This article has been written by Yamuna K. pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) course from LawSikho.

This article has been edited and published by Shashwat Kaushik.

Introduction

The Indian economy has brought drastic changes to the world market. Corporate restructuring plays a very crucial role in establishing business operations to build the monetary and financial systems. The adaptability of corporate restructuring implies for corporate entities in terms of loans and investment purposes. The corporate restructuring, which will strengthen the legal system, will enhance institutionalisation. Institutionalisation refers to non-performing assets, liquidation, and repayment of money. But during pandemic times, the economic system was completely locked down for corporate restructuring. It has affected companies, industry, factories, banking and other institutions. The World Bank has issued an order to file insolvency and to facilitate the recovery of debt from creditors. The Reserve Bank of India has passed a moratorium resolution for six months. The corporate debt crisis was existed and borrowers were unable to lend money to the banking companies. The Government of India made the intervention of COVID-19 to protect effective measures for financial investment, banking, loans, liquidity, SEBI, insolvency procedure and the recovery of debt. In this paper, we discuss how corporate debt restructuring in COVID-19 has faced challenges in filing an insolvency petition and how creditors’ rights were extended.

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Corporate restructuring

Corporate debt restructuring was first introduced by the Reserve Bank of India in 2001. The main objective of corporate debt restructuring is to support and safeguard the company’s requirements, stakeholders, investors, and multiple loans. It applies to all financial institutions restructuring debt and restoring liquidity problems. The corporate debt restructuring will undergo fiscal difficulties to fulfil the loan repayment. Corporate debt restructuring is a prerequisite for economic growth, new investment, and access to banks and non-performing corporations. Corporate debt restructuring is a business tool that enhances profitability without causing any effect on the company. The processes of debt restructuring include standstill agreements, valuations and restructuring options. It shall measure for a moratorium policy and extend the longer period for repayment of the loan. It has assurances to reduce the risk of interest rates. The companies will always depend on corporate debt and the profit of their businesses. It will protect the company’s assets and provide jobs for employees. But in the pandemic crisis, banks were unable to negotiate with borrowers. This pandemic crisis was addressed by the judicial system but left to the Reserve Bank of India to make the implementation policy to clear the corporate debt restructuring. The RBI had imposed guidelines on banks and corporations. A legal remedy was conducted in virtual mode to resolve the debt recovery.

World Bank on corporate restructuring

  • Limited period: The insolvency laws have declared closure in the pandemic and approval of the reorganisation plan procedure has been dismissed. The court has provided a limitation period to avoid the mitigation of losses and extend moratorium for creditors.
  • Suspended business operations: The worldwide lockdown is affecting business operations and parties are struggling to approach firms and companies. The situation has become worse for business commodities, supply chains and labour workers. The government has temporarily locked down business operations and has a duty to impose liquidation to recover from creditors.
  • Encouraging e-filings and virtual court proceedings in insolvency matters: During the emergency period, the court has temporarily locked down banks and corporations based on court intervention. The insolvency court has resumed virtual proceedings and encouraged the E-filings process in the crisis.

Insolvency petition in COVID-19

The Insolvency and Bankruptcy Code of 2016 provides a flexible time process to resolve insolvency petitions for banks and corporations. The ordinance imposes that an application be filed for insolvency proceedings against a company for committing default on or before March 25, 2020. It shall file before adjudicating authority for pending admission, corporate insolvency, liquidation, and ongoing insolvency against creditors and debtors. The COVID-19 has protected the default of companies for committing insolvency petitions. The procedure was extended to 6 months and the code has protected the MSME of the local plan. The loans were followed through informal sources and there was no access to frameworks of resolution. The threshold of default for filing an insolvency petition was increased from 1 lakh to 1 crore.

Fresh start scheme

The ministry of corporate affairs has issued a notification to grant relief to companies and LLPs during the outbreak of COVID-19. The government has issued a new policy for the companies’ fresh start scheme 2020 and revised the LLP settlement scheme 2020, which has allowed filing a fresh start for any filing default, limitation of default, and entitlement to file a complaint fully. This scheme has changed the LLP scheme for filing compliance and lessened the burden of compliance. It also implies various filing obligations under the Companies Act 2013 and the LLP Act 2008 and the burden of financial requirements on long-standing defaults. The scheme has provided certain immunity from penal proceedings, late submissions, and filing appeals before the regional directors. The scheme has introduced MCA 21 for delayed filings of applications and appeals. The validity of the scheme shall extend from April 1 to September 30, 2020 and upon expiry of the scheme, ROC shall take necessary action against defaulting companies.

Moratorium policy on financial emergency

The moratorium period refers to the repayment of a loan extended for a shorter period. Whereas the borrowers are unable to pay the loan due to a force majeure situation. It will allow an individual to pay EMI after some time. The central government has the authority to implement this policy and not harm the creditors. During the outbreak of COVID-19 Reserve Bank of India implemented a loan moratorium to suspend loan repayment. It shall apply to all commercial banks, including regional rural banks, small finance banks, co-operative banks, and financial institutions, for a period of three months.

Benefits for a borrower

Extension of a borrower’s repayment

During the crisis, the borrower failed to repay the loan and developed no tension or risk. It was a systematic rule applicable to all creditors and borrowers of payment.

Financial emergency on COVID-19

The COVID-19 caused a huge breakdown of the economic system and it had effects on millions of people. Some of them have lost their jobs, family and no repayment of money. The moratorium has brought relief for the borrowers to repay the money.

Less impact on credit score

The credit score didn’t affect the borrower’s non-payment of the loan in the EMI process. The moratorium policy never had any negative impact on credit scores, and borrowers were relieved.

Liquidity measures

With the help of the moratorium policy, the RBI announced measures to control COVID-19 effects. The measures were related to mitigating risk and burden on debt-serving, accessing working capital, and financial institutions in the Indian market.

The policy on liquidity measures is:

  • Reduction in policy repo rate: The policy repo rate was applicable under the liquidity adjustment facility for less than 4 percent.
  • Working capital financing: The RBI has sanctioned working capital facilities in terms of cash credit and lending institutions, which may be recalculated to reduce the margins, which may be extended up to August 31, 2020.
  • Granted relief for CRE loans: The loans that were approved by NBFCS, which caused delays for commercial real estate projects, were extended a year without restructuring.
  • Relief for maintaining LCR: As per the guidelines of the RBI, the liquidity coverage ratio was 100%. It has reduced less than 80% until September 2020 and 90% of the ratio from October 2020 to March 2021.

Listed companies on financial emergency

The government of India has issued a gazette on the Securities and Exchange Board of India (Listing obligations and disclosure requirements) Regulations of 2015, which was amended on January 10, 2020. The government initiated on listed companies to follow the COVID-19 pandemic in a strict sense, which has impacted business operations in the company and industries. The SEBI has granted relief to listed entities to follow the order passed by LODR regulations:

  • Regulation 30(3) Disclosure of events or information says that any listed company shall disclose events specified in Para B of Part A of schedule III, based on application requirements specified under sub-regulation(4), which says any event which means disruption of events strikes/lockdown or lockdowns that may be caused by the omission, natural calamity, etc.
  • Regulation 33(3) financial results says that the listed entity shall submit quarterly and year-to-date financial results to the stock exchange within 45 days by end of the quarter year
  • Regulation 34’s annual report shall be submitted by the listed entities and was extended during the lockdown period.

Conclusion

The consequences of corporate debt recovery make it difficult and complex to resolve the issue. The issue of corporate debt is increasing in insolvency petitions, and agreements for loans are waved off. The World Bank had implemented a moratorium policy, which was followed by the RBI. However, the Reserve Bank of India has implemented policies with a positive impact. The protective measures were initiated by the RBI to encourage the Indian markets to participate and provide certain relief to borrowers. The companies have faced the biggest challenges in the corporate debt restructuring. Some of the companies were able to recover their debt through insolvency procedures.

References

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