costs, the mobility advantages of EU member nations and less stringent physical residency requirements. Just as important are the tax regimes of these countries vis-à-vis what prevails in India. More HNIs staying in India for an adequate number of days in each financial year is helpful in bringing their global income under Indian tax. However, it must also be kept in mind that even when families stay in India for shorter durations to minimise their income tax liabilities here, they will end up paying GST on various goods and services they consume.           

A growing number of Indian business families are taking a considered view of where their members should be based, what citizenship(s) they should hold and where their companies should be registered for regulatory and tax purposes. The travel bans imposed at short notice to curb the pandemic has provided one more reason for many to reconsider where their home bases should be. While reasons will naturally vary with specific individuals and families, this trend of wanting to move out is more evident amongst first-generation entrepreneurs, compared to more-established business houses. It is also more prevalent in new age businesses that are built on new technology paradigms and require clarity and relative stability in the regulatory frameworks. This is not to say that western countries are automatically better in this regard: the EU recently announced that device manufacturers must move to standard mobile charging ports (for phones, tablets, cameras, earbuds, etc.) in the next 2 years – a decision that is expected to significantly impact Apple.

As governments take more action against climate change, to protect data privacy and to regulate AI, 5G, etc., new regulations will come into existence at a faster pace than before. More changes to existing rules and regulations can also be expected. There’s also a greater likelihood of new trade blocs forming and countries becoming members of multiple blocs. There is also likely to be greater harmonisation of tax rates (the first steps have already been taken). In the face of such changes, families need to more carefully think through decisions such as the location of businesses, holding structures, governance and multi-jurisdictional estates in order to ensure smooth inter-generational wealth transfers.

Image Credits:

Photo by Monstera: https://www.pexels.com/photo/anonymous-person-magnifying-view-of-coins-shaped-in-world-map-7412098/

A growing number of Indian business families are taking a considered view of where their members should be based, what citizenship(s) they should hold and where their companies should be registered for regulatory and tax purposes. 

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Voluntary Liquidation Process Under IBC: An Update

The Insolvency and Bankruptcy Code, 2016 read with, the Insolvency and Bankruptcy Board of India (Voluntary Liquidation Process) Regulations, 2020, establish a procedure for the voluntary liquidation of solvent corporate persons.

However, in practice, it can be observed that the majority of voluntary liquidation processes are getting delayed. As per the Discussion Paper released by IBBI, as on December 31st, 2021, 1105 voluntary liquidation processes have been initiated. Of which, the liquidators have submitted final reports to the Adjudicating Authority (AA) in 546 cases only. In other words, more than 50% (i.e., 559 cases) of the voluntary liquidation processes are still ongoing. On closer perusal of the ongoing cases, it is found that 293 cases (around 52%) of them have crossed the one-year time mark. In this background, the Voluntary Liquidation Process (Amendment) Regulations, 2022 have been introduced on April 5th 2022 by the IBBI.

Brief Analysis of the Voluntary Liquidation Process Amendments

The new changes seek to complete the voluntary liquidation process in a quick and efficient manner and ensure that the company does not lose value on its remaining assets since the asset value falls drastically with time. Further, the amendment seeks to clarify the date of the commencement of the liquidation process.  Now, the liquidator shall complete the liquidation process and ensure the submission of final reports within 270 days, 90 days earlier as compared to the statutory time period of 12 months. As per the Discussion Paper released by IBBI, Voluntary Liquidation, being non-adversarial in nature, can be completed in 270 days. Further, the liquidator is directed to distribute the proceeds from realization within 30 days from the receipt of the amount to the stakeholders, as compared to the earlier mandated time period of 6 months.

For the past few years, the government has been promoting several initiatives focusing on “ease of doing business” for corporates. However, it is essential to observe that “ease of doing business” does not only include ensuring a seamless start of a business but also includes a quick and easy structure for the exit.

In this backdrop, in the Union Budget 2022-2023, the Honourable Finance Minister announced that “Now the Centre for Processing Accelerated Corporate Exit (C-PACE) with process re-engineering, will be established to facilitate and speed up the voluntary winding-up of these companies from the currently required 2 years to less than 6 months[1].”

Further, in a Discussion Paper released in February 2022[2], IBBI identified the following problems plaguing the voluntary insolvency process:

  1. It was pointed out that the values of assets fall drastically, and hence a quick and efficient liquidation process is pertinent. However, the Code has failed to stipulate a time limit for such a voluntary liquidation process.
  2. It was also observed that more than 50% of the voluntary liquidation cases had been ongoing as per the data presented to the Board (as of December 31st, 2022). Further, 52% of the ongoing cases had crossed the one-year mark.

The relevant stakeholders also observed that one of the aspects that prolong the voluntary liquidation process is the practise of seeking a ‘No Objection Certificate’ (NOC) or ‘No Dues Certificate’ (NDC) from the Income Tax Department by liquidators during the process, even though the Code and the Voluntary Liquidation Regulations have not mandated the issuance of NOC/NDC. In this regard, the Board issued a Circular in November 2021, clarifying that “an insolvency professional handling a voluntary liquidation process is not required to seek any NOC/NDC from the Income Tax Department as part of compliance in the said process.”[3]

In alignment with the intention of the legislation, the Board has introduced the following amendments to optimize the voluntary insolvency process:

Section 10 (2) (r): Corporate Debtor shall be substituted by Corporate person

The amendment states that the liquidator shall maintain such other registers or books as may be necessary to account for transactions entered by the corporate debtor with the corporate person. This ensures holistic coverage of all financial transactions of the corporate debtor for the purpose of liquidation.

Section 30 (2): timeline for preparation of the list of stakeholders in case where no claims are received is reduced

 

Section 30 (2) requires the liquidator to compile a list of stakeholders within 45 days from the last date for receipt of claims. The amendment inserts the following provision; “Provided that where no claim from creditors has been received till the last date for receipt of claims, the liquidator shall prepare the list of stakeholders within fifteen days from the last date for receipt of claims.”

Previously, no differentiation between the timelines was prescribed in cases where there were no claims from creditors. This timeline was introduced because if no such claims were received till the last date, then it must not take much time for the preparation of a list of stakeholders as the list of shareholders/partners is available with the liquidator at the time of commencement.

Section 35: Timeline for distribution of the proceeds from realization reduced

The amendment reduces the period for distribution of proceeds from realisation to the relevant stakeholders to a period of thirty days from the receipt of the amount, from the earlier mandated six months.

The reason for the reduction of this timeline is that the liquidator remains in close contact with the corporate person and hence should be able to distribute the proceeds quickly.

Further, in cases where there are creditors, since the resolution regarding the commencement of the process is approved by the creditors representing two-thirds of the value of the debt of the corporate person, distribution to the creditors should also take much less time than is currently stipulated.

Section 5(2): Timeline for intimation of appointment as liquidator to the Board enhanced.

5(2) provides that an insolvency professional shall notify the Board about his appointment as liquidator within 3 days of such appointment.  As per the amendment, the regulation has changed the timeline for the intimation from 3 days to 7 days.

Section 37: Timeline to complete the liquidation process reduced.  

The amended provides that if the creditors approve the resolution, the liquidator shall complete the liquidation process and submit the final report to the registrar, board, and adjudicating authority within 270 days from the date of the commencement of the liquidation and within 90 days from the liquidation commencement date in all other cases (where there are no creditors for the company). Previously, the time period for completion of liquidation was one year and no such bifurcation of the time period for completion of liquidation on the basis of the presence or absence of creditors was enumerated. The reason for this reduction in the timeline for completion is that the liquidation estate of the corporate person undergoing the voluntary liquidation process is non-adversarial and also generally straightforward both in terms of the size and heterogeneity of the assets involved. Therefore, the realisation of the assets involved during the voluntary liquidation process takes less time as compared to the liquidation process.

Section 38(3): Final Report and Compliance certificate shall be submitted in Form-H.

Section 38 directs the liquidator to submit the final report to the adjudicating authority along with the application. The amendment has specified Form H for submission of the final report. Such specifications were not provided previously. A compliance certificate provides a summary of actions taken by the liquidator during the voluntary liquidation process. It will assist the Adjudicating Authority in expediting the adjudication of dissolution applications.

Section 39(3): Form H substitutes Form I

As per the amended Rules, Section 39 (3), the stakeholder claiming entitlement to any amount deposited into the Corporate Voluntary Liquidation Account, may apply for an order for withdrawal of the amount to the Board on Form H and not Form I.

Date of Commencement of Liquidation

The amendment clarified that for the corporate person who has creditors representing two-thirds of the debt of the corporate person, the date of liquidation commencement is the date on which such creditors approve the declaration passed for the initiation of the liquidation.

Note: In order to curb delays in liquidation, the Board had recently issued a circular clarifying that an Insolvency Professional handling a voluntary liquidation process is not required to seek any NOC/NDC from the Income Tax Department as part of compliance in the said process.

Conclusion

The amendments effectually fall in line with the Board’s intention to substantiate a streamlined and quick voluntary insolvency procedure, which certainly can be perceived as an initiative in the right direction. The proposed amendments by curtailing the unwarranted time spent on various activities (such as obtaining a No-Objection Certificate from the Income Tax office) may ensure the early completion of the voluntary liquidation process, thereby, providing a quicker exit for the corporate person. Further, the proposed reduction in the time taken for distribution of proceeds would result in an early distribution to the stakeholders and thereby, promote entrepreneurship and the availability of credit. It will assist the Adjudicating Authority in expediting the adjudication of dissolution applications.

References: 

[1] https://www.timesnownews.com/business-economy/budget-proposed-c-pace-for-accelerated-corporate-exit-process-article-89283883

[2] https://ibbi.gov.in/webfront/Discussion-Paper-on-Voluntary-Liquidation-process-Jan-2022.pdf

[3] https://www.ibbi.gov.in/uploads/legalframwork/cc881169aad7ee239aea7954505a76ab.pdf

 

Image Credits: Photo by Melinda Gimpel on Unsplash

The amendments effectually fall in alignment with the Board’s intention to substantiate a streamlined and quick voluntary insolvency procedure, which certainly can be perceived an initiative in the right direction.  The proposed amendments by curtailing the unwarranted time spent on various activities (such as obtaining No-Objection Certificate from the Income Tax office) may ensure early completion of the voluntary liquidation process, thereby, providing a quicker exit for the corporate person.

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Why Businesses Should Focus on ESG?

The world has changed in many fundamental ways especially in the last 25 years. I am not referring to technology-led transformation or geopolitical shifts, this piece is about Environmental, Social and Governance criteria – collectively referred to as “ESG”.

Environmental Criteria

 

Environmental costs, which were for long viewed by economists as “externalities”, are now an important consideration in decision-making by governments and business leaders. Given the devastating effects of widespread environmental degradation and climate change, countries around the world are taking concrete actions to limit further damage; many are setting “net zero” emission targets for individual sectors over the next couple of decades. As a result, new legislations are being enacted that require businesses to act in certain ways and desist from other kinds of actions. Arguably, this is the biggest facet of change globally.

Social Criteria

 

The second area of change is that various forms of social injustice are no longer being tolerated. While there were always rules against such inequities, there is now a greater cost imposed on organizations that violate these rules- not just by governments and regulators, but also by consumers, who choose to shift loyalties towards brands that exhibit greater sensitivity to social causes. By definition, social injustice covers a broad range of issues that includes exploitation of children, women or certain races (e.g., the Uighurs); not providing employees good working conditions (physical environment, denying employees time for bio-breaks and rest, harassment at the workplace etc.); discrimination against people with disabilities, gender, age or marital status; even selling goods that are not safe or bad for health arguably fall under this category.

Governance Criteria

 

The thrust on “governance” is the third major driver of change. It is not as if rules and regulations did not previously exist to prevent breakdowns in governance. Yet, there are a number of examples from around the world that showcase bad governance: from companies in South Korea, Japan, the USA and Europe to the ongoing matters at the NSE and BharatPe in India.

 

Why ESG Adoption is Crucial?

 

In recent years, various members of business ecosystems worldwide, including enterprises, investors, regulators and the general public have become far more aware of the importance of compliance with “ESG” norms and standards. They are much less willing to tolerate breaches in an organization’s “ESG” conduct.

At one level, companies that do not do well on “ESG” parameters are more likely to face explicit financial penalties (e.g., carbon taxes). But just as important are the hidden costs that will increasingly need to be borne by ESG laggards. Perhaps the most important is the reduced access to capital because both banks and PE/VC firms are incorporating ESG criteria into their funding/ portfolio strategies.

On the demand side, many consumers (especially from the younger generations) are more conscious of brands that fare better in terms of their commitment to ESG and this, in turn, shapes their purchase decisions. Brands can quickly lose market share if they do not raise their ESG game.

As shown in the chart below, data over the past decade reveals that companies that have successfully implemented ESG strategies have consistently performed better than other global companies that have not paid as much attention to ESG.

 

Source: Stoxx.com quoted in https://sphera.com/spark/the-importance-of-esg-strategy/

This out-performance can be attributed to a combination of factors, including faster top-line growth, sustained cost reductions, higher employee productivity and reduced employee attrition and of course, fewer instances of fines/penalties for non-compliance. Investment decisions and technology choices that are guided by ESG considerations will drive a more efficient allocation of capital; in turn, this will boost ROCE (Return on Capital Employed).

While it is convenient to look at the three strands of ESG separately, in reality, they are closely intertwined. The sooner business leaders acknowledge that ESG is not a fad or a feel-good factor, but in fact, makes sound business sense, the better it is for the world as a whole.

 

Start Your ESG Journey Right Away

 
Someone quipped that the best time to plant more trees was years ago, but the second-best time is now! It’s not too late for you to begin your ESG transformation. But make sure you do it as a well-structured program, and not merely a hotch-potch of initiatives that have no clear owners, goals or measures and therefore cannot be sustained.

 

To report ESG performance, you can take the help of commonly used frameworks such as the following:

  • UN Sustainable Development Goals (SDGs)
  • Global Reporting Initiative (GRI)
  • Sustainability Accounting Standards Board (SASB)
  • Climate Disclosure Standards Board (CDSB)
  • Task Force on Climate-related Financial Disclosures (TCFD)

Image Credits: Photo by Photo Boards on Unsplash

While it is convenient to look at the three strands of ESG separately, in reality, they are closely intertwined. The sooner business leaders acknowledge that ESG is not a fad or a feel-good factor, but in fact, makes sound business sense, the better it is for the world as a whole.

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Beyond the Pandemic: Are we Recovering with Integrity?

This morning, I came across a news report about an autorickshaw driver in Bangalore who returned Rs10000 that was erroneously transferred to his account. He had just dropped off a passenger, who had paid the fare via UPI. Sometime later, the auto driver received a payment of Rs10000 from the same passenger’s mobile phone. Turns out that soon after getting off the auto, that passenger had received a request from his friend to transfer Rs10000, but by mistake, he had transferred the amount to the auto driver’s account. The honest auto driver called up the passenger and returned the money. The grateful passenger wrote a letter of commendation to the police authorities.

While the above news report gladdened my heart, I have also, in the last few days, read news reports about independent directors of various companies resigning from their respective Boards for various reasons. While honesty and integrity have not altogether disappeared, it is saddening that there seems to be a dearth of these values in the corporate world- where, arguably, they are needed the most. I therefore write this piece with mixed feelings.

E&Y’s Global Integrity Report 2022 reveals that a third of the respondents from India reported that their organizations had suffered a “significant incident of fraud” in the last 18 months. In itself, this is a grave concern but what’s worse is that India ranks second worst in this survey, which polled business executives from 54 countries. The survey’s other findings about Indian executives and companies are cause for worry too. Almost two-thirds of the respondents from India have acknowledged that to benefit their careers, they would be willing to indulge in patently unethical conduct such as falsifying information, paying/receiving bribes or ignoring misconduct in their teams/organizations.[1]

The economic disruption that has occurred in the wake of the pandemic has undoubtedly increased challenges for organizations across industry sectors. Owners, business leaders and employees at all levels have experienced the impact in many ways- cost cutting, job losses, scaling down, longer working hours, greater difficulty in closing deals through virtual channels etc. The magnitude of the impact has been varied but some sectors have bounced back faster than others and depending on the nature of their business, have been able to adapt better to hybrid models of working. But to me, nothing gives anyone the excuse to compromise on one’s integrity and ethics. It is better to work smarter and harder, have honest conversations within the organization and with clients or reach out for help than to succumb to the temptation of short cuts. Once we fall prey, it’s a slippery slope, and there’s almost always no going back.

One of the most important lessons I have learnt from my father and grandfather is to never compromise ethics and integrity no matter what the reasons or potential payoffs. This is one of the core values that our firm holds dear. Every individual who is part of our organization understands the importance of honesty, personal and professional integrity and ethics. To me, leadership is not just about vision, strategy and execution or delivering financial success; it is as much about being able to hold one’s head high and look at anyone in the eye because there is nothing to hide in our conduct or speech. And this is what my colleagues and I strive hard to practise every single day.

 

References:

[1] https://www.cnbctv18.com/business/33-of-indian-businesses-saw-major-fraud-in-last-18-months-ey-global-integrity-report-12229822.htm 

 

Image Credits:

Photo by Christian Lue on Unsplash

The economic disruption that has occurred in the wake of the pandemic has undoubtedly increased challenges for organizations across industry sectors. Owners, business leaders and employees at all levels have experienced the impact in many ways- cost-cutting, job losses, scaling down, longer working hours, greater difficulty in closing deals through virtual channels etc.

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