Insolvency resolution cannot breach FDI rules, says Centre

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New Delhi | Published: October 27, 2017 5:30:24 AM

An insolvency resolution plan must not breach the country’s foreign direct investment (FDI) rules and suggest higher FDI in a debtor firm than the cap stipulated for that sector, the ministry of corporate affairs has informed stakeholders.

Insolvency resolution, FDI rules, Foreign Exchange Management Act, 1999, foreign investors,  IBC, FDI laws, centre, fdi policyThe IBC is aimed at the turnaround of stressed assets or, in the case of liquidation, their quick monetisation.

An insolvency resolution plan must not breach the country’s foreign direct investment (FDI) rules and suggest higher FDI in a debtor firm than the cap stipulated for that sector, the ministry of corporate affairs has informed stakeholders. This means no foreign investor can buy more equity even in a stressed company than allowed under the FDI norms for the relevant sector. In an illustration of Section 30(2)(e) of the Insolvency and Bankruptcy Code 2016, which directs resolution professionals to ensure any such resolution plan “does not contravene any of the provisions of the law for the time being in force”, the ministry told stakeholders in a letter: “…the resolution plan must not contemplate 100% foreign investment in a corporate debtor if the FDI policy/relevant foreign exchange laws permit foreign investment only up to 75% in the relevant sector of the industry.”

So, for instance, if a stressed airline goes for liquidation, foreign investors can’t pick up more than 49% in it, as the FDI laws allow only up to 49% in airlines. Similarly, if a tobacco manufacturing firm is liquidated, no foreign investor can buy any stake in it, as FDI is prohibited in this sector. The ministry said the resolution plan should be compliant with requirements such as restrictions on an Indian entity to issue securities to a person resident outside India under the Foreign Exchange Management Act, 1999 etc. “The purpose is to prevent approval of resolution plans, which are not legally implementable,” it said.

The requirement of Section 30(2)(e) of the code is to ensure that the resolution plan considered and approved by the committee of creditors and the adjudicating authority is compliant with the provisions of the applicable laws, and therefore, is legally implementable, it added. The IBC is aimed at the turnaround of stressed assets or, in the case of liquidation, their quick monetisation. Secured creditors, including banks, are placed third in the preference order in case of any liquidation to receive the proceeds, after meeting the cost of resolution and workers’ dues. Well over 400 cases of default, including 11 of the dozen large bad loan accounts of banks identified by the central bank, have been admitted by the national company law tribunals under the IBC.

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