Paper Companies

In India, the term "paper company" or "shell company" is often used to describe entities that exist primarily on paper, with little or no actual business activity. But if we step back, it’s clear that all companies, by their nature, are paper entities—legal constructs rather than physical beings. A company is an artificial entity, created through documentation and compliance procedures, defined by the paperwork that establishes and governs it. It is the legal paper that makes a company a company; they are not people, and they don’t exist outside the constructs of law and compliance.

The distinction, therefore, is not between real companies and paper companies but between those that serve a lawful, intended purpose and those that might be structured to obscure dubious activities. Many paper-based entities operate legitimately, while others may misuse the legal framework.

Legitimate Roles of Low-Activity or Dormant Companies

Several business structures operate with minimal visible activity but serve valid and strategic purposes:

• Holding Companies: Holding companies are legitimate entities set up to manage and control shares in other companies. They typically exist to organize assets, streamline operations, and facilitate business strategy but may not engage in daily business transactions.

• Asset-Specific Companies: Some companies are established specifically to hold a single asset, such as intellectual property or real estate, and have no operational need for employees or frequent transactions.

• Dormant Companies: Businesses may register and maintain companies with future prospects in mind. Dormant companies, or early-stage startups, might be inactive yet compliant, waiting to launch or re-purpose based on business needs.

These companies exist to fulfill legal and strategic purposes, even if their day-to-day activities are minimal or absent. Simply put, they are "paper companies" in the sense that they are entities governed by documentation and legal requirements, but they are not illegitimate.

Regulatory Oversight and the Broad Approach

Despite the inherent legitimacy of paper entities, regulatory bodies like the Ministry of Corporate Affairs (MCA), the Securities and Exchange Board of India (SEBI), and the Income Tax Department have intensified scrutiny on companies with minimal operations, concerned that they may be conduits for tax evasion, money laundering, or other illicit activities. However, their approach often categorizes all inactive or minimally active companies together, leading to a broad sweep that includes legitimate entities within its scope.

When Overreach Affects Compliance

A key example of such overreach was seen in 2017, when the MCA deregistered over 200,000 companies due to inactivity. While the intent was to target suspicious entities, many compliant holding companies, dormant businesses, and investment vehicles were also affected. This broad-brush approach does not account for the varied, legitimate reasons a company might remain inactive or minimal in operations, even while fully compliant with tax filings, MCA requirements, and other obligations.

The Distinction Between Inactive and Illegitimate

In India’s regulatory environment, the lack of a legal definition for "shell company" or "paper company" has led to misinterpretations. Inactive does not mean illegitimate, and minimal operations do not equate to suspicious intent. Key reasons why inactive or paper-based companies are legitimate include:

1. Strategic Legal Structuring: Many entities, such as holding companies or asset-specific entities, play crucial roles in corporate strategy without the need for day-to-day transactions.

2. Compliance-Driven Purpose: Companies that file taxes, submit MCA documentation, and meet regulatory requirements operate within the law, regardless of their operational size.

3. Future-Ready Ventures: Companies may maintain dormant status for future purposes, such as expansions, investments, or future reactivation, without engaging in substantial activities immediately.

The Need for a Targeted Approach

Regulatory efforts would benefit from focusing on specific patterns of non-compliance or suspicious transactions instead of generalizing based on minimal activity. Distinguishing between companies with complex business structures and companies involved in illicit transactions would allow authorities to better target actual misuse.

By refining their approach, regulatory bodies could more effectively identify companies involved in suspicious activities, without unduly penalizing those that serve lawful, strategic purposes. This would protect the interests of law-abiding businesses, support economic strategy, and help prevent the unnecessary burdens that blanket measures create.

Conclusion

In essence, every company is a paper entity—formed and governed by legal documentation. Yet, the function and purpose of these entities vary widely, from active trading companies to passive holding structures. While regulatory oversight is essential to curb misuse, a more discerning, criteria-based approach is needed to differentiate between companies with minimal activity for legitimate reasons and those structured for dubious purposes. This would foster a balanced, fair regulatory environment that supports lawful business operations while focusing resources on genuine cases of misuse.

Summons under PMLA

The Prevention of Money Laundering Act (PMLA) allows statements recorded by investigating officers to be used as evidence in court under Section 50. This provision undermines key constitutional rights and opens the door for abuse, similar to what occurred under TADA and POTA.

1. Violation of Constitutional Rights
Self-Incrimination (Article 20(3)): PMLA violates the right against self-incrimination by making statements recorded by officers admissible, creating pressure for individuals to incriminate themselves. In Nandini Satpathy v. P.L. Dani (1978), the Supreme Court held that indirect coercion to confess violates Article 20(3).
Right to Fair Procedure (Article 21): Maneka Gandhi v. Union of India (1978) established that the procedure must be "fair, just, and reasonable." PMLA's lack of safeguards compromises fair trial rights by allowing statements made without judicial oversight to be used as evidence.

2. Historical Abuse Under TADA and POTA
Similar provisions under TADA and POTA allowed statements made before officers to be admissible, leading to widespread misuse. Kartar Singh v. State of Punjab (1994) recognized the potential for abuse under TADA. Both TADA and POTA were repealed due to their coercive nature and misuse for extracting false confessions.

3. Artificial Distinction Between ED and Police Officers
PMLA's classification of ED officers as "non-police" allows them to record admissible statements. However, this distinction is arbitrary, as ED officers perform police-like functions. In Tofan Singh v. State of Tamil Nadu (2020), the Supreme Court ruled that officers under similar laws (NDPS) should be considered police officers, making confessions inadmissible. The same logic should apply to ED officers under PMLA.

4. Lack of Safeguards and Judicial Oversight
Unlike confessions made before a magistrate, PMLA provides no neutral oversight during questioning. This lack of protection increases the risk of coercion and violates principles outlined in Section 164 of the CrPC, which requires that confessions be made voluntarily before a judicial officer.

5. Global Standards and Potential for Misuse
International law, such as in Miranda v. Arizona (1966) in the U.S., protects individuals from coercive interrogations. PMLA falls short of such standards. Moreover, the act has been used for selective targeting, raising concerns about political misuse, much like the misuse of TADA and POTA.

Conclusion
PMLA’s provisions allowing statements made to investigating officers to be used as evidence violate constitutional safeguards, lack proper oversight, and mirror the abuses seen under TADA and POTA. Either these provisions should be repealed, or significant reforms are needed to ensure fair legal processes.

Guidelines for Committee of Creditors

In their infinite wisdom, the guardians of insolvency have issued “Guidelines” for the Committee of Creditors (CoC) on 06.08.2024. A quick read of the 3-page document reveals that the IBBI expects the CoC to demonstrate: (i) objectivity and integrity, (ii) independence and impartiality, (iii) professional competence and participation, (iv) cooperation, supervision, and timeliness, (v) confidentiality, and (vi) the sharing of information. Essentially, the IBBI has tossed around a bunch of action verbs reminiscent of the jargon MBA graduates throw around during vague consulting interviews.

 

This contrasts with the numerous other guidelines, circulars, notifications, and amendments to regulations that the IBBI periodically issues, often leaving everyone unclear about the current state of the law. The IBBI operates on a principle: the best way to train goalkeepers is by constantly changing the rules of the game. And in this grand game of insolvency, Insolvency Professionals are the goalkeepers.

 

However, in every other publication, the IBBI first mentions the specific section of the Code that empowers it to issue such documents. Then the IBBI mentions why such a publication was necessary, often in an accompanied press release. Then there’s a breakdown of steps to be taken to give effect to the publication. However, when it comes to the CoC, the IBBI merely issues guidelines without referring to a single section or regulation in the legal framework. Why? Because the IBBI was never empowered to assign responsibility (blame) to any of the various stakeholders in the insolvency process – CoC, SCC, NCLT, SBoD, or the auditors. So all the “responsibility” falls on the Insolvency Professional who is the country’s new favourite scapegoat. This often leads to professionals being unfairly scrutinized while the real decision-makers remain insulated.

 

This is reminiscent of IBBI’s circular dt. 10.08.2018 which quotes various judgements from benches of the NCLT which mention that the members of the CoC attending the meetings of the CoC should be empowered to take decisions during the meetings. The NCLT had also directed the IBBI to form appropriate regulations on the matter. In this view, the IBBI had issued this circular directing the IRP / RP to include a note in the agenda for the meeting that the meeting must be attended by persons who are competent and authorized to take decisions on the spot without deferring to internal approval. Here again, the responsibility was thrown on the shoulders of the IRP / RP. Interestingly, this circular was rescinded by circular dt. 23.05.2022 which said that the 10.08.2018 circular was no longer necessary as it had been incorporated in regulation 17 of the CIRP Regulations. But regulation 17 made no such requirement for the CoC. And once again, the insolvency process was left at the mercy of the CoC.

 

To be fair to the IBBI, it is not their fault that they do not exercise any control over the CoC / SCC. The Code simply does not provide the IBBI any power to regulate the actions of the CoC, as it gives to regulate the actions of IPs. But the Code does give the power to the IBBI regarding the constitution of the CoC and SCC. IPs face a regular problem of non-contribution of funds from the CoC / SCC. However, the regulations do not provide the IPs any power to take any penal measures against the CoC / SCC. Instead, the IP is left as a beggar at the heels of the CoC / SCC in hopes of future fee payments and new assignments.

 

The past decade of insolvency has indoctrinated a culture where any lacuna in the insolvency process automatically becomes a fault of the IP. When the CoC does not approve a resolution plan for months in hopes of a higher resolution value through negotiations, it is the RP who has to take repeated extensions, exclusions, and enlargements from the NCLT. When the CoC does not furnish its confidentiality undertaking, the RP has to explain to the Board why the Information Memorandum was issued belatedly to the CoC. In doing so, we have built an expectation of the CoC to be cajoled by the IP at every stage of the insolvency process – right from the choice of the RP by the CoC.

 

The legislature, judiciary, and IBBI have consistently failed to assign real responsibility to the CoC and SCC. This has left IPs as the lone rangers in the vast landscape of insolvency. Being the only class of stakeholders that can be regulated by the IBBI, the IP becomes a natural scapegoat in the insolvency process. Perhaps it's time to empower the CoC with responsibilities—or at least some mild consequences—for their inaction. Otherwise, we may soon find that the only IPs left standing are those who couldn't secure employment elsewhere. And that might not be the vision of the profession that the IBBI is trying to create. Isn't it time we redefined the responsibilities of the CoC before we run out of capable Insolvency Professionals?

Audit Requirements under IBC

• U/r 7(2)(ca) and 13(2)(ca) of the IP Regulations, both an IP and IPE are required to pay 1% of their annual turnover to the Board within 30 days of the end of each financial year
  
  
• U/r 7(2)(cb) of the IP Regulations r/w 31A(2) of the CIRP Regulations, a fee of 1% of the cost incurred in a CIRP must be paid to the Board within 30 days of the end of each quarter
  
  
• U/r 15(1)(b) and 15(5) of Liquidation Regulations, the progress report of a Corporate Debtor will contain audited accounts of the liquidator’s receipts and payments for the financial year. This report needs to be filed with the Adjudicating Authority within 15 days of the end of the fiscal year
  
  
• Tabulating all costs and revenues of the IP, IPE, and the Corporate Debtors at the end of every year / quarter is often a huge task that requires at least an internal audit and ideally a statutory audit
  
  
• Due to the incomplete audit, IPs and IPEs are compelled to submit fees to the Board based on provisional financials to comply with the Board's regulations
  
  
• However, these provisional figures are subject to change, resulting in fees being paid to the Board based on inaccurate revenue and cost estimates
  
  
• It is reasonable to expect that any fee levied by any statutory authority, including the Board, should be calculated based on audited financial statements. That is why most taxes and levies are also based on audited financial statements
  
  
• Surprisingly, the Board only requires IPs to complete audits of themselves, IPEs, and Corporate Debtors within tight timelines of 15 or 30 days
  
  
• This expectation is unrealistic and places undue burden on IPs, leaving room for potential misrepresentation to the Board and potential penalties in the future
  
  
• Therefore, the Board may reconsider its timelines for fee levies until audits of IPs, IPEs, and Corporate Debtors can be appropriately completed

Early Warning Signals of Stress in a Corporate

Stress in the world of banking and finance is associated with sign of  incipient sickness in the conduct of business of borrower. To know the concept of  stressed asset in corporate  we need to look back to couple of decades after  bank nationalization. 

In the early ninety’s of last century prudential norms of asset classification and capital adequacy  were introduced in the country under Banking and Financial sector reforms which together with the industrial sector reforms made a paradigm shift from age old banking practice in India. Prior to that in two tranches nationalization of banks took effect leading to fast expansion of banking throughout the length and breadth of the country. The resultant surge of industrial activities in India due to relatively easy access to fund, deregulation in industrial sector and liberal industrial policies and encouragement by way of incentives & subsidy from both the central and  state governments altogether changed the sloth, slow moving underdeveloped  economy to a rapidly growing developing economy.

The resultant economic activities brought sea changes in social sector gradually shifting large chunk of population from agriculture towards micro, medium and large industries. As a natural consequence service sector started growing by leaps and bounds and India freed itself from  dependence of first world country  in matters of food grains, machineries etc.

In the above back drop, banks, more particularly Public Sector Banks which were the only players gradually shifted their preference in urban and metros from trade and small priority sector lending to industrial advances, advances to service sectors and retail lending. 

To regulate the fast growing  banking activity Reserve Bank of India  was focussed towards honest implementation of  income recognition and asset classification, tight provisioning norms and capital adequacy in banks besides the traditional credit management approach. With the formation of separate Tribunal under the prescription of Narasimham Committee for recovery of Non Performing Assets,  the credit discipline from the point of view of lenders and borrowers were satisfactory. The system started wilting with time as there were stiff competition within the banks for sharing chunk of the pie.

In the midst of unhealthy competition among banks inadequate credit appraisals of new industrial and infrastructure advances became a new norm leading to acceptance of small, medium and large advances proposals from dubious entities having little exposure, knowledge and inadequate investible funds with them. The generous approach of banks by way of relaxations in various norms and securities encouraged fly by night operators to encash the opportunity. The unfortunate result of dilution of norms was quick mortality ( means slippage of an advance facility within one year of disbursement). As a result there were unmanageable pile of suits in   Debt  Recovery Tribunal and locking up of bank funds necessitated new enactment SARFAESI Act 2002 to enable bankers to encash their enforceable securities. 

Post Global Financial Crisis in 2008 saw another new development with the introduction of regulatory forbearance by RBI. The asset classification norms were tweaked in restructured accounts to give relief for temporary mismatch in cash flow in the existing economic slow down throughout the world. The bankers, particularly the PSBs allowed all and sundry including insolvents within the facility thus deferring identification of potential NPAs. At withdrawal of the regulatory forbearance there were flood of slippage and the NPA level of all banks and particularly PSBs went to new height not experienced in previous two decades.

Meanwhile, during the last decade RBI felt urgent necessity of implementing stringent credit monitoring mechanism to curb the disproportionate growth of impaired assets and introduced stressed assets concept within the standard asset category based  on period of default in payment of either the principal or interest or for continuous excess of balance outstanding over limit or drawing power or for non renewal of accounts within a definite time frame. Depending upon time period of overdue the stressed assets other than NPA are SMA 0( 1 to 30days default), SMA 1 (31to 60 days default) and SMA 2 (61 to 90 days default). If the default persist on 91^st day accounts turned to NPA. The periodical AQR(Asset Quality Review) of RBI for big advances of Banks to recognise incipient sickness in accounts and prescribe immediate corrective measures is a step towards this direction.

Finally, the Insolvency and Bankruptcy Code 2016 is based on default concept of corporate and has given free hand to bankers to quickly move to the NCLT to save upon time and   value of the impaired assets.   

Insolvency and Bankruptcy Code, 2016 (“IBC”) has been primarily used for Corporate Debtors. 4,593 Corporate Debtors have undergone the Corporate Insolvency Resolution Process (“CIRP”) with initiation of 4,708 CIRPs, closure of 3,068 CIRPs, and ongoing 1,608 CIRPs as on 30.09.2021 as depicted as depicted adjacent.

 

Particularly worrying is the increase in ongoing cases which might soon run to unmanageable levels. This is also because that many cases for which IBC is not an ideal fit get dumped in the IBC process indiscriminately.

 

We see from the adjacent figure that most of the CIRPs discussed above end in liquidation which is not the end of the IBC process nor is it the end of the litigation process. In fact, many cases linger on without end in liquidation offering no exit since unlike CIRP liquidation is not a time-bound process. Only 14% of the closed CIRP cases have seen resolution.

 

Of all the CIRPs admitted, there is wide variation in the admission, settlement, resolution, and liquidation in terms of the sectoral distribution. This is well shown in the adjacent graph.

 

We see that while the manufacturing sector is most likely to get resolved, and the real estate sector is most likely to enter into settlement and withdrawal. The electricity sector is also highly likely to get resolved and undefined sectors are most likely to be liquidated, seeing no resolution. Most of the discussion of the IBC has been centered around big real estate and manufacturing units since they form the bulk of the cases. However, the efficacy of the IBC as a blanket solution for distressed assets is really tested in the face of other sectors. We see that even though the real estate sector is most likely to be settled, accounts which are not settled are highly likely to enter liquidation thus causing distress to many home buyers.

 

Of the 4,708 CIRPs admitted till September 2021, 1,419 have concluded in liquidation with 1,640 still ongoing. Of the 1,419 liquidations, only 164 have been concluded accounting for only 5% of the total CIRP closures. Hence, liquidation is a limbo process not beneficial for every kind of corporate debtor. However, the very kind of corporate debtor which is most likely to enter into liquidation is the same kind which should not have been admitted into CIRP in the first place.

 

The starkest difficulty of IBC is seen in the case of infrastructure companies. Generally these are large corporate houses building infrastructure projects for various government undertakings such as road, railways, bridges etc. The banking facility availed by such companies is a non-fund based facility viz. a “Bank Guarantee”. In case of default, this bank guarantee comes due as a liability providing no relief on the asset side of the corporate debtor. The assets are future receivables from the project which has failed. So the possibility of any receivables are remote. The government generally has a clause inherent to the contract of such companies that in case of insolvency or bankruptcy of such a company, the contract gets automatically terminated. The infrastructure asset being an immovable construction is seized by the government along with its roadways and waterways and the company is left without any recourse. In this scenario, the company enters the IBC with nothing but a myriad of litigation and a bank guarantee liability running at least hundreds of crores in rupees. This is an impossible situation to navigate through and the company inevitably falls into unsolvable litigation and liquidation, with some scrap value getting preserved. Certainly IBC is not the appropriate way to go about resolving such a company.

 

Contrast that with a real estate company without any liquidity to service its bankers. The bankers invoke the IBC which risks this real estate borrower to lose not only the project at hand, but also the control of all lands acquired in the company. The company has value and it has been seen that the management becomes surprisingly resourceful in finding the liquidity in view of incoming insolvency. Where even the threat of a “creditor in control” model results in the resolution of the corporate debtor.

Effectiveness of IBC’s institutional structures – IBBI, IPs, AA, and IUs

As per IBBI Newsletter of June, 2021, IBC had enabled recovery of Rs. 2.5 lakh crore, against admitted financial claims of Rs. 7 lakh crore – translating to a recovery rate of 36% – for the 396 cases resolved out of the total 4,541 admitted. Of the remaining cases, 1,349 were under liquidation; 1,114 were closed under appeal/ review/ settled or withdrawn, and 1,682 were outstanding. A closer look at the data shows, however, the recovery rate and resolution timelines have a lot more room for improvement. This makes a continuous strengthening of the Code and stabilisation of the overall ecosystem imperative. In respect of 396 resolved cases, actual recovery rate was 36%.

Firstly, out of these 396 cases, the recovery rate, excluding the top 15 of the 396 resolved cases, estimated actual recovery rate was 18% in respect of remaining 381 cases. Estimated actual recovery rate for 1349 liquidation cases was 5%. Secondly, average resolution time for the aforementioned resolved cases is 419 days compared with the stipulated maximum of 330 days. About 75% of outstanding cases have already been pending for more than 270 days.

Notwithstanding these challenges, the IBC has played a key role in resolution of stressed assets so far. Its effectiveness will continue to be tested given the elevated level of stressed assets² in the Indian financial system. In this milieu, the government has been proactive in addressing issues being faced by various stakeholders. In August this year, the Standing Committee on Finance made recommendations to reinforce the IBC and the associated ecosystem. The critical recommendations include: 1) developing specialised National Company Law Tribunal (NCLT) benches to hear only IBC matters; 2) establishing professional code of conduct for committee of creditors (CoC); 3) strengthening the role of resolution professionals; and 4) digitalising IBC platforms in order to make the resolution process faster and maximise the realisable value of assets.

 

However, after all said and done, there seems to be a lot to be done at the Code enforcing agencies, which are IBBI, IPA, CoC, IPs, IU and AA.

Firstly, some words about AA may be stated. IBBI has been a silent spectator of the AA encroaching into its jurisdiction. While IBBI has been stressing the need of observing timeline of the IBC processes, the AA never seems to be bothered about the timeline when it comes to their obligation in the adherence to timeline. AA liberally allows adjournments on flimsy grounds or blank requests by the parties or on its own accord without any reasons. AA liberally allows time for filing pleadings in spite of the non-compliance by delinquent parties to the case. AA entertains arguments by senior counsels for hours together on a particular law point when the IBC is all about the necessity of the business-like attitude of all concerned in resolving the cases. AA frequently takes views beyond the IBC on the pretext of natural justice and even dares to remove the RP on the application of the Suspended BOD, ignoring that RP had filed application under section 66 of the IBC for several hundred crores of rupees  and also ignoring the specific direction of the Supreme Court. It seems that the AA acts more on the wisdom of the judge than on the letter and spirit of the statute. AA even delays the cases where CoC files application for replacement of RP and also when the RP files application for liquidation. Even after the completion of timeline, the AA does not pass the order of liquidation even when the case is fixed for the same for hearing and adjourns abruptly.

Secondly, IBBI, itself adds to agony to effective management of the IBC. IPs are being supervised by IPAs and also by IBBI. For same information, multiple information is to be filed by IP separately to IPA and also to IBBI in different time based and event based forms. IBBI, liberally, amends regulations without any value addition to the IBC system. One such example was the introduction of Form CIRP-8 by inserting Regulation 40A in the CIRP Regulations. The RP, who complied with the requirement of intimation of determination to the IBBI as per CIRP Regulation 35A long back, was also required to file the Form. Instead of requiring to file additional information over the earlier or requiring the updation of earlier information, a whole new Form is asked to be filed by both IPAs and IBBI. IP is forced to keep the IBBI informed every 30 days about the delays in the any event of the IBC, even when the delay had nothing to do with the RP’s action, in Form-8 and is made liable for penalty on lapses. IBBI makes a panel of IPs for providing the same to AAs. These empanelled IPs are rendered eligible for allotment for assignment by the AA for a period of 6 months. Most recent such panel has been released on 31.12.2021 for validity from 01.01.2022 to 30.06.2022. Such panel suffers from some inherent discrepancies since it allows only those IPs to apply for empanelment, who hold the valid AFA for the full period of the stated period. Out of 3500 and odd IPs, only about 900 IPs were empanelled. Similarly for the immediately preceding 6 month period, only 500 IPs were empanelled. Such stipulation for AFA holding was illogical and impractical as it denied the opportunity to even an IP, whose AFA was subject to renewal at the far end of the period and the IP could renew the AFA only within 45 days prior to the expiry date. Further, the guidelines for empanelment stated that the IPs with existing assignments were less eligible for assignment than the IPs with no existing assignments, but such information was not forwarded to the AA by IBBI. The CPE hours earned by IPs, have to be claimed by them in the IBBI website within a week. Such information on the IBBI website has to be approved by the IPA. IPA takes 3-4 months’ time in approval and sometimes rejects the claim without any communication to the IP.

Thirdly, the IPA also contributes its own role in the frustration of the IBC system. The IPA enrols the IPs. IBBI registers the IPs. Thereafter, IPA allows the AFA. IPA requires IPs to file monthly returns and half yearly returns. The IPA requires the IPs to file the disclosures of the relationships with the professionals; CoC members etc. even if there are no related parties or connected parties and require that NIL statement has to be filed. At the time of AFA renewals, it requires the IPs to file Forms with IBBI even if those are not required to be filed. These specific requirements are made by the IPAs when renewal of AFA is being applied, delaying the AFA approval, sometimes, leading to missing the important timelines, like IBBI empanelment etc. Such requirements could be asked by the IPAs in more frequent manner and not to delay on such reasons. CPE hours should be approved more regularly as it expects from the IPs.

Fourthly, the CoC is more concerned on recovery and not resolution. In most of the cases, the CoC consciously drives the CIRP to liquidation. CoC is L1 driven and non-committal of reasonable professional fees for the IPs, forensic audit for quality work, interim finance and extending further credit line to prospective resolution applicants. In many cases, the CoC constituents act through their senior employee officers, who delay the CIRP process by not deciding on the matters in the CoC meetings. In some strange cases, it has been found that such senior officers seem to be more on the sides of the Suspended BOD, who bled the CD in the past. 

Fifthly, IP, who acts as IRP or RP, is not less responsible for the effectiveness of the IBC system. A chain is as strong as its weakest link. The RP is required to interact with the Suspended BOD (SBOD), who was primarily responsible for the stressful condition of the CD. The SBOD was not, prima facie, desired that there should be any CIRP or at least the IP, who was in the driving seat, should be rendered helpless by not providing information, records and encumbering the assets etc. aided by the senior lawyers, who represent them forcefully before AA and prove that the IP was not doing his duty properly and unnecessary harassing the SBOD. If the IP was not strong enough to sustain the pressure of the less supporting CoC and over pressurising SBOD, would not be able to prove the fraud and avoidable transactions conclusively, leading to the delinquent SBOD getting scot free.

Last but not the least, the IU, has been moving at snail’s pace in providing the much needed support system to the IBC system. The IU has not been pro-active in spreading the services, which it could extend at economical cost competing with market forces providing similar services.

Need for Developing a Market for Distressed Assets

With the onset of the Insolvency and Bankruptcy Code, 2016 (“Code”), much focus has shifted to distressed assets and opportunities in the same. As developed economies realize, there is a wealth of opportunity in the markets for distressed assets and have structures to optimize the same. India is still in a protective stage where the market for distressed assets is scattered with neither a coherent information platform, nor a way to inform investors regarding all aspects of the assets.

 

The scattered nature of stressed assets may be seen in several avenues – (i) assignment of distressed loans by lenders to asset reconstruction companies, (ii) sale of physical assets under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI”), (iii) resolution by means of a resolution plan under the provisions of the Code, (iv) sale of assets under liquidation etc. All such avenues use a myriad of marketing and technology platforms including the website of the Insolvency and Bankruptcy Board of India (“Board”), the website of National E-Governance Services Ltd (“NeSL”), MJunction Services Ltd, AuctionTiger.net, newspaper advertisements, local dealerships etc.

 

Over time, the market for distressed assets has grown bigger and more scattered. Every attempt to streamline the process ends up creating a choice for a new process versus an old one, which results in further dispersion of information. For example, in a typical auction for an assignment of a loan account, the bid documents are only distributed to asset reconstruction companies (“ARCs”) having an ‘agreement’ with the assignor lender. Such assignor, being typically a large public sector bank, does not go out to explore the market for more financial institutions but restricts the search to ARCs having an agreement with itself. Given that information inadequacy omnipresent in all stressed asset cases, the ARCs take their time while doing their due-diligence by when the assignors’ auction process may be over. There is no single platform where the list of all such loan accounts may be listed with basic details about them. Most such deals then happen bilaterally rather than exploring the wider market. So while the process may give an illusion of a ‘Swiss Challenge Method’ being followed, in practice it is simply a negotiated deal. Even then, the cooperation of the original management of the borrower is actively sought by the assignee to the debt in order to effectively resolve the company. In most such cases, the assignee is reduced to be a backdoor vehicle for the borrower to enter into a settlement with its lender. And the entire process happens without any transparency or regulation.

 

Similar inadequacies are faced in other processes of sale of distressed assets as well. The reasons being lack of transparency and lack of a coherent market for distressed assets. Time and again the government has tried to implement systems to build such a system. The Board has enabled the listing of all auctions under liquidation on its website and has encourages the use of NeSL to conduct the auctions so that all such activities at least till the fold of the Code may remain organized, and hence measurable. However, the Board made no means available to convert the data into metrics. Further, the technology platforms recommended turned out to be ineffective at the time of their launch losing much confidence in the eyes of the stakeholders, who resorted to using private platforms for their needs. Today, there are over 15 auction service providers marketing themselves and rendering services to insolvency professionals with no means of collating data amongst themselves.

 

Another major distressed asset in the country is in the form of companies looking to be resolved. This happens both within the framework of the Code and outside it. And is met with the highest level of customization possible for distressed assets in the country. The resolution plans may be as simple as refinancing or settlement via equity infusion to revive the corporate debtor. Or may include parts of mergers and acquisition, dissolving parts of the business, tax optimization, and refinancing using long-term debts which themselves may run into stress in due course. In this scenario we realize why stressed assets have customarily been a very disorganized space. Different borrowers may require a variety of different solutions, which may not always be available in the market. Of course the lack of information availability does little to help standardize the process. But fact remains that there’re no “standard solutions” when it comes to stressed assets.

 

The National Company Law Tribunal that acts as an adjudicating authority for insolvency cases in India might be the greatest repository of data for insolvency cases. All insolvency cases at some point need to refer to the Adjudicating Authority for a variety of reasons and if not for anything else, then at least for obtaining final orders on their cases. Further, the Adjudicating Authority requires the insolvency professionals to regularly report the progress of the cases, creating a large repository of regularly updated information. However, all this information is never converted into any knowledge due to the lack of any metrics. The information keeps getting rusted into back alleys of old courtrooms (or in a modern sense, in cloud storages). But no real value is ever derived out of them. It is no surprise that the number of cases pending to be adjudicating before such forums itself is an undefined number with no metrics for that as well. The judicial system works without accountability, or worse – measurability.

Foreign Direct Investment (FDI)

Market size

According to the Department for Promotion of Industry and Internal Trade (DPIIT), FDI equity inflow in India stood at US$ 521.47 billion between April 2000 and December 2020, indicating that the government's efforts to improve ease of doing business and relaxing FDI norms have yielded results.

FDI equity inflows in India stood at US$ 51.47 billion in 2020-21 (between April 2020 and December 2020). Data for 2020-21 indicates that the computer software and hardware sector attracted the highest FDI equity inflows of US$ 24.39 billion, followed by the construction (infrastructure) activities (US$ 7.15 billion), service sector (US$ 3.86 billion) and trading (US$ 2.14 billion).

In 2020-21 (between April 2020 and December 2020), India received the highest FDI equity inflows from Singapore (US$ 15.72 billion), followed by the US (US$ 12.83 billion), the UAE (US$ 3.92 billion), Mauritius (US$ 3.48 billion), Cayman Islands (US$ 2.53 billion), the Netherlands (US$ 2.44 billion) and the UK (US$ 1.83 billion).

In 2020-21 (between April 2020 and December 2020), Gujarat received the highest FDI equity inflows of US$ 21.24 billion, followed by Maharashtra (US$ 13.64 billion), Karnataka (US$ 6.37 billion) and Delhi (US$ 4.22 billion).

Investments / Developments

Some of the significant FDI announcements made recently are as follows:

• In the first nine months of FY21: Total FDI inflows amounted to US$ 67.54 billion, a 22% YoY increase.
• February 2021: Amazon announced to start manufacturing electronic devices in India from 2021
• January 2021: Amazon partnered with Startup India, Sequoia Capital India and Fireside Ventures to launch an accelerator programme to support early-stage start-ups take their brands to international markets and boost domestic exports.
• November 2020: Rs. 2,480 crore (US$ 337.53 million) foreign direct investment (FDI) in ATC Telecom Infra Pvt. Ltd. was approved by the Union Cabinet.
• In November 2020: Amazon Web Services (AWS) announced to invest US$ 2.77 billion (Rs. 20,761 crore) in Telangana to set up multiple data centres; this is the largest FDI in the history of the state.
• Since April 2020, the government has received over 120 foreign direct investment (FDI) proposals worth Rs. 12,000 crore (US$ 1.63 billion) from China. Between April 2000 and September 2020, India received US$ 2.43 billion FDI from China.
• According to the Reserve Bank of India (RBI), India’s Outward Foreign Direct Investments (OFDIs) in equity, loan and guaranteed issue stood at US$ 1.85 billion in February 2021 vs. US$ 1.19 billion in January 2021.

Government Initiatives

• March 2021: The parliament approved a bill to increase foreign direct investment (FDI) in the insurance sector from 49% to 74%.
  
  
• March 2021: Mr. Shripad Naik, the Minister of State for Defence, stated that a total of 44 Indian companies, including public sector units, have received approvals related to FDI for joint production of defence items with foreign organisations.
  
  
• December 2020: The Government of Uttar Pradesh agreed to provide Samsung Display Noida Private Limited with special incentives to set up a mobile and IT display product manufacturing unit. Under the Central Government's scheme for promotion of manufacturing electronic components and semiconductors (SPECS), Samsung will also receive a financial incentive of Rs. 460 crores (US$ 62.61 million). This project will develop a global export hub in Uttar Pradesh and will help the state attract more foreign direct investments (FDI).
  
  
• December 2020: Changes in the guidelines for the provision of Direct-to-Home (DTH) services have been approved by the Union Cabinet, enabling 100% FDI in the DTH broadcasting services market.

(Source: https://www.ibef.org/economy/foreign-direct-investment.aspx)

Stock Market Basics

 Who is a broker?

 

A broker is a member of a stock exchange, who is permitted to do equity trades there.  Broker is an enrolled member of the exchange and is registered with SEBI. A broker is an intermediate person (or a company) between an investor and a stock exchange. They buy & sell shares and other securities for investors in the stock market. Please note that an investor cannot directly deal with the stock exchange.

 

What is an ISIN Number?

 

ISIN (International Securities Identification Number) is a unique identification number for a security across the universe.

 

How is SENSEX decided?

 

Sensex, generally a stock market index, was launched in 1986 by BSE (Bombay Stock Exchange). It evaluates the fluctuations in stock prices of 30 big companies in terms of market value, turnover, profit etc. The value of the Sensex is calculated on every minute basis. If the Sensex is going up that means the stock price of most companies of BSE is increasing and if the Sensex is going down that means the share price of most BSE companies is decreasing. The base year of the Sensex is 1978-79 and the base index value was set at 100.

 

What is MID CAP?

 

According to the current market, companies are categories in large-cap, mid-cap and small-cap companies. Company's capitalization is calculated on the basis of the total number of its outstanding shares in the market multiplied by the current price per share. The mid-cap companies’ market capitalization lies between Rs 5,000 - 20,000cr. Mid-cap companies are considerably smaller than large-cap companies in comparison to revenue, profitability, employees, client base, etc.

 

What is Future and Option?

 

Future Contracts	Options
Future Contracts are a type of derivatives deriving value from an underlying instrument.	Options are a type of derivatives deriving value from an underlying instrument.
In future contracts, the buyers and sellers must be agreeable on a specific future date for trading before the expiration date.	Gives rights, not the obligation to the investor to buy or sell before the contract expires. Only buyer or seller has an obligation to buy or sell.
Buy and sell at an acceptable future price.	Buy and sell at the strike price.
Helpful for institutional investors to trade in big quantities.	Helpful for retail investors to trade in a certain quantity.
Futures are comparatively riskier than Options	Options are less Risky than Futures.
Can provide unlimited loss and profit to the buyers.	Can provide unlimited profit but limited loss contract to buyers.

 

 

Why do share prices move up and down?

 

The answer in two words is "Demand & Supply". For example, if there is more demand for shares of a company and less people are willing to sell them, the share will move upwards and if there is a huge supply but no one is interested in buying shares at the current price, the share will move downwards.

 

Also there are many factors involved in this including the company's financial result, overall economy situations, sector performance, government rules & regulations, major political & natural events, future of the company, upcoming products & services, company management changes, stock market frauds  etc. Any one of them and many more factors affect demand & supply of a company stock and ultimately move its prices to go up & down. Thus, it is very hard to predict stock movement and require lots of research and expertise.

 

The difference between stockholder and stakeholder?

• A stakeholder can or cannot be the shareholder in a company but a shareholder is always a stakeholder.
• A shareholder has at least one stock in the public company and interest in stock performance, whereas a stakeholder has an interest in the company's performance.
• A shareholder can be an institution, company and individual holding thestocks and a stakeholder can be employees, supplier, owner, vendors, customers,and bondholders.
• A shareholder can buy or sell the stocks frequently based on their needs,but stakeholders are concerned with the long term need and performance of the company
• A shareholder is the owner of the company whereas a stakeholder can or can or cannot be the owner of the company. 

What is Thematic Investing?

 

Thematic Investing is  a way to make investment decisions based upon emerging themes — themes that are identified by looking at the intersection of shifting economics, demographics, psychographics, technologies, mixed with regulatory mandates and other forces. It is based on predictions about trends rather than on past performance of the market or the fundamentals of a specific company.

 

The closest comparison of thematic investment is Exchange Traded Funds (ETF's). Thematic investment offers a lot more flexibility over ETFs as the companies to invest in a theme are identified by the broker, fund-manager or even a group of people in a community.

How different is Thematic Investing from Mutual Funds?

 

In Thematic Investing, an investor investing in a portfolio of company shares instead of individual stocks. Thematic Investing is a recent concept and not very popular yet but if anyone compare between Thematic Investing and Mutual fund, there are some differences which makes thematic investing better than mutual fund investing in many ways:

1. Investor can customize Thematic Investing but mutual funds can't be customized.
2. Mutual funds comes with many other charges and expense which is usually around 2% - 2.5% of the investment. But in case with Thematic Investing it's very low compare to mutual fund.
3. In thematic investing, investor can rebalance/redeem/ invest at any point of time. But in mutual fund, it is the Fund manager who decides the fate of investors
4. Mutual funds have too many stocks in their portfolios, thematic has few.

 

What are the different types of derivatives?

 

There are four different types of derivative contracts-

• Futures contracts: Futures are traded on BSE or NSE exchange and is a standardized contract to buy or sell the underlying at a specified price, at a certain date.
• Forward contracts: Forwards are traded in OTC markets and is a customized agreement between two individuals to buy or sell underlying assets at a specified date, at a certain date in future.
• Options contracts: Options gives the right, but not an obligation, to buy or sell the underlying asset at a certain date and at a specified price. Options are traded in both OTC markets and BSE, NSE exchanges.
• Swaps: It is a contract made between two financial institutions to exchange cash flows in the future. Swaps do not derive their value from any underlying instrument. These contracts are traded in OTC markets only.

Is Demat account required for Options Trading?

 

Options contracts in India are settled in cash and there are no deliveries involved. The profit/loss arising from the transaction is settled in cash. The profit will be credited to investor account and loss would be deducted from the trade value. So, a trader doesn't need a demat account for Options trading. However, investor would need a trading account and a linked savings bank account to buy/sell Call and Put options from the exchanges.

Difference between Direct Investment in Shares and Investment in Mutual Funds

Shares are the physical representation of a small portion of a company’s value that is traded in the stock market. When a company goes public and issues shares, the combined value of the shares of the company in the stock market and/or owned by persons, constitutes the total value of the company. As a shareholder, owning a small part of the company means that they can take part in the annual shareholder meets.

 

Mutual funds are a collection of stocks and bonds that are managed by fund managers in an Asset Management Company (AMC). If it is an equity mutual fund, it will contain stocks, while debt mutual funds will contain government bonds and securities. A mutual fund is like a huge basket with shares from several companies.

 

Investment in mutual funds is a form of investment in stocks and bonds that is managed by an AMC or investment house, while direct investment in stocks and shares is an active form of investment, where one can handle the purchase and sale of the same himself. 

 

The following are the key differences between investment in shares and mutual funds:

 

Direct Investment in Shares	Investment in Mutual Funds
Shares are a part of a business’s growth strategy.	Mutual funds are investment options for investors.
Trading in shares requires the shareholder to have a demat account.	Mutual funds do not need a demat account.
An investor has no control over the actual choice or trade of stocks.	Mutual funds are a portfolio of stocks of companies pre-determined and altered by a fund manager.
Direct investment in shares requires strong knowledge of the stock market and company performances. It is a hands-on activity involving quick market decisions and is better for experienced stock traders.	Mutual funds are managed by a fund manager in an AMC. This external management of the portfolio ensures that there is direct involvement on the part of the investor except at the time of choosing the fund. For this reason, mutual funds are ideal for a new investor who does not know much about the stock market.
Direct investment in shares requires more time and dedication.	The passive nature of mutual funds makes it easier for anyone and everyone with money to take part in it.
A shareholder cannot make a fixed investment in shares directly as the prices fluctuate constantly and need personal attention and prompt trade decision.	Anyone can invest in mutual funds through a fixed monthly Systematic Investment Plan (SIP), as it is managed by a professional.
Direct investment in stocks does not offer the protection from negative returns and makes the stocks volatile. Unless anyone is dealing in a significant number of stocks at the same time, their money will be at high risk.	As mutual funds hold a diversified portfolio, negative returns are cushioned by the other stocks that do well.
Investment in shares could give quick returns if anyone buys and sells at the right time and chooses high-growth stocks.	Mutual funds have a longer-term growth trajectory and will give good returns only after 5-7 years.
In case of direct investment in shares, shareholders need to pay brokerage to the stock broker.	In case of mutual funds, a mutual fund holder needs to pay fund management charges, a front-end load upon initial purchase, back-end load upon sale, early redemption charges, etc.
While dealing with shares, shareholders may not be able to juggle with a large portfolio.	It is easier for mutual fund holders to diversify the portfolio using mutual funds as there are options such as hybrid funds.
Direct investment in shares can give tax benefits only under Section 80CCG of the Income Tax Act.	Tax benefits on mutual funds can be claimed under Section 80CCG as well as 80C of the Income Tax Act if it is an Equity-Linked Savings Scheme (ELSS).

 

Whether a person invests in shares or mutual funds depends on their knowledge and experience of the market and the amount of time they have. Mutual funds are a great investing instrument if such people are a dilettante and aim for a steady growth of wealth. But if a person is a stock market virtuoso and has enough time in hand, direct investment in shares is a better choice.