Corporate Law

Pre Pack Paradigm in India

Corporate rescue, as a precursor to insolvency resolution, enforcement against or liquidation of a company, is a prominent feature of insolvency laws across the globe. Corporate rescue provides creditors of a stressed debtor company with the tools to formulate a plan to salvage the status of such debtor company and revive the business again. The Insolvency and Bankruptcy Code, 2016 aims at business revival under strict timelines, however adherence to the adjudicatory timeline prescribed by the Code remains a challenge.

While the Code facilitates the recovery of dues with minimum losses for creditors, the timely revival of debtor companies is often delayed. Furthermore, other issues exist such as formal engagement of third-party advisors, direct and indirect costs, operational disruptions, and loss of goodwill of the debtor company, to name a few.

Legal luminaries opine that introduction of the pre-packaged insolvency resolution process (pre-packs) with necessary checks and balances could change the course of insolvency resolution in India. The Indian economy is grappling with mounting non-performing assets (NPA) and creditors including banks, financial institutions, and other lenders are left high and dry with sluggish recoveries. Pre-packs across jurisdictions are known to plug this wide recovery gap.

Typically, pre-packs are known to combine “the best of both worlds” so that insolvency proceedings cause nominal disruption to debtors’ company’s operations by combining speedy resolution, cost-effectiveness, and value maximization with a focus on business continuity. With most pre-packs having the potential to reduce litigation, due to their consensual and informal nature; their success is subject to the binding effect it has on the debtors, creditors, and other stakeholders.

However, meticulous studies of pre-packs reveal tailor-made features to suit each jurisdiction and none of these variants can be replicated in India without dovetailing it from the legal framework.

Further, past trends regarding out-of-court settlement and restructuring schemes indicate little to no success and often end up before the courts. Furthermore, private negotiation among stakeholders prior to commencement of the formal process, which contributes to the advantages of pre-pack, is often a source of distress. Therefore, balancing transparency during the pre-pack process without risking the confidence of creditors, customers and employees may be a challenge.

Another major concern is that pre-packs pay no consideration to the future viability of the new company emerging from a pre-pack sale. The current laws state the legal responsibility of the insolvency practitioner towards the creditors of the old business; however, the long-term interests of stakeholders of the new business should also be taken into account with good intention.

Besides, pre-packs also give rise to the concern of ‘serial pre-packing where pre-pack is used to avoid loan repayment and perpetuate unviable businesses. The informal process of pre-packs involving private negotiations of high-value businesses would only exacerbate the existing problems. Therefore, pre-packs should be designed to enhance transparency in India, although different countries across the world have varying levels of transparency, but usually less than the CIRP.

In view of the above, corporate rescue and specifically pre-packs would prove useful since the liquidation of borrowers seems far from a viable solution to cure the longstanding malaise of NPAs in India. However, its impact at the grassroots level can be gauged only after the meticulous implementation of the Pre-packaged Insolvency Resolution Process under the Insolvency and Bankruptcy Code, 2016.

Thus, as creditors await pre-packs, the hope is that legislators succeed in resolving the existing NPA problem and default culture; and not promulgate just another corporate rescue method riddled with implementation ineffectiveness and woes.
 

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Anti Trust Legislation to Control Corporate Monopolies

When one takes a picture of the entire world, it becomes quite clear that the problems of concentration of economic power, monopoly, and restrictive trade practices are present in almost all the democratic countries of the world. However, with increasing globalization and industrialization, competition among companies and countries is becoming vigorous and complicated leading to monopolistic tendencies.

Monopoly market, a market where avarice and profit-making drive decision making, social welfare usually takes a backseat. Apparently, Adam Smith’s free-market economy pivots around the quintessential prospect of minimal government intervention so that markets can self-regulate and operate rationally. Unfortunately, in most cases, such an unregulated environment allows the rise of monopolies through organic or inorganic growth.

During the time of license raj, monopolies and the Restrictive Trade Practices Commission were denounced by all shades of liberal opinion. However, even after the British raj, monopiles persisted due to India’s socialistic and archaic structure. However, such a detestable taste in expansion and restricted entry in the market was altered in 1991 through LPG policies.

Need for Antitrust laws

It is no news that the exponential rise of big techs like Google, Apple, Amazon, Facebook, etc. mimics the dominance enjoyed by these particular trusts in various vulnerable markets. Over the past years, according to their conduct and corporate behavior, many of these firms have systematically engaged in predatory conduct to drive out competition by various ways of “killer acquisitions”.

Though the monopoly situation of Microsoft was buried long ago in 2001, the embers have again been fanned with a growing consensus that big tech now wields overwhelming power, so much so that they cause tangible harm to competitors and consumers alike. Given Amazon’s alleged report of mistreatment of its employees, with plummeting social welfare, such monopolies need curtailment.

Now, if the problem is considered in the Indian context, such firms do operate in India too, to such a large extent that they are increasingly taking over the e-commerce and welfare sector in India. Given the precarious presence of such tech giants in the country, it is time that India starts considering a revamp strategy for its anti-trust laws.
As aforementioned, the impact of the west’s events in India cannot be, by any chance, downplayed.

Given the globalized era that we live in, the Competition Commission of India (CCI) has a penchant to mirror the US and the EU antitrust authorities. Thus, given the EU and US antitrust bodies’ stringent stand against tech giants like Facebook, WhatsApp, etc., there is a high probability that the CCI might initiate investigations to assess the detestable dominance of big tech firms in India and assess the requirement for a breakup of various power-wielding corporations.

But are India’s Antitrust laws ready for such significant change? Perhaps not. The western countries were the first to introduce the mammoth Competition laws to mitigate unfair advantages that money mongers enjoyed and to divest monopolies to protect the competitive integrity of relevant markets. But the story of the Competition Commission of India is quite different.

It is to be noted that the Indian competition law is not bothered about dominance by any single money monger or player in the market. The competition commission of India only objects to the use of such prominent power by an entity to unfairly control the market and manipulate prices for their products and services.

This particular denial of the competition act of 2002, to weed out the prerequisites for the determination of unfair dominance is in sharp contrast to the western antitrust laws which emphatically view every move by companies to consolidate their position with suspicion. Such a western approach has its merits, which kills unfair monopolies in their nascent stage.

Moreover, Section 28 of the Competition Act, 2002 which effectively empowers the CCI to divide a dominant firm to ensure that no firm can abuse its dominant position is ill-planned and doesn’t lay out a coherent, robust foundation for the act. This is due to the fact that the said section does not effectively require the CCI to make an actual finding of abuse to direct a firm’s division. It is to be noted that just mere apprehension of abuse by a dominant firm is sufficient to trigger the operation of this provision.

Thus, it is quite surprising that the robust foundation on which CCI laws are based is ill-defined and thus ill-omened. The Act itself does not effectively provide any guidance for determining justifiable triggers. Mere apprehension, in many cases, can lead to unjustifiable and ill-omened divestment because many firms go for mergers and acquisitions to expand capital and to earn large-scale benefits and economies of scale, which as a matter of fact is good for the economy. But a mere apprehension of an unjust takeover can have debilitating consequences.

Thus, such apprehensions, can in many cases also lead to slower growth, a restrictive business environment, and the threat of being mishandled. Given India’s NPA crisis, acquisition and merger seem to be the perfect ways out for various debilitating firms, thus mere apprehension as a base of divestment and antitrust procedures does not speak well of the antitrust laws in India. But on the other hand, this lack of guidance severely expands the scope of this provision and strengthens the CCI’s power.

But even after such ‘turbo-charged anti-competition law, Indian corporates have grown immensely and have associated themselves with everything that is undesirable in corporate clout. The reason why such leniency takes place in dealing with the big fish is politics and lousy policy formulation.

Some glaring examples of the same are Reliance Jio and ‘Salt to Steel’, a nice catch line associated with Tatas for a long. There is hardly any activity that one can cite, where these group entities are not present in India. In fact, Reliance has expanded so much across India that even the agriculture sector has not been spared of its charms. Reliance’s hold on the agriculture sector has already become all-pervading, with no specific sphere of activity, that one can think of, which has been spared.

Reliance’s footprint in the country’s agricultural sector might be new but Mr. Anil Ambani is leaving no stone unturned to sweep the market with his all-pervading presence. As a matter of fact, Reliance has launched an all-encompassing ‘farm-to-fork business’, which offers to deliver on many grounds like providing prominent help with the delivery cycle from harvest to the store by sourcing nearly half of all vegetables and fruits required for its retail chain. It is to be noted that this has grown by leaps and bounds through meticulously planned acquisitions and yet CCI has never been apprehensive about it.

Thus, all in all, in view of the fast-paced development, the recent surge of investigations by the CCI against big techs like Google and Amazon and the growing power of Ambanis, Adanis, and Tatas in the country can significantly and effectively act as a catalyst for the CCI to test the waters within the realm of its powers.

Thus, in order to maintain a balanced equilibrium between encouraging healthy competition and ensuring companies adhere to Anti-Trust laws, it is imperative to set a strong narrative against global giants operating in India according to their whims and fancies and therefore it will be interesting to witness how a genuine Anti-Trust Legislation to control corporate monopolies will take effect in India.

Tags: corporate monopolies, restrictive trade practices, anti trust legislation, monopolistic tendencies, monopolistic competition, monopoly market

CCI World-Class Merger Control Regime: M&A Activity in India

When the COVID-19 pandemic practically shut down global business in March 2020, the M&A world was thrown into an unruly tailspin. Unsigned pending deals were put on hold, in many cases indefinitely. Global uncertainty, stay-at-home orders, nervous credit markets, and rapidly changing industry conditions served as speed bumps to deal-making, if not absolute barriers.

While deal volume made a very strong and perhaps surprising comeback in the second half of the year, 2020 will be remembered as the year of the pandemic, and many lessons will be learned.

On June 1, 2011, India joined the world league with the US and EU as it was the day when merger control under the country’s Competition Act had gone live. This had emphatically given the CCI, the power to review an M&A transaction’s competitive effects, where parties, whether in India or overseas, exceed certain Indian and global asset-size/turnover benchmarks.

There are innumerable advantages of M&A activity in India, especially when it comes to its NPA crisis. With the banking sector reeling under the dead weight of its bad loans, the timely resolution is the key to revival as loss can be mitigated smoothly and timely. This is because the loss of shareholders and depositors is positively correlated with the time taken for banking resolution.

Luckily, M&Ahelps to mitigate this detestable, odious problem with its timely resolution policy. This can be seen as the developments in the cases handled by CCI have been significant and rapid, with 834 transactions notified to the CCI, with 824, or 98.8%, cleared in an average of 20 days, and none prohibited.

How do bank mergers lead to mitigation of the NPA problem in the banking sector?

As it is known, a bank merger is emphatically a merger of two or more banks. The bank reeling under the weight of its bad loan can significantly be merged with banks with, if not insurmountable, at least good profits and good administration. As it is known that banks’ NPAs rise due to their flawed management program, thus integration with a bank with good management can lead to better management and mitigation of the other bank’s crisis.

This implies that when banks are merged, the strong banks can significantly take some measures, in association with other banks’ top management, for improving services. This can include improved recovery measures, transfer of NPA accounts to specially designated branches, named Asset Recovery branch or with permission of top management, subject to legal restrictions, sell NPAs to an organization specialized in recovery at a discount.

Thus, it can be rightly stated that these measures reduce NPAs by recovery by transferring the problem to another organization known as Asset recovery companies or famously known as bad banks or ARC. It is to be noted that the percentage of NPAs is also reduced due to the integrated capital of the two merging banks. Thus, the merger of an indebted bank with a bank of good business and healthy deposits, improvement in good total business can take place.

To top it all, merged banks or big banks will also be able to get access to refinance, which is significantly available to only a few big banks. However, these require freedom for banks to function competitively and utilize the best expertise.

Additionally, a larger bank can manage its short- and long-term liquidity quite better. There will not be any need for overnight borrowings in the call money market and from RBI under Liquidity Adjustment Facility (LAF) and Marginal Standing Facility (MSF).

In contrast to the government’s reluctant and unprofitable approach to recapitalization, mergers usually guarantee a larger capital base and higher liquidity, thus the burden on the central government to recapitalize the public sector banks, again and again, comes down substantially. In addition to all the perks aforementioned, the merger can reduce the cost of banking operations and it will result in better NPA and Risk management.

For the bank, retaining and enhancing its identity as a larger bank becomes easier. After the merger, the benefits of the merger are enormous the generation of a brand-new customer base, empowerment of business, increased hold in the market share, and the opportunity for a technology upgrade. Thus overall it proves to be beneficial for the overall economy as well.

How do merger control regimes and increased profits help the economy?

Mergers ensure a better efficiency ratio for business operations as well as banking operations which is ultimately beneficial for the economy. Consequently, it leads to an increase in profitability and helps raise the standard of living, which is crucial for a growing economy like India.

As a matter of fact, the chances of survival of underperforming banks increase significantly and hence customer trust remains intact which is vital for the Economy and the bank which have to maintain their goodwill. The weaker bank gets merged into a stronger one and gets the benefit of large-scale operations.

But is M&A as rosy as it might sound? Of course, every coin has two sides to it so does M&A. It is to be noted that when two entities are merged, the inefficiencies of the smaller bank can also get integrated into the larger bank.

Recapitalization, the preferred solution by the government works for small-scale losses of small banks as recapitalization can revive the capital base of small banks. But if big bank defaults or the giant shaped bank books incur huge losses or high NPAs, it will be difficult for the entire banking system to sustain and for the government to regain control.

Thus, Mergers are important for the consolidation and expansion purposes of banks. Additionally, they are also crucial for the Economy as they are most of the time successful in saving weak banks which fail in meeting expectations or maintaining their bad loans.

But on the other hand, Mergers create a variety of problems that can cause great damage if merging is not executed properly as various cultures are involved in the transition. If merging is needed, it must be executed to lead to an environment of trust and agreement among the people of both organizations.

If people, work culture, and vision are blended amicably, merging will definitely have synergic effects and create a win-win situation. Looking ahead, we expect deal volume to continue to strengthen, particularly as companies spot new opportunities with vaccine rollouts enabling economic recovery and growth. The lessons from last spring’s busted, or nearly busted, deals will continue to live on in new deal terms.

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