Timothy Lopes, Executive, Vinod Kothari Consultants Pvt. Ltd.
As investors wait eagerly in anticipation of what changes Budget, 2020 could bring, the RBI has on 23rd January, 2020, provided a boost by revising the norms for investment in debt by Foreign Portfolio Investors (FPIs). This comes as a boost to FPIs as the revised norms allow more flexibility for investment in the Indian Bond Market.
Further the RBI has also amended the Voluntary Retention Route for FPIs extending its scope by increasing the investment cap limit to almost twice the previously stated amount. The amendments widen the benefits to FPIs who invest under the scheme.
This write up intends to cover the revised limits in brief.
Review of limits for investment in debt by FPIs
- Investment by FPIs in Government securities
As per Directions issued by RBI with respect to investment in debt by FPIs, FPIs were allowed to make short term investments in either Central Government Securities or State Development Loans. However, the said short term investment was capped at 20% of the total investment of that FPI, i.e., the short term investment by an FPI in Government Securities earlier could not exceed 20% of their total investment.
The above limit of 20% has now been increased to 30% of the total investment of the FPI.
- Investment by FPIs in Corporate Bonds
Similar to the above restriction, FPIs were also restricted from making short term investments of more than 20% of their total investment in Corporate Bonds.
The above cap is also increased from 20% to 30% of the total investment of the FPI.
The above increase in investment limits provides more flexibility for making investment decisions by FPIs.
Exemptions from short term investment limit
As per the RBI directions, certain types of securities such as Security Receipts (SRs) were exempted from the above limit. Thus, the above short term investment limit were not applicable in case of investment by an FPI in SRs.
Now the above exemption is extended to the following securities as well –
- Debt instruments issued by Asset Reconstruction Companies; and
- Debt instruments issued by an entity under the Corporate Insolvency Resolution Process as per the resolution plan approved by the National Company Law Tribunal under the Insolvency and Bankruptcy Code, 2016
This widens the scope of investment by FPIs who wish to make short term investments in debt.
Further the requirements of single/group investor-wise limits in corporate bonds are not applicable to investments by Multilateral Financial Institutions and investments by FPIs in ‘Exempted Securities’.
Thus this amendment brings in more options for FPIs to invest without having to consider the single/group investor-wise limits.
Relaxations in “Voluntary Retention Route” for FPIs
The Voluntary Retention Route for FPIs was first introduced on March 01, 2019 with a view to enable FPIs to invest in debt markets in India. FPI investments through this route are free from the macro-prudential regulations and other regulatory norms applicable to FPI investment in debt markets subject to the condition that the FPIs voluntarily commit to retain a required minimum percentage of their investments in India for a specified period.
Subsequently the scheme was amended on 24th May, 2019.
On 23rd January, 2020 the RBI has brought in certain relaxations to the above VRR scheme. The changes made are most certainly welcome since it increases the scope of the scheme and provides relaxations to FPIs. The highlights are as under –
Increase in investment cap –
Investment through the VRR for FPIs was earlier subject to a cap of Rs. 75,000 crores. As on date around Rs. 54,300 crores has already been invested in the scheme. Thus based on feedback from the market and in consultation with the Government it was decided to increase the said investment limit to Rs. 1,50,000 crores.
Transfer of investments made under General Investment Limit to VRR –
‘General Investment Limit’, for any one of the three categories, viz., Central Government Securities, State Development Loans or Corporate Debt Instruments, means the FPI investment limits announced for these categories under the Medium Term Framework, in terms of RBI Circular dated April 6, 2018, as modified from time to time.
Now the RBI has allowed FPIs to transfer their investments made under the above mentioned limit to the VRR scheme.
Investment in ETFs that trade invest only in debt
Earlier under the VRR scheme, investments were allowed in the following –
- Any Government Securities i.e., Central Government dated Securities (G-Secs), Treasury Bills (T-bills) as well as State Development Loans (SDLs);
- Any instrument listed under Schedule 1 to Foreign Exchange Management (Debt Instruments) Regulations, 2019 notified, vide, Notification dated October 17, 2019, other than those specified at 1A(a) and 1A(d) of that schedule;
- Repo transactions, and reverse repo transactions.
Pursuant to the amendment, the RBI has allowed FPIs to invest in Exchange Traded Funds (ETFs) investing only in debt instruments.
Further the following features are introduced for the fresh allotment opened by RBI under this route –
- The minimum retention period shall be three years.
- Investment limits shall be available ‘on tap’ and allotted on ‘first come, first served’ basis.
- The ‘tap’ shall be kept open till the limit is fully allotted.
- FPIs may apply for investment limits online to Clearing Corporation of India Ltd. (CCIL) through their respective custodians.
- CCIL will separately notify the operational details of application process and allotment.
The changes made by RBI certainly attract more FPIs to the Indian Bond Market and extends its scope. The relaxations come ahead of the Budget, 2020 wherein foreign investors have more expectations for new reforms to boost growth and investment in the Indian economy.
Links to our earlier write ups on the subject –
Recommendations to further liberalise FPI Regulations –
RBI removes cap on investment in corporate bonds by FPIs –
RBI widens FPI’s avenue in corporate bonds –
SEBI brings in liberalised framework for Foreign Portfolio Investors –
– Ishika Agrawal (email@example.com)
The way businesses are done, has evolved with the evolution of technology. Now-a-days, business transactions and business contracts are mostly executed electronically in order to save time and expenses. However, this also raises concerns on enforceability of e-agreements in courts and the stamp duty implications on such agreements. In this article, we have tried to broadly discuss the acceptance of e- agreements as evidence in courts and the stamp duty implications on such agreements.
II. Whether E-agreement is to be stamped?
In India, stamp duty is levied under Indian Stamp Act, 1899 (“Stamp Act”) as well as various legislation enacted by different States in India for the levy of stamp duty. Every instrument under which rights are created or transferred needs to be stamped under the specific stamp duty legislation. There is no specific provision in the Stamp Act that specifically deals with electronic records and/or the stamp duty payable on execution thereof.
Section 3 of Stamp Act is the charging section which provides for the levy of stamp duty on specified instruments upon their execution. Relevant provision of section 3 is reproduced below:
3. Instruments chargeable with duty- Subject to the provisions of this Act and the exemptions contained in Schedule I, the following instruments shall be chargeable with duty of the amount indicated in that Schedule as the proper duty therefore respectively, that is to say—
(a) every instrument mentioned in that Schedule which, not having been previously executed by any person, is executed in India on or after the first day of July, 1899;
(b) every bill of exchange payable otherwise than on demand or promissory note drawn or made out of India on or after that day and accepted or paid, or presented for acceptance or payment, or endorsed, transferred or otherwise negotiated, in India; and
(c) every instrument (other than a bill of exchange, or promissory note) mentioned in that Schedule, which, not having been previously executed by any person, is executed out of India on or after that day, relates to any property situate, or to any matter or thing done or to be done, in India and is received in India.
As per the above provision, broadly, two things are required for chargeability of stamp duty:
- There must be an instrument as mentioned in the schedule I of Stamp Act.
- The instrument must be executed.
What is Instrument?
The word ‘instrument’ is defined in section 2(14) of Stamp Act. There has been certain ambiguousness in the interpretation of definition of Instrument. Recent amendments have been made in the Stamp Act by Finance Act, 2019 which will come in force from 1st April, 2020.
Prior to the amendment, section 2(14) read as:
2(14) “Instrument includes every document by which any right or liability is, or purports to be, created, transferred, limited, extended, extinguished or recorded”.
However, after the amendment, the scope of the definition given in section 2(14) has been widened by the inclusion of clause (b) and clause (c) which states that:
(14) “instrument” includes—
(a) every document, by which any right or liability is, or purports to be, created, transferred, limited, extended, extinguished or recorded;
(b) a document, electronic or otherwise, created for a transaction in a stock exchange or depository by which any right or liability is, or purports to be, created, transferred, limited, extended, extinguished or recorded; and
(c) any other document mentioned in Schedule I,
but does not include such instruments as may be specified by the Government, by notification in the Official Gazette;
The aforesaid amendment is only with respect to the electronic document created for a transaction in a stock exchange or depository, but (a) of the aforesaid section is unaltered. Therefore, it may appear that the term “document” in clause (a) does not include electronic documents – however, such interpretation will not be in spirit of law. The Information Technology Act has already accorded legal recognition to electronic records. Therefore, the word “document” shall be read so as to include electronic documents as well.
Apart from the Indian Stamp Act, many states have their own legislation w.r.t. stamp duty. Majority of state specific stamp duty laws also do not specifically include electronic records within their ambit, however, some state stamp duty laws do refer to electronic records. For instance, Section 2(l) of the Maharashtra Stamp Act, 1958  defining instrument, specifically refers to electronic records. It states that:
“instrument includes every document by which any right or liability is, or purports to be, created, transferred, limited, extended, extinguished or recorded, but does not include a bill of exchange, cheque, promissory note, bill of lading, letter of credit, policy of insurance, transfer of share, debenture, proxy and receipt;
Explanation. – The term “document” also includes any electronic record as defined in clause (t) of sub-section (1) of section 2 of the Information Technology Act, 2000.”
This makes clear that, Maharashtra Stamp Act imposes stamp duty on electronic agreements as well. This justifies that even electronic agreements come under the scope of Stamp Act, thus need to be stamped.
What is execution?
Section 2(12) of Stamp Act defines the terms “executed” and “execution”, which is also widened by the recent amendment to take into account, attribution of electronic records. It states that:
“2(12). “Executed and execution”- executed and execution used with reference to instruments, mean signed and signature” and includes attribution of electronic record within the meaning of section 11 of the Information Technology Act, 2000.”
Thus the execution means putting signature on the instrument by the party to the agreement. Attribution of electronic record will also be treated as execution. It can be concluded from the above definition that, the specific instrument would attract payment of stamp duty upon their execution i.e. when it is signed or bears a signature, even if the execution takes place electronically.
III. Time and Manner of Stamping
As discussed, an e-agreement is required to be stamped according to State specific stamp laws. Section 3 of the Indian Stamp Act and the stamp legislation of several other States in India specify that an instrument to be chargeable with stamp duty must be “executed”.
Section 17 of Stamp Act stipulates when an instrument has to be stamped. It states that:
17. Instruments executed in India- All instruments chargeable with duty and executed by any person in India shall be stamped before or at the time of execution.
Thus, the stamp duty is to be paid before or at the time of executing the e- agreement and cannot be paid after execution.
However, one may also refer to section 17 of the Maharashtra Stamp Act which allow payment of stamp duty on the next working day following the day of execution.
There are some of the e-agreements such as click wrap agreements where execution does not takes place by the customer. Click-wrap agreements are the agreements where the customer accepts the terms and conditions of the contract by clicking on “OK” or “I agree” or such other similar terms. In case of such e-agreements, while the agreement can be said to be executed by the originator (by way of attribution), there is no signature of the customer which means such agreement does not get executed. Since, execution does not takes place, such agreements need not be stamped. However, another view can be derived that in such click wrap agreements there is acknowledgement of receipt of the electronic record by the customer. Such “acknowledgment” of receipt of electronic record u/s 12 of IT Act may be treated as deemed “execution”  by the customer. However, there are no clear provisions in the Stamp Act dealing with eligibility of stamp duty to click-wrap agreements.
As regards the manner of stamping, same can be done in three ways:-
- E-stamping: Some states like Maharashtra provides specific provisions for e-stamping. In such case, both the party can digitally sign the document and get it stamped electronically on the same day. For instance, Maharashtra E-Registration and E-Filing Rules, 2013 facilitates online payment of stamp duty and registration fees. Rule 10 of the said rules states that:
Rule 10. For online registration, Stamp duty and registration fees shall be paid online to Government of Maharashtra through Government Receipt Accounting System (GRAS) (Virtual Treasury) by electronic transfer of funds or any other mode of payment prescribed by the Government.
Further, as per Rule 3 of The Maharashtra ePayment of Stamp Duty and Refund Rules 2014, the stamp duty required to be paid under the act, may be paid online into the Virtual Treasury through Government Revenue and Accounting System (GRAS).
- Franking: There is also the concept of franking in some of the states, in which case, document may be printed and stamped by the way of franking before the parties have affixed their signature. For instance, in case of Maharashtra Stamp Act, 1958, section 2(k) which defines “Impressed stamp” also includes impression by franking machine.
- Physical Stamping: Where the facility of e-stamping or franking is not available, a print of the e-agreement may be taken and the same may then be adequately stamped with adhesive stamps or impressed stamps before or on the date of execution by the parties as per section 10 of Indian Stamp Act.
However, the liability to pay stamp duty will be upon either of the party to contract as per the agreement entered between them. In the absence of any such agreement, liability to pay stamp duty shall be upon such person as may be determined under section 29 of the Indian Stamp Act.
IV. Consequences of Non- stamping
Non-payment of stamp duty in respect of documents would attract similar consequences for both physical instruments as well as electronic instruments, unless specific consequences have been prescribed for electronically executed instruments under the respective stamp duty laws.
Inadmissibility as an evidence:
In terms of the Indian Stamp Act and most State stamp duty laws, instruments which are chargeable with stamp duty are inadmissible as evidence in case appropriate stamp duty has not been paid. Section 35 of Indian Stamp Act deals with the consequences of non-stamping of documents. It states that:
- Instruments not duly stamped inadmissible in evidence, etc.-No instrument chargeable with duty shall be admitted in evidence for any purpose by any person having by law or consent of parties authority to receive evidence, or shall be acted upon, registered or authenticated by any such person or by any public officer, unless such instrument is duly stamped.
However, the inappropriately stamped instruments may be admissible as evidence upon payment of applicable duty, along with prescribed penalty.
Every person who executes or signs, otherwise than as a witness, any instruments which is not duly stamped but the same was chargeable with stamp duty, can be held liable for monetary fines. In case of an intentional evasion of stamp duty, criminal liability can also be imposed.
When all the applicable laws are taken and interpreted in conjunction with one another, it can be understood that, e-agreements being a valid agreements are also liable for stamp duty on execution. However, the same levy will be as per the respective State laws. Where the State legislation provides for the facility of e-stamping, the same shall be availed in order to move towards the goal of paperless economy. Whereas, some States are yet to recognize the importance and validity of e-agreements and e-stamping. It is looked forward on the part of state as well as central government to make specific provisions for e-agreements and e-stamping in order to save time and money and to provide an ease for doing business.
Our write-up on the legal validity of e-agreements can be viewed here.
 The Central Government and the State Government (s) have been empowered under the Union List and the State list (respectively) to levy stamp duty on instruments specified therein.
 The amendment was brought by the Finance Act, 2019, which by Notification of Ministry of Finance dated 8th January, 2020 are to be effective from the 1st day of April, 2020”
 Section 11 of the IT Act provides for attribution of electronic record as follows –
“11. Attribution of electronic records.–An electronic record shall be attributed to the originator–
(a) if it was sent by the originator himself;
(b) by a person who had the authority to act on behalf of the originator in respect of that electronic record; or
(c) by an information system programmed by or on behalf of the originator to operate automatically.”
 For instance, Article 7 of the UNCITRAL Model Law on E-Commerce states that where the law requires a signature of a person, that requirement is met in relation to a data message if a method is used to identify that person and to indicate that person’s approval of the information contained in the data message; and that method is as reliable as was appropriate for the purpose for which the data message was generated or communicated, in the light of all the circumstances, including any relevant agreement. This way of putting “signature” is not explicitly recognized in relevant Acts, however, the Courts may take a liberal view in this regard.
-Richa Saraf (firstname.lastname@example.org)
It is a well settled principle that a writ petition may be entertained by the High Courts only in absence of any efficacious alternate remedy. However, one of the exceptions to the said rule is where there is lack of jurisdiction on the part of the statutory/ quasi- judicial authority, against whose order a judicial review is sought. In the recent case of Embassy Property Developments Pvt. Ltd. vs. State of Karnataka & Ors., the primary issue for consideration before the Hon’ble Supreme Court was with regard to the jurisdiction of High Court to grant relief against the order of NCLT, disrupting the hierarchy laid down by the Code. For the said purpose, the Apex Court examined the limitations on the power exercisable by the Adjudicating Authority, and held that in case any party is aggrieved by the decision of NCLT, the Code provides for filing of an appeal before NCLAT, however, considering the exercise of excess jurisdiction by the NCLT, the High Court may entertain a petition under Article 226/ 227 of the Constitution.
The article analyses the impact of the ruling on the jurisdiction of NCLT to deal with various matters related to the corporate debtor under insolvency or liquidation.
FACTS OF THE CASE
The National Company Law Tribunal, Chennai Bench vide order dated 12.03.2018 ordered for initiation of corporate insolvency resolution process of Tiffins Barytes Asbestos & Paints Ltd. (“Corporate Debtor”).
The Corporate Debtor held a mining lease granted by the Government of Karnataka, which was to expire on 25.05.2018. A notice for pre- termination of the lease was issued by the Government of Karnataka before CIRP commencement, on ground of violation of various statutory rules, and terms and conditions of the lease agreement, however, the order of termination was passed by the Government of Karnataka after the commencement of CIRP.
The RP filed an application before NCLT, Chennai, praying for setting aside of the order of Government of Karnataka, and seeking a declaration that the lease should be deemed to be valid until 31.03.2020 in terms of Section 8A(6) of the Mines & Minerals (Development and Regulation) Act, 1957 (“Mines Act”), and also, a consequential direction on the Government of Karnataka to enter into a supplemental lease deed. The Adjudicating Authority allowed the RP’s application, setting aside the order of Government of Karnataka on the ground that the same is in violation to the moratorium under Section 14 of the Insolvency and Bankruptcy Code. Challenging the order of NCLT, Government of Karnataka moved a writ petition before High Court of Karnataka, wherein the Hon’ble High Court granted a stay of operation of the NCLT directions. The RP, the Resolution Applicant and the Committee of Creditors (“Appellants”) then filed an appeal before the Supreme Court against the interim order passed by the High Court.
CONTENTIONS W.R.T. JURISDICTION OF NCLT AND THE OBSERVATIONS OF THE SUPREME COURT:
1. IBC is a complete code in itself and has an overriding effect over other laws: The Code covers the entire gamut of law relating to insolvency resolution of corporate persons and others in a time bound manner, therefore, one of the contentions raised in the matter was that there exists no room to challenge the orders of NCLT, otherwise than in the manner provided in the Code. In this regard, it was contended that Section 60(5) provides an exclusive jurisdiction to NCTL to deal with all the matters relating to the corporate debtor. The relevant extract is reproduced below for reference:
“Notwithstanding anything to the contrary contained in any other law for the time being in force, NCLT shall have jurisdiction to entertain or dispose of –
(a) any application or proceeding by or against the corporate debtor or corporate person;
(b) any claim made by or against the corporate debtor or corporate person, including claims by or against any of its subsidiaries situated in India; and
(c) any question of priorities or any question of law or facts, arising out of or in relation to the insolvency resolution or liquidation proceedings of the corporate debtor or corporate person under this Code.”
Further, since Section 238 stipulates that the provisions of this Code shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law, the only option available with the RP is to move an application before NCLT under the provisions of the Code.
The Apex Court discussed the limitation on the jurisdiction of NCLT to exercise its power under Section 60(5). It held that NCLT is a creature of a special statute to discharge certain specific functions, and it cannot be elevated to the status of a superior court having the power of judicial review over administrative action. Observing that NCLT is not even a civil court, which has been granted the jurisdiction, by virtue of Section 9 of the Code of Civil procedure, to try suits of civil nature, and therefore, NCLT can only exercise only such powers which are within the contours of jurisdiction prescribed by the statute, which it is required to administer.
Citing an instance where a corporate debtor may have suffered an order at the hands of the Income Tax Appellate Tribunal, at the time of initiation of CIRP, the Apex Court observed that if Section 60(5)(c) of the Code is interpreted to include all questions of law or facts under the sky, an RP will then claim a right to challenge the order of the Income Tax Appellate Tribunal before the NCLT, instead of moving a statutory appeal under Section 260A of the Income Tax Act, 1961, and the jurisdiction of NCLT laid down in Section 60(5) cannot be stretched so far as to bring such absurd results.
2. Measure to protect the asset of the Corporate Debtor: Section 25(1) of the Code stipulates that it shall be the duty of the resolution professional to preserve and protect the assets of the corporate debtor, and therefore, the IRP moved the NCLT for appropriate reliefs, for the purpose of preservation of properties of the Corporate Debtor.
It was further contended by the counsel of the IRP that Section 14 of the IBC granted a deemed extension of lease, and therefore, the application before NCLT was only for declaration of that the lease is valid. In this regard, reliance was placed on Section 14(1)(d) which prohibits, during the period of moratorium, the recovery of any property by an owner or lessor where such property is occupied by or in the possession of the corporate debtor.
The Supreme Court observed that the moratorium provided for in Section 14 cannot have any impact on the right of the Government to refuse extension of lease. The Apex Court discussed the purpose and scope of moratorium and held that moratorium is only to preserve the “status quo” and not to create a new right. Analysing the provision contained in Section 14(1)(d), it was held that the said section will not go to the rescue of the Corporate Debtor since what is provided therein is only the right not to be dispossessed but does not by itself provides the right which the Corporate Debtor does not otherwise have (in the instant case, the right to have the renewal of lease). Further, considering that there existed disputes arising under the Mines Act, and those revolving around decisions of statutory or quasi-judicial authorities, the Supreme Court deliberated on the provisions contained in Section 18(f)(vi) of the Code-
“The IRP shall take control and custody of any asset over which the corporate debtor has ownership rights as recorded in the balance sheet of the corporate debtor, or with information utility or the depository of securities or any other registry that records the ownership of assets, including assets subject to the determination of ownership by a court or authority.”
If the intent of the Code was to confer with NCLT the jurisdiction to decide all types of claims relating to the asset of the corporate debtor, Section 18(f)(vi) would not have provided for determination of ownership by a court or other authority, and therefore, the Apex Court held that wherever the corporate debtor has to exercise rights in judicial, quasi- judicial proceedings, the RP cannot short- circuit the same and bring a claim before NCLT taking advantage of Section 60(5).
3. Jurisdiction based on consensus between parties: One of the contentions raised in the appeal was that since the State of Karnataka recognised the jurisdiction of NCLT for raising all its contentions, it was not open to the Government to later question the jurisdiction of the NCLT in next round of litigation. The Apex Court held that the fact that the Government of Karnataka conceded to the jurisdiction of the NCLT does not ipso facto provide NCLT with the jurisdiction to entertain any application. NCLT is a creature of statue, any jurisdiction to the NCLT has also been granted by the statute, and the mere agreement between parties to approach a particular court or tribunal does not automatically provide jurisdiction to a court.
From the above discussion, it is clear that the jurisdiction of Adjudicating Authority is confined only to contractual matters between parties, and an order passed by a statutory/ quasi- judicial authority under certain special laws, or which falls in the realm of public law, cannot be determined by NCLT. A decision taken by the government or a statutory authority cannot, by any stretch of imagination, be brought within the fold of “arising out of or in relation to insolvency resolution” as appearing in Section 60 of the Code. The correctness of the said decision can be called into question only in a superior court vested with the power of judicial review over administrative action.