Liquidation: Liquidator’s role, functions and distributive justice under section 53

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Distributive justice between workmen’s dues and secured creditors rights, w.r.t sec. 52 and 53 of the Code

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Summary of Supreme Court Judgements on IBC

Resolution Team | resolution@vinodkothari.com

Our compilation of older SC rulings relating to IBC can be read here

Our compilation of NCLAT rulings relating to IBC part -1 can be read here

Comments on IBBI Discussion Paper on Streamlining the Liquidation Process

Team Resolution | resolution@vinodkothari.com

The Insolvency and Bankruptcy Board of India (‘IBBI’/ ‘Board’) issued Discussion Paper on Corporate Liquidation Process, dated 14th June, 2022 [1](‘Discussion Paper’) which envisages -(a) Streamlining the constitution of SCC (b) Expanding power of SCC; (c) Relinquishment of security interest by the Secured Financial Creditors; (d) Reduction of timeline of compromise or arrangement process; (e) Clarification regarding submission of progress reports to Board; (f) Event based timelines of Auction; (g) timeline for successive auction, (h) treatment of avoidance application before closure of liquidation process, and (i) consideration of claims submitted during CIRP, and the Board has solicited comments of the same.

Following are our general and specific comments on the proposals made in the Discussion Paper and other aspects of liquidation processes –

A.    General Comments

The following are our general comments/suggestions on the proposals made in the Discussion Paper:

1. The general suggestions with respect to various issues faced by liquidators and suggested solutions are as listed below:

1.1. Lightening litigation burden

1.1.1. Infrastructure issues – NCLTs need to be strengthened in terms of benches and bench members;

1.1.2 Continuing engagement with professionals as quite often there are serious gaps in alignment

1.1.3. NCLT members to have strong incentive for better time management

1.1.4. De-clogging NCLTs

a. Remove operational creditors’ claim beyond a hard timeline

b. Move extension application or other matters not requiring adjudication from the domain of NCLTs

c. Create expert advisory cell in IBBI/IPA (similar to informal guidance scheme of SEBI), which the IPs can approach for clarifications/interpretations pertaining to law

d. Identify other non-adjudicative matters, not need exercise of judicial discretion, and move them out of NCLTs

Read more

Pledge as transfer: Several SEBI Regulations may require review post SC Ruling

– Vinita Nair | Senior Partner, Vinod Kothari & Co. | corplaw@vinodkothari.com

Hon’ble Supreme Court, in the matter of PTC India Financial Services Limited v. Venkateshwar Kari and Another (PTC India ruling), brought out a very important distinction between the meaning of beneficial owner under the Depository law, and the right of the pledgee/ pawnee/ security interest holder) to cause the sale of goods pledged by pledgor/ pawnor in terms of the rights arising under the pledge[1]. The PTC India ruling inter-alia holds that “beneficial ownership” in the context of the Depositories Act should not be confused with beneficial ownership in law. Getting registered as a “beneficial owner” in terms of Section 10 of Depositories Act, 1996 read with Regulation 58 (8) of the SEBI (Depositories and the Participants) Regulations, 1996[2] (‘Depository law’) does not amount to any transfer of title to the pawnee – it is merely a procedural precondition to sale by the pawnee. It further stipulates that there is no concept of ‘sale to self’ by the pledgee and that the pledgee is bound by the two options provided under Section 176 of the Indian Contract Act, 1872 (‘ICA, 1872’), viz., right to bring a suit against the pawnor and retain the goods pledged as collateral security, or sell the thing pledged on giving reasonable notice to the pawnor and sue for the balance, if any. This ruling triggers the need to review current practice followed by companies and also validity of orders pronounced by Securities Appellate Tribunal (‘SAT’) and SEBI from time to time w.r.t. pledge.

The Apex Court referred to the decision of Securities Appellate Tribunal (‘SAT’) in the matter of Liquid Holdings Private Limited v. The Securities Exchange Board of India[3] where SAT held that the banks being recorded as beneficial owners of the shares pursuant to invocation of pledge became the members of the target company and subsequent transfer of the said shares by the banks back to the appellants resulted in purchase by the appellants attracting the open offer obligations under SEBI (Substantial Acquisition and Takeovers) Regulations, 1997 [Repealed by SEBI (Substantial Acquisition and Takeovers) Regulations, 2011] (‘Takeover Code’). The Apex Court observed that SEBI should examine the provisions of Depository law and the Takeover Code to avoid discord or ambiguity resulting in  instability or confusion especially on applicability of Takeover Code when the pawnee exercises his right to be recorded as a ‘beneficial owner’, while reserving his right to sell the pledge. Additionally, in the author’s view, there is an equal need to examine the applicability of SEBI (Prohibition of Insider Trading) Regulations, 2015 (‘PIT Regulations’) in the context of pledges[4], for reasons discussed in the latter part of this article.

Read more

Broken Pledge? Apex Court reviews the law on pledges

By Vinod Kothari, Managing Partner, Sikha Bansal, Partner and Shraddha Shivani, Executive | corplaw@vinodkothari.com

The Supreme Court ruling in  PTC India Financial Services Limited v. Venkateshwar Kari and Another is significant in many ways – not that it categorically rewrites the law of pledges which is settled with 150 years of the statute[1] and even longer history of rulings, but it surely refreshes one of the predicaments of a pledge. Importantly, since most of the pledges of securities currently are in the dematerialised format, it brings out a very important distinction between the meaning of beneficial owner under the Depository law, and the right of the pledgee (a.k.a. pawnee or security interest holder) to cause the sale in terms of the rights arising under the pledge. Also, very importantly, the SC dwells upon the essential principle of equity of redemption in pledges and renders void any provision in the pledge agreement which allows the pledgee to make a sale of the pledged article without notice to the pledgor, or to forfeit the pledged article and convert the same as pledgee’s own property. There are also observations in the ruling that seem to give an indefinite time to the pledgee for the sale of the pledged property – this is a point that this article discusses at some length.

Read more

Accounting and Tax considerations in Going Concern Sale in Liquidation

By Devika Agrawal, Executive, Vinod Kothari and Company

devika@vinokothari.com

Background

The preamble to the Insolvency and Bankruptcy Code, 2016 (‘Code’) enlists value maximisation as one of its key objectives. In line with the said objective, the Code included ‘Going Concern Sale’ (‘GCS’) of the corporate debtor or the business of the corporate debtor in liquidation, vide the Amendment dated 22nd October, 2018[1] in the Liquidation Process Regulations, as one of the modes of sale. The underlying intent of introducing GCS in liquidation was to maximise value. It was expected that introduction of GCS in liquidation would give a breather and will be looked forward to by Corporate Debtors undergoing liquidation process, however, the statistics presented by the Quarterly Newsletter of the IBBI, for the quarter ended 30th September, 2021[2] give a different view as only six out of the 1419 orders for commencement of liquidation, were closed by a sale as a going concern under liquidation process. For an enhanced understanding of a GCS, our Articles on the topic can be referred to.[3]

One probable reason for lesser use of GCS may be tax considerations attached to such sale, (for example, questions concerning write back of liabilities, continuation of tax benefits, carry forward of losses and unabsorbed depreciation). Besides, given how different GCS in liquidation is from a conventional GCS and a GCS in CIRP, acquirers often face issues in accounting for assets acquired under a GCS in liquidation. Further, there remains uncertainty with respect to the accounting for and recording of transactions. In this article the author attempts to discuss accounting and tax issues in GCS in liquidation.

GCS in liquidation vs. conventional GCS vs. GCS in CIRP

As stated above, it is important to note that a GCS in liquidation is different from a conventional GCS and a GCS in CIRP by way of a resolution plan. The difference lies not just in the circumstances under which a GCS takes place in each of the said three modes but also the manner of treatment of assets, liabilities, profits, losses and share capital. The accounting and tax considerations depend on the same. When one talks about accounting and taxation, it becomes important to see what happens to each component when a transaction takes place.

A snapshot of the treatment of these components under different modes of sale specified above has been tabulated below.

Sl. NoBasisGCS in liquidationConventional GCSGCS by way of a Resolution Plan in CIRP
1.Transfer of liabilitiesAll liabilities are settled from the sale proceeds, in accordance with Section 53. Thereafter, pending liabilities, if any stand extinguished.Liabilities associated with the assets  are transferred to the acquirer.Liabilities are in the form of claims on the CD. They are paid off in a manner provided for in the Resolution Plan as approved by CoC.
2.Valuation of AssetsThe successful auction bidder pays a lump sum, without assigning values to individual assets.   In a GCS in liquidation, the value of assets may be  comparatively lower because it bears the burden of a failed resolution process.The buyer pays a lump sum, without assigning values to individual assets.The buyer pays a lump sum, without assigning values to individual assets.
3.Carry forward of lossesThe benefit of carry forward of losses has not been provided for the purpose of a GCS in liquidation. However, in certain rulings[4], the Hon’ble NCLT has allowed carry forward of losses, but again, subject to approval of IT Authorities. See discussion below.The Income Tax Act, 1961, does not allow carry forward and set off of losses when a business is sold as a going concern.Section 79(2)(c) of the Income Tax Act, provides an incentive to resolution applicants and has allowed the benefit of carry forward losses where a change in shareholding takes place pursuant to a resolution plan. 
4.ProfitsProfits during liquidation, if any, get subsumed in the liquidation estate, and distributed in accordance with section 53.Assets and liabilities are transferred on a particular date.As consented to between CoC and resolution applicant – see para 68 of Committee of Creditors of Essar Steel Limited v. Satish Kumar Gupta (SC).

At this juncture, having discussed the difference between the above mentioned modes of sale, it becomes important to discuss the accounting and taxation concerns which may have become the probable reasons for lesser use of GCS in Liquidation.

Accounting Concerns 

Preparation of books of accounts in liquidation – Obligation of the Liquidator or Auction purchaser?

Section 35 of the Code enlists the duties and powers of the liquidator appointed under the Code, which has to be read with the provisions of the Liquidation Regulations.

Liquidation is a terminal process and as such, it is a settled principle that during the liquidation process, the liquidator does not prepare any balance sheet or profit and loss account.  Instead, reg. 15(3) requires the liquidator to prepare a  receipt and payments account on a cash-basis. Hence, the question of any preparation of profit and loss account or balance sheet does not arise.

However, after a GCS is completed, sale consideration is received and a sale certificate is issued by the liquidator in favour of the auction purchaser, the corporate debtor is transferred to the auction purchaser. At this juncture, an important question that raises its head is, who would be responsible to prepare the books of accounts of the corporate debtor post the completion of a GCS – Liquidator or an Auction purchaser.

Once the sale is completed, it becomes the responsibility of the acquirer to take all the necessary steps viz-a-viz the corporate debtor. It was held in the case of Gaurav Jain Vs. Sanjay Gupta (Liquidator of Topworth Pipes & Tubes Pvt Ltd)[5]:  

“The Corporate Debtor survives, only the ownership is transferred by the Liquidator to the purchaser. All the rights, titles and interest in the Corporate Debtor including the legal entity is transferred to the purchaser. After the sale as a ‘going concern’, the purchaser will be carrying on the business of the corporate debtor.”

Thus, it may be concluded that once the corporate debtor is transferred to the acquirer, it should become the responsibility of the acquirer to prepare the books of accounts and annual financial statements of the Company. The Liquidator remains responsible only for the preparation of the receipts and payments account until the liquidation process is over.

However, the situation can get tricky when GCS takes place in the middle of a financial year. In such a situation, the following questions need to be answered for a smooth completion of GCS of the CD in liquidation.

  • What date should be considered as the date of sale?
  • Who prepares the financial statements for the entire financial year in which the sale takes place?

On the first question, one may note Schedule I of the Liquidation Regulations which states:

“On payment of the full amount, the sale shall stand completed, the liquidator shall execute a Certificate of sale or sale deed to transfer such assets and the assets shall be delivered to him in the manner specified in the terms of sale.”

Hence, ideally, the date on which sale certificate is issued should be taken as the date of sale.

On the second question, say, the sale takes place on 15th January, 2022. Should the acquirer prepare the financial statements for the entire FY 2021-22? Or, should the liquidator provide completed financial statements to the acquirer as on 31st March, 2022?

As indicated earlier, after sale, the responsibility to prepare financial statements, is that of the acquirer. Before sale, the liquidator does not prepare any balance sheet/profit and loss statement. Hence, the acquirer shall prepare financial statements from the period 15th January to 31st March, 2022 to close the accounts of the financial year.

Given how liabilities and assets are dealt with in a GCS in liquidation, the accounting shall be done as follows:

Asset Side:

In a GCS, the buyer pays a lump sum amount as sale consideration, without assigning values to individual assets. Therefore, the valuation of individual assets of the corporate debtor after completion of sale as a going concern shall be the responsibility of the acquirer. The acquirer puts a value on the assets of the corporate debtor, which is his bid price – it may, therefore, spread the purchase consideration paid by him to various assets of the corporate debtor as is commonly done in case of a slump sale.

Liabilities side:

All liabilities of the corporate debtor, including the share capital becomes a claim on the liquidation estate. As such the same are settled in terms of sec. 53 of the Code. Therefore, the question of carryover of any liabilities of the corporate debtor onto the books of the entity, acquired under GCS, does not arise. 

In the matter of Gaurav Jain v. Sanjay Gupta (Supra), it was held by the Hon’ble NCLT, Mumbai bench that,

“The Applicant shall not be responsible for any other claims / liabilities / obligations etc. payable by the corporate debtor as on this date to the Creditors or any other stakeholders including Government dues. All liabilities of the Corporate Debtor as on the date stands extinguished, as far as the Applicant is concerned.”

“Creditors of the corporate debtor which include creditors in any form or category including government departments shall stand extinguished qua the Applicant”

[Emphasis Supplied]

As it has been discussed, there is no case of remission or cessation of liability, as it becomes a claim on the liquidation estate and not the corporate debtor. Thus, the question of writing off liabilities does not arise, let alone the taxability of the same under section 41(1) (a) of the Income Tax Act, 1961.

Note that, in certain cases, by agreement, buyers may take over certain liabilities. In that case, the acquired liabilities too, will appear on the new balance sheet.

Share Capital:

As for the share capital of the Corporate Debtor, the existing shares shall stand cancelled without there being any payment to the shareholders, since such shareholders assume the nature of claimholders upon commencement of liquidation, who shall be paid  in terms of sec. 53 of the Code, only if proceeds from liquidation estate are that sufficient.

As regards recording of capital by the auction purchaser, the corporate debtor issues new shares to the extent of the share capital. It is understood that the consideration received from the acquirer will be split into share capital and liabilities, based on the capital structure that the acquirer decides.

Reference may be drawn from the IBBI Discussion paper dated 27th April, 2019,[6] which discusses the modalities of a GCS and says as follows;

“The consideration received from the sale will be split into share capital and liabilities, based on a capital structure that the acquirer decides. There will be an issuance of shares by the corporate debtor being sold to the extent of the share capital. The existing shares of the corporate debtor will not be transferred and shall be extinguished. The existing shareholders will become claimants front he liquidation proceeds under section 53 of the Code”

[Emphasis Supplied]

Tax Considerations

Tax issues under GCS would arise as a result of confusion surrounding the following:

  • Carry forward and set off of losses and unabsorbed depreciation – Section 115JB and Section 79(2)(c) of Income Tax Act, 1961.
  • Writing off Liabilities

Carry forward and set off of losses and unabsorbed depreciation – Section 115JB and Section 79(2)(c) of Income Tax Act, 1961

  • Carry Forward and set off of losses and unabsorbed depreciation – Section 115JB

Section 115JB of the Income Tax Act, 1961,[7] provides for levy of a minimum alternate tax (MAT) on the “book profits” of a company. For the purpose of computation of book profits, the said section allows a deduction in respect of the amount of loss brought forward or unabsorbed depreciation, whichever is less as per the books of accounts.

However, for companies whose application for CIRP under the Code has been admitted by the AA, a carve out has been provided. Accordingly, an aggregate of unabsorbed depreciation and loss brought forward shall be allowed to be reduced from the book profits, if any.

The Act provides that;

“(iih) the aggregate amount of unabsorbed depreciation and loss brought forward in case of a—

 (A) company, and its subsidiary and the subsidiary of such subsidiary, where, the Tribunal, on an application moved by the Central Government under section 241 of the Companies Act, 2013 (18 of 2013) has suspended the Board of Directors of such company and has appointed new directors who are nominated by the Central Government under section 242 of the said Act;

(B) company against whom an application for corporate insolvency resolution process has been admitted by the Adjudicating Authority under section 7 or section 9 or section 10 of the Insolvency and Bankruptcy Code, 2016 (31 of 2016).”

[Emphasis supplied]

It can be clearly deduced from the provisions of the said section that the above mentioned carve out has been provided specifically for the purpose of a Resolution Plan during CIRP and not for a GCS in liquidation. 

  • Carry forward of losses – Section 79(2)(c)

Additionally, Section 79(2)(c) of the Income Tax Act, 1961 (‘Act’)[8], provides that the benefit carry forward of loss cannot be taken where there has been a change in shareholding. However, to provide an incentive to resolution applicants, the Income Tax Act has allowed the benefit of carry forward losses where such change in shareholding takes place pursuant to a resolution plan. 

However, no such exemption has been provided for the purpose of a GCS in liquidation. Hence, there exists uncertainty w.r.t the same. At this juncture, reliance may be drawn to certain NCLT rulings[9], wherein such benefit has been allowed by the Adjudicating Authority, subject to the approval by the concerned Income Tax Authorities under the relevant provisions of the Act.

Conclusion

While the process w.r.t. conduct of GCS has been explained by the Liquidation Regulations, the above discussed points have not been explicitly mentioned or ascribed in any guidance note or standards. Due to these uncertainties, these questions have often been subject to litigation, which leads to further delays. Hence, the need of the hour is a clear set of rules and standards, addressing the questions discussed above, as a result of which GCS is expected to gain further traction and deliver better results.


[1] The Insolvency and Bankruptcy Board of India (Liquidation Process) (Second Amendment) Regulations, 2018

[2] IBBI Quarterly Newsletter, July – September, 2021

[3] Enabling Going Concern sale in Liquidation – by Resolution Service Team, Vinod Kothari & Company

  Liquidation sale as a Going Concern – The concern is Dead, Long Live The Concern, authored by Vinod Kothari

  Concerns on Going Concern Sale under IBC – to be or not to be, authored by Parth Ved

  Sale of Legal Entity as an asset: A step towards value maximisation, authored by Megha Mittal

[4]Nitin Jain Liquidator of PSL Limited vs. Lucky Holding Private Limited

[5] Gaurav Jain (Supra)

[6] Discussion Paper dated 27th April, 2019

[7] Section 115JB of Income Tax Act, 1961

[8] Section 79 of the Income Tax Act, 1961

[9] Gaurav Jain (Supra)

Nitin Jain Liquidator of PSL Limited vs. Lucky Holding Private Limited

Takeaways from Budget 2022-23 – Fast Track Exit for Companies

By Shaivi Bhamaria – Associate, [shaivi@vinodkothari.com]

Introduction

Over the past few years the Government of India has been increasingly focusing on ‘ease of doing business’ by corporates, and has taken several initiatives towards the same, such as exemption to private companies from the requirement of minimum paid up capital by way of the Companies (Amendment) Act, 2015; establishment to the Central Registration Centre (‘CRC’) under section 396 of the Companies Act, 2013 (‘CA, 2013’) for providing speedy incorporation related services; launch of the integrated web form SPICe+ and integration of the MCA21 system with the CBDT for issue of PAN and TAN to a company incorporated using SPICe+; launch of  web based service R.U.N. (Reserve Unique Name) for reserving a name for a new company, etc..

However, the term ‘ease of doing business’ includes not only a seamless start to a business or making the journey less cumbersome, but also involves the ease of exit. While there are various modes of exit available to corporates,  such as winding up, summary liquidation, mergers and amalgamations etc[1], given that in voluntary modes of exit like striking off or voluntary liquidation under IBC, the company is either solvent enough to meet its liabilities or holds nil assets and liabilities, ideally, the closure processes is expected to be fast and simple, However, it has been observed that these voluntary modes have not been essentially ‘easy’ given the significant delays associated with them.

It is in the backdrop of such delays, the Union Budget, 2022-23[2] has proposed certain reforms, specifically for speeding up the striking off process under section 248 (2) of the Companies Act. Further, the Insolvency and Bankruptcy Board of India (‘IBBI’) has issued a Discussion Paper dated 1st February, 2022[3] proposing amendments in the IBBI (Voluntary Liquidation) Regulations, 2016, for ensuring a faster closure of voluntary liquidation processes.

In this write up, the author discusses the two sets of proposed reforms as mentioned above, and attempts to gauge their effectiveness at present and post implementation of the proposed amendments. Read more

Non-Performing Assets: A Solution at Last?

– Shreyan Srivastava (resolution@vinodkothari.com)

Background

In India, Non-Performing Assets (“NPAs”) have been a chronic plaque in the economy for decades. Although recent reports indicate that the Gross NPA (“GNPA”) and Net NPA (“NNPA”) have been systematically declining, in comparison to other economies, the country still faces a high volume of NPAs. For this reason, for the last several budgets, economic policies in India have been tailored to provide relief from the existing NPAs and to provide mitigatory steps to reduce the rate of such NPAs.

In this article, we discuss the current situation of NPAs in the country and assess the feasibility of the steps taken by the Government to mitigate, control and resolve the same, specifically through measures introduced by the Union Budget 2021-22[1] leading upto the Union Budget 2022-23[2] and the extent of the reliefs they provide.

A Two-Decade History

As illustrated in Figure 1, from the fiscal year of 2008-09, both Gross NPA (“GNPA”) and Net NPA (“NNPA”) for Scheduled Commercial Banks (“SCBs”) were following an upward trend with a slight dip in 2010-11. The highest NPA was recorded for the financial year of 2017-18, following which a structural decline was observed despite the overwhelming impact of the pandemic on all economic sectors in 2020.[3]

As per data provided by the RBI, there has been a constant decline of Net and Gross NPA Ratios in Scheduled Commercial Bank ever since the fiscal year of 2018-19:-

  • As of September-end 2021, the NNPA ratio sits at 2.2% compared to 6% in 2017-18.
  • As of September-end 2021, the GNPA ratio sits at 6.9% compared to 11.2% in 2017-18.

Similarly, the NNPA and GNPA ratios for NBFCs stood at 6.55% and 2.93% and 6.55% for September-end 2021.

A large portion of this declining rates of GNPA and NNPA ratios can be attributed to various available resolution mechanisms, including the Insolvency and Bankruptcy Code (IBC), SARFAESI Act, Debt Recovery Tribunals, etc, which have proved to be useful to certain extent. However, there still remains a large stock of legacy NPAs which are yet to be resolved. As per a report issued by RBI[5], in F.Y. 2019-20, the total amount of NPAs recovered was merely 23% of the total NPAs worth a whopping Rs. 7,42,431 crores.

The Indian Council for Research on International Economic Relations (“ICRIER”) studied Asset Management in various foreign jurisdictions such as the United States, Sweden, Italy and Indonesia all of which had instituted a centrally owned Asset Management Company (“AMC”) during a financial crisis with a sunset clause. Thus, once the financial crises had been lifted the AMC would be dissolved via its sunset clause.

Union Budget 2021-22: Creation of the Bad Bank

The need for a government owned ARC to manage the NPA problem on a large scale was identified as early as 2017 by the ICRIER and recognising the same the Governor of the RBI: Shri Shaktikanta Das observed: “If there is a proposal to set up a bad bank, the RBI will look at it”.[6] Subsequently, the Finance Minister of India during the Union Budget Speech of 2021-22 stated:

“An Asset Reconstruction Company Limited and Asset Management Company would be set up to consolidate and take over the existing stressed debt and then manage and dispose of the assets to Alternate Investment Funds and other potential investors for eventual value realization”.[7]

Soon after the Union Budget of 2021-22, the Government incorporated the National Asset Reconstruction Company Limited (“NARCL”) under the Companies Act, 2013 and registered the same with the RBI. The NARCL is essentially the first government owned ARC in India, set up in a manner similar to Asset Management Companies in the foreign jurisdiction, and is owned primarily by public sector banks.

As provided in its mandate, the Indian Debt Resolution Company Limited (“IDRLC”) was set up to act as the operational entity designed to manage the NARCL such that while the latter would offer the purchase stressed assets of the lead bank and acquire them, the IDRLC would engage with the management (market professionals and turnaround experts) and value addition of such assets. Thus, what was born was a unique Public-Private Partnership of NARCL-IDRLC with the mandate to mitigate the NPA problem in the economy.

The NARCL had proposed to acquire stressed assets worth Rs 2 lakh crore in a phased manner in the proportion of 15% Cash and 85% in Security Receipts (SRs), all the while operating within the existing framework for ARCs as issued by the RBI.[8]In fact, the NARCL had already planned for Phase I with fully provisioned assets of about Rs. 90,000 crores expected to be transferred to NARCL before the end of the current financial year of 2021-22.[9] From what is understood, NARCL shall focus on the legacy assets, worth Rs. 500 crores or more, which are generally not targeted by the privately owned ARCs.

However, despite being proposed a year back, NARCL was only made live on 27th January, 2022, merely 4 days prior to the Union Budget 2022-23. Hence, we are currently in a very nascent and premature stage to gauge if at all the public-private relationship would give the expected results.

The National Bank for Financing Infrastructure and Development

With the NARCL due to begin their operations of Phase I, the Ministry of Finance issued a notification on 28th January 2022 (close to the Union Budget Speech of 2022-23) which formally established the National Bank for Financing Infrastructure and Development (“NBFID”).[10]As elaborated by the PRS India, the NBFID is to operate as a corporate body with authorised share capital of one lakh crore rupees which can only be held by selected public sector enterprises.[11] Its mandate would be to directly or indirectly lend, invest, or attract investments for infrastructure projects as selected by the Central Government located entirely or partly in India. The various sectors have been identified in Figure 2 below: –

Thus, unlike any other jurisdictions, India appears to adopt a three-fold sectoral approach to rectify their NPA problem:

  • Private Sector: Private ARCs registered with the RBI.
  • Public-Private: The NARCL-IDRLC
  • Public: The NBFID.

Concluding Remarks

While the Union Budget 2021-22 had formally recognised the commencement of the NBFID and NARCIL, its performance and efficacy is yet to be investigated. Moreover, what makes the NBFID stand out from its government owned AMC counterparts in foreign jurisdictions is the lack of a sunset clause given that it targets the Infrastructure Sector. Similarly, not much can be said about the NARCL-IDRLC which is also due to begin its Phase I sometime before 31st March 2022.

[1] https://www.indiabudget.gov.in/budget2021-22/doc/Budget_Speech.pdf

[2] https://www.indiabudget.gov.in/doc/Budget_Speech.pdf

[3] https://www.indiabudget.gov.in/economicsurvey/doc/echapter.pdf#page=55

[4] https://www.indiabudget.gov.in/economicsurvey/doc/echapter.pdf#page=55

[5] https://rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID=1188

[6] 39th Palkhivala Memorial Lecture

[7] https://www.indiabudget.gov.in/budget2021-22/doc/Budget_Speech.pdf

[8] https://pib.gov.in/PressReleseDetailm.aspx?PRID=1755466

[9] https://pib.gov.in/PressReleseDetailm.aspx?PRID=1755466

[10] https://egazette.nic.in/WriteReadData/2021/226210.pdf

[11] As per PRS India: the shares may be held by: (i) central government, (ii) multilateral institutions, (iii) sovereign wealth funds, (iv) pension funds, (v) insurers, (vi) financial institutions, (vii) banks, and (viii) any other institution prescribed by the central government.

[12] https://prsindia.org/billtrack/the-national-bank-for-financing-infrastructure-and-development-bill-2021