In a landmark judgment that significantly impacts the banking sector's approach to Micro, Small, and Medium Enterprises (MSMEs), the Supreme Court has established comprehensive guidelines regarding the classification of MSME loan accounts as Non-Performing Assets (NPAs). The judgment emphasizes the mandatory nature of the Framework for Revival and Rehabilitation of MSMEs which have been prioritised by the government for a long time.
The Court examined the legislative framework, particularly focusing on the intersection of three crucial statutes: the MSMED Act, 2006, the Banking Regulation Act, 1949, and the SARFAESI Act, of 2002. Section 9 of the MSMED Act empowers the Central Government to take measures for facilitating promotion and development and enhance the competitiveness of MSMEs by specifying programs, guidelines, or instructions as it may deem fit.
The Framework, initially notified by the MSME Ministry on May 29, 2015, was designed to provide a simpler and faster mechanism to address stress in MSME accounts. Under this Framework, as the Court emphasized, the Banks had to identify incipient stress in the account by creating three sub-categories under the Special Mention Account (SMA) category: SMA-0 for accounts showing signs of incipient stress but not overdue for more than 30 days, SMA-1 for accounts overdue between 31-60 days, and SMA-2 for accounts overdue between 61-90 days.
The Court explicitly stated that the Instructions/Directions issued by the Central Government under Section 9 of the MSMED Act and by the RBI under Section 21 and Section 35A have statutory force and are binding to all the Banking companies. This interpretation significantly strengthens the Framework's implementation requirements.
The Court's ruling creates a balanced approach to responsibilities between banks and MSMEs. While the court mandated that the entire exercise as contained in the Framework for Revival and Rehabilitation of MSMEs is required to be carried out by the banking companies before the accounts of MSMEs turn into Non-Performing Assets, it simultaneously emphasizes that it would be equally incumbent on the part of the concerned MSMEs to be vigilant enough to follow the process laid down under the said Framework.
As far as the SARFAESI Act is concerned, the judgment clarifies that while the SARFAESI Act provisions have an overriding effect, they can only be initiated after the proper classification of an account as NPA, which must follow the Framework's requirements for MSME accounts. However, the Court also established a crucial limitation which states that if at the stage of classification of the loan account of the borrower as NPA, the borrower does not bring to the notice of the concerned bank/creditor that it is a Micro, Small or Medium Enterprise under the MSMED Act then such an Enterprise could not be permitted to misuse the process of law for thwarting the actions taken under the SARFAESI Act by raising the plea of being an MSME at a belated stage.
The Supreme Court's verdict explicitly overturned the High Court's interpretation that banks were not obliged to adopt the restructuring process without an application from MSMEs. The Court termed this interpretation as "highly erroneous," establishing unequivocally that the Framework's requirements are mandatory, not directory and banks can initiate the restructuring process independently.
This judgment has far-reaching implications for both banking institutions and MSMEs. Banks must now ensure comprehensive compliance with the Framework before NPA classification, including the creation and maintenance of Special Mention Account categories and a proactive approach to stress identification. MSMEs, in turn, must maintain timely documentation of their status and actively participate in the stress identification process.
The Supreme Court's ruling thus establishes a clear precedent for handling MSME loan accounts, emphasizing both the rights and responsibilities of financial institutions and MSMEs. While maintaining existing SARFAESI proceedings and preserving alternative remedies for appellants, the judgment creates a comprehensive framework that demands proactive engagement from both financial institutions and MSMEs while ensuring procedural fairness and systematic stress resolution. This balanced approach serves to protect MSME interests while maintaining banking sector stability, marking a significant development in banking jurisprudence.
The Reserve Bank of India (RBI) has enacted comprehensive modifications to its regulatory framework governing investments by regulated entities (REs) in Alternative Investment Funds (AIFs), marking a pivotal evolution in the financial sector's oversight mechanisms. These amendments, issued on March 27, 2024, refine the earlier guidelines set forth on December 19, 2023, which aimed primarily at curbing the practice of loan evergreening through AIF investments. The regulatory changes are designed to ensure a more robust and transparent investment framework for REs, including commercial banks, cooperative banks, financial institutions, and non-banking financial companies (NBFCs).
In its initial circular, the RBI imposed stringent restrictions on REs, preventing them from investing in AIF schemes that had downstream investments in their debtor companies. This measure was part of a broader strategy to eliminate indirect exposures that could potentially mask distressed loan accounts. According to the RBI's directive, REs were required to divest from such AIF schemes within 30 days of a downstream investment being made into their debtor companies or face provisioning penalties equal to 100% of their investment.
The revised framework introduces several key modifications that balance stakeholder concerns while maintaining stringent regulatory oversight. One of the most critical changes is the exclusion of equity investments from the definition of downstream investments, although the oversight of hybrid instruments remains. This adjustment, noted in the March 2024 circular, reflects a more nuanced understanding of corporate financing structures, acknowledging the role of equity in capital formation while addressing risks associated with hybrid instruments. By distinguishing between equity and other financial instruments, the RBI has demonstrated a sophisticated approach to managing systemic risk.
Another significant revision pertains to the provisioning requirements for REs. Under the revised guidelines, the 100% provisioning requirement now applies only to the portion of the RE's investment that is channeled through the AIF into a debtor company, rather than the entirety of the RE's investment in the AIF scheme. This proportional provisioning requirement reflects a more calibrated risk management framework that better aligns with actual risk exposure, mitigating unnecessary capital strain on REs while ensuring that provisions are appropriately allocated where risks are concentrated.
Moreover, the RBI has introduced specific guidance on capital treatment for investments in subordinated units of AIF schemes with a priority distribution model. Under the revised guidelines, the capital deduction for such investments must now be equally distributed between Tier-1 and Tier-2 capital, encompassing all forms of subordinated exposures, including sponsor units. This amendment provides greater clarity and precision in calculating capital adequacy, enabling REs to maintain compliance with prudential norms while managing their exposure to subordinated risks.
A particularly notable development is the explicit exclusion of investments made through intermediary vehicles, such as fund of funds and mutual funds, from the scope of the original circular. This carve-out allows REs to maintain strategic investments via such intermediaries while adhering to the broader regulatory objectives set out by the RBI. The exclusion is especially beneficial to development finance institutions like NABARD, SIDBI, and NIIF, which rely on intermediary investment vehicles to fulfill their sectoral mandates without being encumbered by direct regulatory restrictions.
Despite these clarifications and amendments, certain challenges remain. Tracking downstream investments continues to pose practical difficulties due to the fungible nature of funds within AIFs and the independent decision-making authority of AIF managers. Additionally, the treatment of compulsorily convertible instruments and the broader implications for sponsor relationships within AIFs may require further clarification from the RBI.
These modifications represent a measured and balanced regulatory approach, addressing industry concerns while upholding the RBI’s commitment to safeguarding the financial system from systemic risks. The amendments demonstrate the RBI’s agility in adapting its regulatory frameworks to evolving market conditions, ensuring that investments by REs in AIFs remain transparent and subject to rigorous oversight. As the financial sector adapts to these revised guidelines, ongoing dialogue between the RBI and stakeholders will be critical in ensuring effective implementation and addressing any emerging challenges.
In recent years, a new category of social media influencers has gained prominence, they are famously referred to as "finfluencers". The name indicates a combination of "financial" and "influencers." The Advertising Standards Council of India (ASCI) defines these individuals as those who use digital and social platforms to share information and guidance on various financial matters, including investment strategies, personal finance management, and insurance options.
With the increase in popularity of social media, the community of influencers in various categories has also increased. Popular segments include personal care, Health Care, Food and Beverage, Fashion and Lifestyle, Edutech etc. One such well-known category is financial education/information on which finfluencers create and publish content. A significant portion of the followers of these influencers consists of individual investors seeking easily accessible financial advice to support their investment objectives. This trend has drawn the attention of regulatory bodies like the Securities and Exchange Board of India (SEBI), who express concerns that the recommendations provided may not always stem from transparent, well-researched, or expert sources.
The Securities and Exchange Board of India (SEBI) addressed the issue of financial influencers in its 2023 consultation paper, "Association of SEBI Registered Intermediaries/Regulated Entities with Unregistered Entities (including Finfluencers)." This document proposed regulating finfluencers through registration and disclosure requirements. It also suggested penalties for misleading claims along with guidelines for regulated entities' interactions with unregulated parties.
The 206th SEBI Board meeting this year in June 2024, approved the recommendations outlined in Consultation Paper. The approved recommendations include:
As per SEBI's definition provided under SEBI (Investment Advisers) Regulations, 2013 (“IA Regulations”), individuals who provide investment advice for a fee are investment advisers. At first glance, finfluencers might not seem to fit this category as they often don't charge their audience directly. However, the situation becomes more complex when we consider finfluencers who offer paid courses or personalized advice related to securities trading.
A recent SEBI order addressed a case involving a popular finfluencer. The individual allegedly used social media to promote paid courses promising personalized investment guidance. SEBI determined that such activities fall under the purview of investment advice IA Regulations.
SEBI aims to ensure that regulated financial entities only partner with finfluencers who are officially permitted to give investment advice. This may lead regulated entities to require registration from finfluencers they work with. Finfluencers who want to maintain sponsorship relationships with these entities will likely need to meet SEBI's regulatory standards.
The new guidelines aim to protect consumers from inefficient advice by regulating the emerging trends of finfluencers activities. However, the new requirements pose several challenges. Regulated entities may need to significantly enhance their customer onboarding processes to identify potential finfluencers which will increase due diligence requirements. In order to regulate, initially it is important to identify these finfluencers but identifying finfluencers who operate anonymously on platforms like Telegram or Reddit could be particularly difficult. Before engaging with finfluencers, entities will need to verify whether identified finfluencers are properly registered or permitted by SEBI. These additional due diligence requirements could increase operational costs for regulated entities.
The proposed regulations aim to bring finfluencers under closer regulatory scrutiny. However, the practical implementation of these rules may present significant challenges for both finfluencers and regulated financial entities. Further clarification from SEBI regarding the extent of due diligence required and methods of its implementation will be crucial for entities to navigate this new regulatory landscape effectively.
Related party transactions (RPTs) often lead to conflicts between listed companies and their related parties. Since many Indian listed companies are promoter-driven or closely held, SEBI has consistently updated the regulatory framework governing RPTs to mitigate the risk of its misuse. The framework for related party transactions in listed entities is primarily laid out in the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR Regulations). These regulations focus on ensuring transparency, disclosure, and compliance. SEBI has taken significant steps to reinforce the regulatory framework for RPTs. one such step is SEBI Working Group Report on RPTs, published on January 27, 2020. This report noted that while companies were adhering to the letter of the law, they often violated its spirit. As a result, SEBI expanded the scope of RPT regulations to include transactions with unrelated parties if such transactions have the "purpose and effect" of benefiting a related party. In addition to that, recent enforcement actions involving Linde India Limited (LIL) and Reliance Home Finance Limited (RHFL) prove that SEBI is moving towards stricter enforcement of the related party transactions framework. The regulator now focuses on examining the purpose and effect of transactions carried out by listed companies and their subsidiaries to determine compliance with related party transactions regulations.
In the case of RHFL, SEBI issued a detailed order on August 22, 2024, penalizing 27 companies. RHFL, a non-banking financial company (NBFC), had transferred significant funds to borrowers with weak financials and little or no cash flow, bypassing standard due diligence procedures. SEBI alleged that these actions were part of a deliberate scheme created by RHFL's promoters and key management personnel to provide funds to entities connected to the promoters. RHFL argued that these loans were given in the ordinary course of business, at arm's length, and therefore did not constitute related party transactions. However, SEBI found that these transactions were part of a coordinated effort to benefit related entities at the expense of public shareholders. SEBI's investigation revealed connections between RHFL and the borrowing entities through common directorships, addresses, and cross-holdings. RHFL also claimed that SEBI lacked jurisdiction to act, as the company was regulated by the National Housing Bank and the Reserve Bank of India. SEBI refuted this, asserting its authority over RHFL as a listed company. SEBI concluded that RHFL had violated the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Markets) Regulations, 2003, by misleading investors about the diversion of funds, which also breached the LODR Regulations due to inadequate disclosures.
SEBI passed an order on Linde India Limited on July 24, 2024, relating to agreements between LIL, a listed company, and Praxair India Private Limited (PIPL), an unlisted company, following the global merger of Linde AG and Praxair Inc. These agreements involved commercial transactions and a joint venture/shareholder agreement detailing business allocation. Investors raised concerns that these agreements constituted related party transactions that were not in the best interest of public shareholders. LIL contended that shareholder approval was unnecessary because the transactions did not meet the materiality threshold of 10% of turnover, as required under Regulation 23 of the LODR Regulations. LIL further argued that only transactions executed under a "common contract" should be aggregated when calculating the materiality threshold. SEBI disagreed, ruling that all RPTs with a related party must be aggregated for assessing materiality, regardless of whether they were under different contracts. SEBI also rejected LIL’s argument that allocating business opportunities did not constitute an related party transactions, noting that future business allocation is effectively a transfer of assets and should be subject to the same scrutiny. Furthermore, SEBI found that the board had approved the allocation without obtaining a valuation report or assessing the potential financial impact on public shareholders.
In the RHFL case, SEBI took into account the circumvention of due diligence, involvement of connected entities, and lack of disclosure as evidence of a scheme to defraud investors. In the Linde case, SEBI criticized LIL’s board for proceeding with the RPT after receiving legal opinions that shareholder approval was unnecessary, despite shareholders having initially rejected the transaction.
SEBI’s recent enforcement orders underscore the importance of transparency and robust governance in managing RPTs. Companies should consider the financial impact of all obligations when determining whether related party transactions compliance is required. Apart from that, independent valuations should be conducted when appropriate. Furthermore, agreements that involve the relinquishment of rights or business opportunities to related parties should be carefully assessed. It is no longer sufficient to follow the formal requirements of the law; companies must also consider the substance and potential consequences of their actions. Boards are expected to act with prudence and care, ensuring that public shareholders’ interests are not adversely affected by RPTs.
SEBI's evolving approach to regulating related party transactions indicates that higher standards of governance are now the norm. The regulator has shown that it will enforce stringent compliance measures to protect public shareholders. Hence, the companies must adopt a forward-thinking approach to governance. The companies must carefully balance the interests of the business with those of public shareholders to ensure long-term success and compliance.
The Securities and Exchange Board of India (SEBI) via circular no. SEBI/HO/AFD/AFD-POD-1/P/CIR/2024/112 amended the borrowing norms for Category I and II Alternative Investment Funds (AIFs) to give them more operational flexibility and promote ease of doing business. AIFs can now borrow to bridge shortfalls in drawdown commitments. The move is expected to help AIFs with liquidity concerns due to delayed capital contributions from investors.
This article delves into the critical issues surrounding these regulatory changes, including the impact of delayed capital contributions on AIF liquidity, the potential risks associated with increased borrowing, and the balance between operational flexibility and investor protection. Additionally, it also covers SEBI's recent proposal to allow AIFs to pledge equity holdings in infrastructure investee companies, a significant shift aimed at facilitating debt raising for capital-intensive projects.
Earlier, Category I and II AIFs were not allowed to borrow except for meeting temporary needs or covering operational expenses. Borrowing for this purpose was restricted to a period of 30 days for not more than four times a year. However, as per the new norms introduced by SEBI on August 19, 2024, Category I and II AIFs are permitted to borrow funds specifically to meet drawdown shortfalls subject to certain conditions.
However, there are certain prerequisites. AIF shall disclose the intention to borrow for drawdown shortfalls in its PPM (document disclosing material information about the AIF to the prospective investors to raise funds through private placement).
Borrowing shall only be allowed in case of emergency where an investment opportunity is on the horizon and despite best efforts, the manager has not been able to obtain the required drawdown amount. The borrowed amount cannot exceed:
The costs of the borrowings are for the account solely of the investors who have not made their committed drawdown amount available. AIFs must maintain a 30-day cooling-off period between borrowing periods. The details relating to borrowings and lending, including, where relevant, amounts borrowed and details on the use and investment of monies borrowed or raised through leverage, shall be disclosed at least once a year to all investors.
These are intended to make sure that borrowing is resorted to as a last measure and it does not become an undue burden on the compliant investors. This in-built mechanism also addresses risks such as over-dependence on borrowed funds and ensures that AIFs adopt a more balanced approach to liquidity management, which may not be possible if the incentives are stacked heavily in favor of short-term returns.
The new regulations strike a balance between providing AIFs with the flexibility to manage liquidity challenges and maintaining investor protection. There are various managing risks associated with borrowing, such as higher costs for delinquent investors and administrative complexities. SEBI’s move brings Indian AIFs closer to international standards.
SEBI’s relaxation of borrowing rules for Category I and II AIFs represents a pivotal shift in India's regulatory framework for alternative investments. By enabling funds to address drawdown shortfalls through borrowing, the regulator has provided a solution to time-sensitive investment opportunities while ensuring that the burden of such borrowing falls squarely on delinquent investors.
One more significant development happened on February 2, 2024, when SEBI issued a consultation paper proposing that Category I and II AIFs be allowed to create an encumbrance on their equity holdings in infrastructure sector investee companies. The objective is to facilitate raising debt for these companies, which often require equity pledges to secure loans for capital-intensive projects.
Infrastructure projects, especially those in sectors such as transport, energy, and telecommunications, are characterized by high leverage. However, lenders usually seek equity collateral to safeguard themselves from undue risks associated with these projects. AIFs, specifically those focused on infrastructure assets have been constrained by the extant regulations which prohibit the use of equity collateral by AIFs to raise debt for investment in their investee companies.
Earlier, SEBI prevented Category I and II AIF from pledging shares to obtain loans as investors of AIF may lose money in the fund if investee companies default on loan repayment. However, it says it will allow AIFto pledge equity shares of investee companies in the infrastructure sector in order to provide ease of doing business for AIFs and to foster an ecosystem wherein private capital effectively complements the various modes available for infrastructure financing.
The above-discussed regulatory changes for Category I and II AIFs mark a significant shift towards greater flexibility and efficiency in the Indian investment landscape. By allowing AIFs to borrow to bridge drawdown shortfalls and pledge equity in infrastructure projects, SEBI has addressed liquidity challenges. These amendments enhance AIFs' operational capabilities while balancing investor protection, aligning Indian regulations with international standards, and fostering a more dynamic investment environment.
In this case the Hon’ble Bombay High Court has addressed the question that whether the moratorium under section 96 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) is in respect of debt or debtor and whether in view of the commencement of the moratorium can arbitration proceedings be stayed against some of the parties and against other parties?
The factual matrix is that the Petitioner had sanctioned a loan to one Sterling Motor Company (“SMC”). The loan documents were executed by Mr. Traun Kapoor in the capacity of the proprietor and has also stood as guarantor for the repayment of the said loan. Also, Mrs. Pavan Kapoor, Mr. B. L. Passi and Rameshwar Sweets and Namkeens Private Limited stood as guarantors. Thereafter, the Petitioner initiated arbitration proceedings. During the pendency of the said arbitration proceedings, Volkswagen Finance Private Limited filed a Company Petition against SMC and Mr. Tarun Kapoor. In view thereof, Mr. Tarun Kapoor filed an application in the Hon’ble National Company Law Tribunal (“NCLT”) thereby contending that in view of section 96 of the IBC, a moratorium had come into effect due to the initiation of the aforesaid insolvency proceedings by the said Volkswagen Finance Private Limited on account of which the arbitration proceedings were required to be kept in abeyance. In the meantime, Mr. B.L. Passi passed away and his legal heirs (the present Respondents) were impleaded as a party to the arbitration proceedings.
Vide order dated 11th January 2021, the Ld. Arbitrator accorded the benefit of the moratorium to Mr. Tarun Kapoor and Mrs. Pavan Kapoor and the proceedings against them were directed to remain in abeyance. However, the arbitration proceedings against Respondent Nos. 4 and 5 were directed to continue. Also, the Ld. Arbitrator restrained the present Respondents from disposing of their assets. Thereafter, Mr. Tarun Kapoor filed an application in the arbitration proceedings seeking adjournment of the arbitration proceedings, sine die on account of the proceedings against SMC kept in abeyance (by order dated 11th January 2021) which came to be dismissed by order dated 16th December 2021 as a result of which the proceedings continued. Subsequently, vide order dated 7th October 2022, the Ld. Arbitrator directed the arbitration proceedings to remain in abeyance as long as the moratorium is in force. Also, the Ld. Arbitrator dismissed the application filed by the Petitioner seeking vacation of the order dated 7th October 2022.
The Hon’ble Court held that it could invoke jurisdiction under Article 226 only if the arbitral tribunal acted perversely or committed patent illegality. As regards, the issue of separating and continuing arbitration proceedings, the Hon’ble Court held that Section 3(11) of the IBC defines 'debt' as a liability from any person, including financial and operational debts, without distinguishing between principal borrowers and guarantors. Similarly, the protection under Section 96 is in respect of entire debt, regardless of who owes it. Thus, the moratorium covers “all debts”, including those owed by guarantors. The court further stated that when the Hon’ble NCLT imposed moratorium under Section 96 for the principal borrower and the guarantor, it covered the entire debt without any distinction. The debt in arbitration includes liabilities of both the principal borrower and guarantors, and it cannot be divided to stay proceedings against one party while continuing against others. Also, there is no provision in the Arbitration & Conciliation Act, 1996 for splitting up arbitration proceedings; and the same has to be decided in their entirety against all the parties and the entitlement of the Claimant and the liabilities of the respective Respondents shall be determined on the basis of the evidence.
Thus, the Hon’ble Court clarified that the moratorium applies to the entire debt, not allowing selective continuation of arbitration proceedings.
In the intricate landscape of consumer finance and insurance, non-disclosure often presents complex legal challenges. The Government of India has taken various steps to strengthen the Consumer Disputes Redressal Commission (CDRC) and improve the consumer dispute resolution mechanism and the commission remains one of the most preferred destinations for consumers to get their disputes resolved. The term “consumer” is given a wide interpretation by the courts which favours the aggrieved individual in getting compensation from the other party violating his rights. In New India Assurance Co. Ltd. v. Hilli Multipurpose Cold Storage Pvt. Ltd. The Supreme Court emphasized the consumer-friendly nature of the consumer forum. Further, the Supreme Court in Today Homes And Infrastructure Pvt Ltd V. Ajay Nagpal And Ors. held that the Real Estate (Regulation and Development) Act, 2016 (‘RERA Act’) does not bar the ‘consumer complaints’ filed by the apartment allottees against builders under Consumer Protection Act. hence, the consumer can seek compensation in a wide range of claims. Government remains to play an active role in promoting the forum as an effective way of consumer redressal. In spite of its popularity and the number of complaints received, the pendency in the consumer commissions shows a declining trend from 5.55 lakhs in December 2022 to 5.45 lakhs in September 2023. In 2023 number of cases disposed of was 1.36 lakhs which is higher than the number of cases filed at 1.26 lakh. CONFONET 2.0 software provides a robust framework for filing complaints and making electronic tracing very easy.
National Consumer Disputes Redressal Commission remains to play an active role in the evolving landscape surrounding consumer disputes. The recent case before the National Consumer Disputes Redressal Commission (NCDRC) involving Bajaj Allianz Life Insurance Co. Ltd. and a policyholder, Bharti Mahaveer Jain, brings to light crucial issues of contract interpretation, disclosure obligations, and the boundaries of insurance coverage. This case not only underscores the importance of clear communication in financial products but also tests the limits of consumer protection in India's evolving insurance sector.
The respondent, Bharti Mahaveer Jain, availed two home loans of ₹28,95,000 and ₹48,60,000 as a co-borrower with her husband from Bajaj Finance Ltd. Along with the loans, she obtained an insurance policy on October 8, 2013, under a scheme where Bajaj Finance Ltd. was the Master Policy Holder of a Group Master Policy from Bajaj Allianz Life Insurance Co. Ltd. This policy was valid until June 20, 2016.
The respondent was enrolled in the Group Insurance Scheme with a risk commencement date of December 21, 2013, for a sum assured of ₹71,49,174. On March 20, 2014, the respondent informed the insurance company that she had been diagnosed with carcinoma of the right breast and was hospitalized on March 15, 2014.
The insurance company rejected the claim based on Clause 15(iii)(a) of the Master Policy, which excluded "any critical illness which existed at or occurred within 6 months of the entry date or the date of revival." The Claim Review Committee also rejected the critical illness claim.
The respondent then approached the State Commission in Consumer Complaint 114 of 2020, seeking payment of the sum assured, interest, compensation for mental agony and harassment, and costs. The complaint was allowed.
The appellant argued that the State Commission erred in not appreciating that a contract must be interpreted according to its terms and conditions. They cited the Supreme Court judgments in General Assurance Society Limited Vs. Chandumull Jain & Anr. and The Oriental Insurance Co. Ltd. Vs. Sony Cherian[1] to support their contention that insurance policies should be strictly construed to determine the insurer's liability.
The appellant claimed that the policy had a 15-day Free Look Period, and since no request for cancellation was received, the Certificate of Insurance (COI) stood confirmed. They maintained that the claim was rightly rejected under Clause 15(iii)(a) of the Master Policy, which excluded critical illnesses within 180 days from the date of risk.
The insurance company argued that the terms of the policy were clear and that they were justified in rejecting the claim based on these terms.
The respondent contended that the Master Policy containing the terms and conditions of the risk covered was not provided to her, and therefore, the exclusion clause relied upon by the insurance company was not in her knowledge. She argued that this violated the Guidelines, Rules, and Regulations of the Insurance Regulatory and Development Authority of India (IRDA).
The respondent claimed that the condition regarding the exclusion of the critical illness benefit was only produced before the State Commission for the first time in the Written Statement. She argued that since carcinoma of the right breast constituted a critical illness, the sum assured of ₹71,49,714 was payable by the appellant.
The respondent contended that due to the insurance company's failure to release the insurance amount, she had to pay 72 loan installments amounting to ₹65,03,832. She argued that the repudiation of her claim constituted a deficiency in service and unfair trade practice.
The respondent cited the Supreme Court judgments in Bharat Watch Company Vs. National Insurance Company[2] and Modern Insulators Ltd. Vs. Oriental Insurance Co. Ltd. to support her argument that it was the duty of the parties to disclose known facts, and in the absence of communication of the exclusion clause, the insurer could not claim its benefit.
Additionally, the respondent claimed that the appellant was not authorized to issue a certificate of insurance under the Master Insurance Policy, as it had already been withdrawn on October 8, 2013, as per the list of products with IRDA. She argued that the Master Policy dated October 21, 2015, issued to Bajaj Finance Ltd. had no legal validity.
The respondent also alleged that the appellant had violated IRDA guidelines and circulars issued under Section 34 of the Insurance Act, 1938. She claimed that the appellants had issued notices under Section 138 of the Negotiable Instruments Act and Section 25 of the Payment and Settlement Act, 2007 to coerce her.
The National Consumer Disputes Redressal Commission (NCDRC) delivered a detailed decision on this appeal, carefully considering the arguments from both parties. The NCDRC identified the core issue as whether the treatment of critical illness (carcinoma) was covered under the Certificate of Insurance (COI) issued as an add-on to the loan under the Master Policy, and whether the rejection of the claim constituted a deficiency in service. The Commission acknowledged the appellant's argument, based on Supreme Court judgments, that insurance contracts should be strictly interpreted. However, they also considered the respondent's contention that non-disclosure of policy terms constitutes a deficiency in service. The NCDRC noted that the appellant had not denied failing to communicate the policy terms and conditions to the respondent. They deemed this significant, as the respondent was not made aware that claims for critical illnesses couldn't be made within six months of the policy's start date. The Commission held that since the terms and conditions were not conveyed to the respondent, the appellant's argument about the 15-day free look period and subsequent confirmation of the policy was not sustainable. They upheld the State Commission's interpretation allowing the appeal for insurance cover for critical illness. The NCDRC disagreed with the State Commission's order regarding the repayment of loan installments. They clarified that the Certificate of Insurance only covered specific items under the Group Insurance Scheme and did not extend to repayment of EMIs for the loan from Bajaj Finance Limited. The Commission found no merit in ordering repayment of the loan amount, as it was not part of the insurance policy in question and was not properly pleaded in terms of deficiency of service regarding the loan account. The NCDRC partially allowed the appeal with the following directives: a) The appellant was ordered to pay ₹3,07,604 to the respondent as medical expenses under the insurance policy. b) This amount should be paid with 9% per annum interest from the date of admission, within eight weeks. If not paid within this timeframe, the interest rate would increase to 12%. c) The awards of ₹25,000 for mental agony and ₹15,000 as litigation costs were upheld. d) The State Commission's direction to refund ₹65,03,832 was set aside. The Commission clarified that in a claim related to critical illness, the appellant could only be held liable for the treatment of critical illness as claimed. They emphasized that the housing loan issue was separate and not related to the insurance claim for critical illness treatment.
By partially allowing the appeal, the Commission has struck a careful balance between upholding contractual obligations and protecting consumer rights. This judgment highlights the need for clear delineation between different financial products, even when they are offered as part of a package. For insurers, this case serves as a stark reminder of their duty to ensure that all policy terms, especially exclusions, are clearly communicated to policyholders. For consumers, it reinforces the importance of thoroughly understanding the terms of their insurance policies and the specific coverages they provide.
India’s growth rate of 7.2% in fiscal 2022-2023 was the second-highest among the G20 countries and almost twice the average for emerging market economies that year.[1] The country is an emerging economy. It has been a significant growth engine for the world, contributing 16% to the global growth in 2023. It is also situated at a strategically advantageous position in world geography. We get sunlight for the majority of the days which is more than 300 sunny days a year. It was about time that we realized to utilize the environment around us for our benefit.
It would be incorrect to assume that the country only has advantages and no disadvantages when it comes to its location in geography. However, we did a commendable job in utilizing the advantages for our good and also adapting to the disadvantages. One of the examples would be utilizing solar panels to meet increasing energy demands and other instances can be the cultivation of water-intensive crops like sugarcane where rainfall is abundant like Maharashtra and water-efficient crops like millet in Rajasthan. This is a smart way to deal with the needs of a country that is growing and as a consequence of such growth, the needs of its people are also increasing.
Every country just like India is dependent on the environment however humans have managed to reverse the situation wherein the environment is now dependent on us. The needs may change but one thing is constant, we cannot survive without the environment but the environment will not only survive but thrive without us something we saw in COVID times. The ramifications of climate change and environmental degradation pervade all realms, transcending geographical boundaries, sectors, and demographics without prejudice; however, the magnitude of their impact varies across different spheres. A propitious development is a cognizance among the global citizenry regarding the anthropogenic causation of nature's despoilment, which has catalyzed a collective endeavor to mitigate and redress the deleterious consequences.
The realization that the environment's survival hinges on human actions has prompted a collective global effort to mitigate climate change's adverse effects. Various measures have been taken by countries together like the Conference of the Parties (COP) and G20 and several measures are being taken individually within the countries like Swach Bharat Abhiyan, Namami Gange, EIA, National Action Plan on Climate Change (NAPCC), India's commitment to achieving a target of net zero emissions by the year 2070 etc.
Recognizing a problem is the initial stride toward finding a solution, and this realization has dawned upon us. An exemplary endeavor in our journey toward embracing climate resilience is the Reserve Bank of India's (RBI) introduction of draft guidelines on the 'Disclosure framework on climate-related financial risks, 2024.' These guidelines mark a significant step in acknowledging and addressing the financial risks posed by climate change, underlining our collective commitment to a sustainable future.".
The framework mandates disclosure by regulated entities (REs) on four key areas of governance, strategy, risk management, and metrics and targets. The central banking regulator recently released draft guidelines on climate risk and sustainable finance and the framework for acceptance of green deposits. The current disclosure framework is a step towards bringing the climate risk assessment, measurement, and reporting requirements under the mainstream compliance framework for financial sector entities in India. This move will help incorporate climate-related issues into the overall organizational culture, policies, and operations.
As per the draft guidelines, it is mandatory for all Scheduled Commercial Banks (excluding Local Area Banks, Payments Banks, and Regional Rural Banks), Tier-IV Primary (Urban) Co-operative Banks, All-India Financial Institutions (such as EXIM Bank, NABARD, NaBFID, NHB, and SIDBI), and Top and Upper Layer Non-Banking Financial Companies (NBFCs) to disclose climate-related financial risks. Climate-related disclosures by REs being a significant source of information, allow different stakeholders (e.g., customers, depositors, investors, and regulators) to understand relevant risks faced and approaches adopted to address such issues. This in turn allows them to make an informed choice.
RBI has clarified that all the entities mentioned above should disclose their governance structures related to climate risk management. This includes details on board oversight, the role of senior management, and how these risks are integrated into overall governance. With this, RBI aims to ensure that senior management and the board assume responsibility for climate risk integration and make this information about climate risk management accessible to stakeholders.
However, there are several limitations and challenges that entities might face including maintaining robust governance structures for climate risk management which can be complex, especially for smaller financial entities with limited resources.
However, RBI has not specified any metrics and methodologies for measuring and reporting climate risks. The lack of sufficient data on climate risks may make it difficult for entities to conduct thorough assessments. Moreover, the individuals in management may not be experts in climate risk management.
Moreover, RBI has mandated the entities to describe the actual and potential impacts of climate-related risks and opportunities on REs, strategy, and financial planning. This involves a thorough assessment of what specific climate-related issues would arise over time and the material impact it could have on the RE along with current and anticipated effects of climate-related financial risks and opportunities on the business model of the RE.
However, integrating climate risk assessments into existing business models and strategies can be difficult, particularly for entities with complex or diversified operations. Successful implementation will depend upon the trained staff with specialized knowledge and skills to assess climate impacts, which many organizations may lack. Climate change is a long-term phenomenon, and its impacts may unfold gradually over years or decades.
Businesses may struggle to incorporate these long-term considerations into their short-term strategic planning. Lastly, switching to sustainable and climate-efficient practices is costly which will automatically increase the financial burden.
Apart from that, RBI has mandated disclosures regarding the processes used by entities to identify, assess, and manage climate-related financial risks. This includes how climate risks are integrated into overall risk management frameworks and the methods used to prioritize these risks. Here, no standard process has been mentioned by RBI that can universally be used by these entities so the chances of different strategies and varying results can impact the object sought to be achieved by RBI. lack of standardised process leaves a lot of scope for interpretation on the side of REs which can differ from one entity to the other.
Entities are further mandated to report the metrics used to assess and manage relevant climate-related risks and opportunities. This includes performance metrics, targets set by the entity, and progress towards achieving these targets. This target can be impacted by limited availability and quality of data. Measuring progress toward targets requires consistent monitoring and reporting mechanisms. For these reasons, additional investments are needed in technology and expertise for monitoring and reporting. In the absence of a standardized process, many organisations might be reluctant to prioritize climate risk management over traditional financial work especially when they know their competitors are not prioritizing the same.
The RBI’s guidelines will be implemented in a phased manner to ensure a smooth transition and adequate preparation time for entities. In Scheduled Commercial Banks, All-India Financial Institutions, and Top-tier NBFCs Governance, Strategy, and Risk Management disclosures will commence from FY 2025-26 and Metrics and Targets disclosures will start from FY 2027-28. Tier-IV UCBs will follow the same implementation schedule, starting a year later. This phased approach allows entities to gradually build their capabilities and integrate the necessary systems for comprehensive climate risk management.
The Reserve Bank of India's (RBI) Draft Disclosure Framework on Climate-related Financial Risks, 2024 represents a commendable effort to address the inadequacies in reporting climate-related information within the financial sector. With a notable portion of climate-related data being either inaccurately reported or altogether omitted due to the absence of binding regulations, the introduction of this framework by the RBI signifies a crucial step towards rectifying this issue. By mandating the reporting of such data, financial entities will be compelled to undertake more climate-efficient measures to mitigate associated risks.
Moreover, this initiative is poised to foster a culture of responsible leadership within management, instilling a habit of considering climate risks when making decisions that could potentially harm the environment. However, this is not the first instance of the RBI taking proactive measures to address climate-related issues. Back in 2007, the RBI published guidelines on Corporate Social Responsibility (CSR), sustainable development, and non-financial reporting, demonstrating its ongoing commitment to promoting sustainability within the financial sector after realizing [2] the general lack of adequate awareness on the part of Asian Companies on issues like global warming and climate change and the risk that it can pose to business models.[3]
[1] World Economic Forum, “India could become the world’s 3rd largest economy in the next 5 years. Here's how” (January 15, 2024), available at https://www.weforum.org/agenda/2024/01/how-india-can-seize-its-moment-to-become-the-world-s-third-largest-economy/#:~:text=On%20the%20economic%20front%2C%20India,emerging%20market%20economies%20that%20year.
[2] PWC “Disclosure framework on climate-related financial risks, 2024”, (Accessed on 23.05.2024), available at https://www.pwc.in/blogs/disclosure-framework-on-climate-related-financial-risks-2024.html#:~:text=On%2028%20February%202024%2C%20the,related%20financial%20risks%2C%202024'.&text=The%20framework%20mandates%20disclosure%20by,management%20and%20metric%20and%20targets.
[3] Business Standard, “RBI asks banks to step up CSR efforts” (Jan 19 2013), available at https://www.business-standard.com/article/finance/rbi-asks-banks-to-step-up-csr-efforts-107122000048_1.html
In the world of banking wherein financial transactions take place in a large number, keeping activities safe from fraud becomes crucial. However, a question arises as to how do lenders know when a loan is fraudulent? Let’s take a look at this perspective.
Loan fraud is considered a practice wherein one person tricks a bank into giving them money dishonestly. It happens in all kinds of loans, like home loans, personal loans, or credit cards. The process of tricking the banks may involve lying about financial conditions, using fake IDs, or forging documents.
Due to the nature of their services, banks might face difficulties in accessing every loan account to find out which is a fraud one. However, there are some cues that must alert a lender:
False Information: If the person who has secured the loan has lied about their financial situation, which includes over assessing or under accessing their income, it could be fraud. Hence, banks must undertake rigorous due diligence.
Identity Theft: When a loan is secured using someone else’s id rather than personal id,this must raise concern about the authenticity of the transaction.
Fake Documents: Forged documents or lack of essential documents is a sign of concern.
Strange Activity: A person who has secured a loan or in the process of securing a loan and who has been parallelly engaged in applying for a lot of different loans all at once or who is known to change the terms of a loan very frequently could be suspicious.
The above activities can be an indication which can help banks can to filter out such kinds of transactions from normal ones. Once they know these accounts require extra attention, they need to do the following:
Documentation and Evidence: Lenders should keep a record of all important details like important documents and the transactions undertaken by these accounts and gather proof if they suspect fraud.
Legal and Regulatory Compliance: Lenders must follow all the applicable laws without any excuse. They are required to promptly report fraud to the authorities and submit all required documents which are relevant for the investigation.
Risk Assessment: It is the responsibility of these institutions to follow various risk assessment approaches for risk mitigation and securing their economic health. It includes initiating fraud prevention measures, suspending or terminating fraud loan accounts, and providing loans only after a complete background check of the customer.
Customer Due Diligence: In order to mitigate the risk of loan frauds, the economic institutions mustimplement robust customer due diligence processes that can help them identify and prevent loan fraud at an early stage. This involves verifying the identity of borrowers, document verification and monitoring account activity for suspicious behavior.
In order to have uniformity in reporting, frauds have been classified by RBI in its Master Directions on Frauds, based mainly on the provisions of the Bharatiya Nyaya Sanhita (erstwhile Indian Penal Code):
The initial decision to classify any standard or Non Performing Asset account as Red Flagged Account (‘RFA’) or Fraud lies with the bank in which the fraud account exists. It is the responsibility of the bank to report the RFA or Fraud status of the account on the Central Repository of Information on Large Credits (CRILC) platform so that other banks are alerted. In case it is decided at the individual bank level to classify the account as fraud straightaway at this stage itself, the bank then has to report the fraud to RBI within 21 days of detection and also report the case to CBI/Police, as is being done hitherto.
Recently in a case which came up for hearing in the Supreme Court challenging the Reserve Bank of India's (RBI) 2016 directions on ‘Frauds Classification and Reporting by Commercial Banks and Select Financial Institutions’, the bench was faced with the question wherein the borrowers were not given a chance to defend themselves before their accounts were labeled as fraudulent. The bench held that while a hearing is not necessary prior to filing an FIR, it is important to read principles of natural justice into the ‘Master Directions on Frauds’ to prevent any arbitrary actions.
The court stated that when an account is classified as fraud, it results in multiple consequences for the borrower. Initially they have to face criminal and civil proceedings when the incident is reported to investigating agencies and also it might happen that this will result in blacklisting and designating the borrower as unworthy of credit by banks.
"When a borrower's account is classified as fraudulent under the Master Directions on Frauds, it essentially results in a freeze on their credit. This means they are prohibited from obtaining financing from financial and capital markets. The inability to raise funds could be devastating for the borrower, potentially leading to severe consequences such as financial ruin and loss of rights protected under Article 19(1)(g) of the Constitution. Debarment prevents a person or entity from exercising their rights and privileges, so it is crucial that the principles of natural justice are followed. The individual facing debarment should have the opportunity to present their case and be heard before any action is taken."
As far as the right of borrowers of being heard is concerned, the Court ruled that the principle of audi alteram partem, meaning "hear the other side", cannot be overlooked in the Master Directions on Frauds. Hence, the lender banks have to give borrowers a chance to defend themselves before labeling their account as fraudulent. It is true that the Master Directions on Frauds do not specifically prescribe for the borrowers to have a chance to defend themselves before their accounts are labeled as fraudulent but the court said that the principle of audi alteram partem must be applied to ensure that the borrowers are not unfairly treated.
Identifying a loan fraud is very important in the banking industry to uphold trust and safety placed in the lending activity and ensuring the good health of the economy. By identifying the indicators like inaccurate information, fake identities, or unusual behavior, lenders can act quickly to safeguard themselves. Establishing proper procedure is key in addressing potential fraud instances, guaranteeing that borrowers are given a chance to advocate for themselves and uphold their entitlements. Since many matter are prone to become adversarial, it is important for the lender to choose the right long-term legal partner to efficiently defend their claims.
In December 2021, a paper published by the Institute for Energy Economics and Financial Analysis (IEEFA) and JMK Research stated that despite having numerous benefits, certain new restrictions have been imposed on the banking of power of renewable energy (“RE”) which is expected to inhibit the growth of the rooftop and open-access solar market, and potentially slow progress towards India’s national target of 450 GW of installed renewable capacity by 2030.
Banking of power is a system in which a generating plant supplies power to the grid, without planning to sell it. Instead, the plant holds the option to draw back the power from the grid within a certain time and against the charges specified under relevant regulations. This concept was first introduced in Tamil Nadu in 1986 and its working is akin to a customer savings bank account.
Despite the above-mentioned benefits, over the last couple of years, governments are issuing restrictive banking notifications for renewable energy projects. Due to this, discoms are limiting their banking provisions considering the looming danger of losing high-ticket commercial and industrial clients to alternative RE power procurement models.
The Ministry of Power issued the Electricity (Promoting Renewable Energy through Green Energy Open Access) Rules which came into force in June 2022. The said rules allowed banking on a monthly basis only for open-access consumers. Moreover, the quantum of banked energy by the said consumers shall not exceed 10% of the total annual consumption of electricity from the distribution licensee by the consumers.
Certain RE-rich states (such as those included in the following table) have reduced the banking period from a year to a month, while others have completely withdrawn banking facilities for RE.
The rule-makers and discoms justify the new restrictions on the following grounds:
Although the points raised by discoms are valid, the national target of 450 GW GW of installed renewable capacity by 2030 seems far-fetched as it requires about INR 1.5 to 2 lakh crore annual investment whereas the actual investment in the renewable sector is estimated to be at a mere INR 75,000 crore.
Considering the gap in demand and supply, a committee of the Indian Parliament suggested the Federal Government consider imposing a “Renewable Finance Obligation for banks and financial institutions” to ensure the inflow of the requisite investment.[3] Certain other recommendations were made under the said report, as follows:
During peak summer and windy seasons, there is a high potential for excess RE generation which can later be utilised with the use of a banking facility. However, in the absence of the same and added restrictions on monthly banking of power, excess generation continues to remain underutilised. Thus, the Indian RE sector is faced with a major setback at such an early stage of its development.
As per the observations of the standing committee, the unique realities of the RE sector must be given due consideration while formulating a framework relating to financing and investments in the sector. Currently, RE projects are at the risk of being categorised as non-performing assets since revenue generation from RE is not uniform throughout the year considering its seasonality & intermittency.
Now, the RBI must consider lifting the INR 30 crore limit imposed on loans for RE projects since it is evidently not sufficient to fund mid and large-sized RE projects in India. An Energy Economist from the Institute for Energy Economics and Financial Analysis opined that as per the International Energy Agency’s India Energy Outlook 2021, India would require USD 110 billion annually to raise RE deployment, and network expansion which is three times the current annual investment i.e., USD 40 billion.[4]
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Disclaimer: The content of this piece published by White & Brief Advocates & Solicitors is intended for informational purposes exclusively and is not intended to be a piece of legal advice on any subject matter. By viewing and reading the information, the reader understands there is no attorney-client relationship between the reader and the publisher. The contents of this informational piece shall not be used as a substitute for professional legal advice from a licensed attorney, and readers are encouraged to consult legal counsel on any specific legal questions they may have concerning a specific situation.
[1] Delhi Electricity Regulatory Commission
[2] Karnataka Electricity Regulatory Commission
[3] Standing Committee on Energy (2021-22), Seventeenth Lok Sabha, Ministry of New and Renewable Energy, Twenty First Report on Financial Constraints in Renewable Energy Sector, Available here.
[4] IEEFA: India Must Invest in Sustainable Energy Choices, Bloomberg Markets,
Recently, the Cabinet Committee on Economic Affairs extended the deadline for furnishing final mega certificates to tax authorities from 10 years to 13 years from the date of import, for ten provisional power projects as indicated in the Policy.[1] The office memorandum bearing no. A-3/2015-IPC (Vol-III) dated April 7, 2022, was introduced by the Ministry of Power (“the Ministry”) to this effect.
The Government stipulated that during the extended period, bids for mega power plants (combination of intermittent renewable energy, storage and conventional power) will be invited in co-ordination with the Ministry of New & Renewable Energy (“MNRE”) and Solar Energy Corporation of India Limited (“SECI”) who would further participate in such bids to secure Power Purchase Agreements (“PPAs”).
Before we understand the amendment, let's first discuss the evolution of this Policy and its importance.
Market Position and Consumer Demand
The Indian public sector lacked adequate resources to match the incremental generational requirement of additional coal mining. To plug this gap, the Ministry is exploring the possibility of setting up mega power projects with the help of private sector players thereby attracting domestic and foreign private investment from eager investors.
Another pertinent issue faced by the Indian Government in the power sector relates to its geography. While the authorities identified locations in eastern, central and coastal India endowed with naturally occurring coal and hydel power capacity, the highest demand for power in southern India. The geographical demand-supply conundrum faced by authorities demands the establishment of mega power projects to tackle the increasing demand for power on the most viable route.
When the private power policy was initiated during 1991-92, the Ministry envisaged that to improve the power supply, it would require setting up more than 10,000 MW of capacity every year in the next few years. Moreover, the fuel for such thermal power plants i.e., coal is located mainly in eastern and central India, whereas the hydel power potential is concentrated in the northeast and north but a higher demand for power is in the south and the west. It is, therefore, obvious that unless mega power projects are set up in the region having coal and hydel potential, it would be difficult to tackle the increasing demand for power on the most viable route. Establishing mega projects in the coastal regions based on imported coal also poses a feasible option.
Regulatory Changes in the Energy Sector
Pertinently, during the launch of the private power policy in 1992, the Ministry found that India requires to set up more than 10,000 megawatts of capacity each year to improve power supply in the coming years.
The public sector front lacked resources for putting up the required additional coal mining capacity to match the incremental generation requirement. Therefore, the Ministry has been exploring the possibility of setting up mega power projects through the private sector route to attract domestic and foreign private investment and the response so far has been positive.
At this juncture, it is important to note that the government amended the Mega Power Policy in 2009 to smoothen the application process to attain final mega certificates.[2]
The said modifications endow benefit of the Policy to the power projects of the following capacity:
| Thermal Power Plants | with a capacity of 1000 MW or more | or 700 MW if the plant is located in Jammu & Kashmir, Sikkim, Arunachal Pradesh, Assam, Meghalaya, Manipur, Mizoram, Nagaland and Tripura. |
| Hydel Power Plants | with a capacity of 500 MW or more | or 350 MW if the plant is in the states of J&K, Sikkim, Arunachal Pradesh, Assam, Meghalaya, Manipur, Mizoram, Nagaland and Tripura |
B. Widening the scope of the Policy
i. The benefits enjoyed by stakeholders under the said Policy are extended to brownfield expansion projects.
ii. The benefits are to be extended to brownfield expansion projects too.
C. Interstate sale of power for achieving mega power project status has been removed.
D. The mega power projects would have to tie up power supply with power distribution companies/utilities through long-term PPA in accordance with the National Electricity Policy 2005 & Tariff Policy 2006.
E. ICB for procurement of equipment for mega projects are not required if the requisite quantum of power has been tied up or the project has been awarded through tariff-based competitive bidding.
F. The present exemption of 15% price preference available to domestic bidders in cost-plus projects of PSU would continue. However, the price preference would not apply to tariff-based competitively bid projects of PSU.
Extension of Deadline to Apply for Mega Power Project Certification
Prior to the recent amendment, the Policy only allowed a period of 120 months or 10 years from the date of import for businesses to apply for and furnish final mega certificates to the tax authorities as against the provisional mega projects. Now, the Cabinet has officially extended the said deadline by 3 years for ten partly / wholly commissioned provisional mega power plants.
Reproduced hereinbelow is the list of 10 (ten) provisional mega power projects to which the aforesaid amendment is applicable and which have been commissioned/partly commissioned so far:
| Sr. No. | Name of the Project | Project Capacity (MW) |
| 1. | Baradhara Thermal Power Plant (“TPP”) (2X600 MW), Janjgir-Champa, Chhattisgarh | 1200 |
| 2. | Anuppur TPP (2X600 MW), M.P. | 1200 |
| 3. | Uchpinde TPP (4x360 MW), Janjgir-Champa, Chhattisgarh | 1440 |
| 4. | Cuddalore TPP (2x600 MW), Tamil Nadu | 1200 |
| 5. | Lalitpur TPP (3x660 MW), Uttar Pradesh | 1980 |
| 6. | Vishakhapatnam TPP (2x520 MW) Andhra Pradesh | 1040 |
| 7. | Nellore TPP (2x660 MW), Andhra Pradesh | 1320 |
| 8. | Raikheda TPP (2x685MW), Raipur, Chhattisgarh | 1370 |
| 9. | Binj Kote TPP (4x300 MW), Raigarh, Chhattisgarh | 1200 |
| 10. | Janjgir-Champa, Akaltara TPP: U-2&5 (2x600MW), Chhattisgarh | 1200 |
Key Takeaways
The extension of time granted to businesses for furnishing final mega certificate is a thoughtful action welcomed by the concerned industry players. The extension thus granted will enable developers to competitively bid for further Power Purchase Agreements and enjoy the applicable tax exemptions under the Policy. The increased liquidity at the behest of the developers will boost the power sector’s growth in India and revive the stressed power assets.
The government will also invite bids for firm power (a combination of intermittent renewable energy, storage, and conventional power) during this extended period in coordination with the MNRE and Solar Energy Corporation of India Limited. Moreover, the ten notified mega projects will be expected to participate in firm power bids to secure PPAs.
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[1] Clause- I of Para- I of Amendment to Mega Power Policy, 2009 (“the Policy”) for Provisional Mega Power Projects dated April 12, 2017.
[2] Ministry of Power vide notification dated 14th December 2009
Recently, as a massive move, the Inter-Ministerial Committee (“IMC”) of the Ministry of Road Transport and Highways (Highways Section) of the Government of India (“the Ministry”) in its meeting held on April 1, 2022, concurred with the proposal permitting a change of ownership from 2 (two) years to 1 (one) year after the commercial operation date (“COD”).
Subsequently, a circular bearing no. NH- 24028/14/2014-H (Vol Il) (E-134863) (“the Circular”) dated May 23, 2022, regarding the change in ownership clauses in the Model Concession Agreement (“the Agreement or MCA”) of BOT (Toll) projects was introduced.
Before getting into the peculiarities of the circular, let us get a brief idea of what is BOT (Toll) Project.
The National Highway Authority of India (“NHAI”) has adopted primarily 4 (four) types of national highway projects in the public-private partnership model, as follows:
| Sr. No. | Type of highway models | Brief Explanation |
| 1. | BOT (Toll) | This model is a public-private partnership in which the private developers/operators, invest in toll-able highway projects and are entitled to collect and retain toll revenue for the tenure of the project concession period. The private developer/operator, who eventually becomes a concessionaire, is responsible for the design, development, operation, and maintenance (O&M) of the project for the entire concession period after it is developed and put to commercial use. On the expiry of the concession period, the facility is transferred to the authority (NHAI). |
| 2. | BOT (Annuity) | In this model, responsibility for the design, development, and O&M of the road project for the entire concession period is vested with the concessionaire for the Project. But, unlike the BOT (Toll) projects, the revenue of the Concessionaire is generated through annuity payments by NHAI during the concession period. |
| 3. | Hybrid Annuity Model (HAM) | In this model, 40% of the project cost is paid by the government or as construction support or grant to the private developer. The rest is funded by the successful bidder during the construction period. Even for these projects, the revenue of the Concessionaire is generated through annuity payments by NHAI during the concession period. |
| 4. | Toll Operate Transfer (TOT) | In this model, the right of collection and appropriation of toll for selected operational national highway projects constructed through public funding are mandatorily assigned to concessionaires for a pre-determined concession period against upfront payment for a lumpsum amount to NHAI. |
The key stakeholders and typical contractual structure for a toll road project can be diagrammatically represented as below:
FEATURES OF A BOT (TOLL) PROJECT
Original- Clause 1.1 read with Article 48 of the Agreement which defines the term “Change in Ownership” states that “a transfer of the direct and/or indirect legal or beneficial ownership of any shares, or securities convertible holding of the {Selected bidder / Consortium Members}, together with {it’s/their} Associates, in the total Equity to decline below 51% (fifty-one per cent) thereof During Construction Period and two years thereafter; provided that any material variation (as compared) to the representation made by the Concessionaire during the bidding process for the purposes of meeting the minimum conditions of eligibility or for evaluation of its application or Bid, as the case may be) in the proportion of the equity holding of {the selected bidder/any Consortium Member} to the total Equity, if it occurs prior to completion of a period two years after COD, shall constitute Change in Ownership”;
Amendment-The said Circular reduces the period of the constitution of change in ownership from 2 (two) years (as stated in the definition above) to 1 (one) year after COD.
Original- The aforesaid sub-clause states that the concessionaire shall not undertake or permit any Change in Ownership, except with the prior approval of the authority.
Amendment- The Circular amends Clause 5.3.1 to include a few conditions for the approval from the authority for undertaking Change in Ownership. The conditions are as follows:
Original- The aforesaid clause states that “the Concessionaire shall at no time undertake or permit any Change in Ownership except in accordance with the provisions of Clause 5.3 and that the {selected bidder/Consortium Members), together with {its/their} Associates, hold not less than 51% (fifty-one per cent) of its issued and paid-up Equity as on the date of this Agreement, and that no member of the Consortium whose technical and financial capacity was evaluated for the purposes of pre-qualification and short-listing in response to the Request for Qualification shall hold less than 26% (twenty-six per cent) of Equity during the Construction Period and two years thereafter; Provided further that any such request made under Clause 5.3, shall at the option of the Authority, be required to be accompanied by a suitable no objection letter from the Senior Lenders.”
Amendment- The Circular reduces the said period of 2 (two) years to 1 (one) year for holding 51% and 26% equity, respectively, during the construction period and thereafter, in the case of consortium members.
Over the last decade, the Government continued making efforts to revive the BOT model. In fact, in the current Financial Year, multiple projects under the said model would be opened for bidding.
Considering the above-discussed amendment of transferring ownership on the expiry of one year after the commercial operation date, monetization of such projects by the promoters by disposing of their stake is likely to have a positive impact on their ability to undertake more projects.
Whilst this appears to be the main objective behind the amendment, neither NHAI nor the lenders would allow any change in ownership during the construction period, since that is the most important aspect of the project, that is, the SPV, which is the successful bidder, is owned and controlled by the promoters, whose experience in the road construction and their financial status, form the basis of being qualified to take up the project. The extension beyond one year after the construction period is intended to achieve consistency and stability in the operation of the project, after the expiry of which dilution of the promoters’ stake in the SPV would not affect the project highway, its operation and maintenance and generation of revenue from the project, and thus, such dilution is not likely to hamper the interests of NHAI or the lenders.
Disclaimer: The information contained in this newsletter does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available herein are for general information purposes only.
[1] Article 5 deals with Obligations of the Concessionaire.
[2] Punch List shall mean document prepared by the contractor that lists any work that is not complete, or not completed correctly.
[3] Article 7 deals with Representations and Warranties.
An association of non-banking financial companies (NBFCs) has sought a “harmonised” regulatory framework with that of banks in response to the discussion paper issued by the Reserve Bank of India (RBI) on January 22. Among the requests made by the Finance Industry Development Council (FIDC) is that of a refinancing arrangement to reduce the dependence of small and medium NBFCs on the banking system and differential risk weights for different loan categories.
“An alternative mechanism for rating these entities may also be considered to ensure that all NBFCs do not get rated on the same parameters irrespective of size, complexity of business and the niches in which they operate. The NBFCs in the proposed BL (base layer) and ML (middle layer) suffer at present due to this rigidity of credit rating templates followed by the rating agencies,” the FIDC conveyed to the RBI in a letter dated February 12, a copy of which FE has seen.
The industry has requested the RBI to articulate a road map for NBFCs in the upper layer (NBFC-UL) to convert themselves into banks. It has sought greater flexibility on matters such as deposit acceptance, raising of funds through external commercial borrowings (ECBs) and setting up of subsidiaries overseas.
For NBFCs in the middle layer, FIDC has sought “a special focus on availability of funding”. These companies would fall primarily in the BBB to AA- category in terms of their external credit rating and they continue to face fundraising challenges, the letter said.
Umesh Revankar, MD & CEO, Shriram Transport Finance Company, told FE that among the representations made by the industry (not by the FIDC) is also a request to reduce the frequency of rotation of statutory auditors. “One of the points is that of the frequent changes required in statutory auditors every three years. We have suggested that it can be every five years,” he said.
Girish Rawat, partner, L&L Partners, explained that currently, the Companies Act, 2013, lays down that prescribed companies are required to mandatorily rotate their auditor. An individual auditor cannot serve for more than one term of five years and an audit firm cannot serve for more than two terms of five consecutive years, with a cooling off period of five years. The RBI has proposed a uniform tenure of three consecutive years for auditors of NBFCs in the middle layer and above, with a cooling off period of six years.
Some experts are of the view that the frequent change in auditors could leave gaps in the audit process. Prateek Bansal, associate partner, White & Brief Advocates and Solicitors, said that the mandatory rotation of auditors leads to increased compliances and processes within the NBFCs. “Now, the proposed time frame of rotation after every three years is further alarming as the likelihood of faulty audits increases due to the short time period allowed to an auditor to become fully acquainted with the system and operations of a company,” he said. “The proposed time limit must be increased to at least five years, which will also be in line with the provisions of Section 139 of the Companies Act, 2013.”