Applicability of Limitation Act to Insolvency & Bankruptcy Code, 2016

The Limitation Act, 1963 (“Limitation Act”) is a law of repose, peace and justice which bars the remedy after lapse of a particular period by way of public policy and expediency without extinguishing the right in certain cases. This is based on a public policy principle that a claimant who has slept over its claim cannot seek to enforce the said claim/rights at a later stage, as it will prejudice the right of the other party. Therefore, when the Insolvency and Bankruptcy Code, 2016 (“Code”) is silent on the applicability of the Limitation Act on the proceedings brought under the Code it poses some interesting issues: which have been discussed in the recent past in a number of cases before the National Company Law Tribunal (“NCLT”) and National Company Law Appellate Tribunal (“NCLAT”). This article aims to highlight some of the said important judicial pronouncements.

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Update on Union Budget 2017-18

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FDI Regime – Press Note 5 of 2016

The Government of India (“Government”) has reviewed the foreign direct investment norms, and sectoral caps prescribed in relation to various sectors under the Consolidated FDI Policy Circular, 2016 dated June 7, 2015 (“FDI Policy”), and subsequently notified the Press Note 5 of 2016 dated 24th June 2016 (“Press Note 5”).[

Press Note 5 eases entry level barriers and FDI norms in a number of sectors such including strategic sectors such as defence, pharmaceuticals, and aviation.

Defence

FDI in the Defence is permitted: (a) upto 49% under automatic route; and (b) above 49% through government approval (wherever it is likely to result in access to modern technology in the country, or for other reasons to be recorded). This FDI sectoral cap has also been made applicable to manufacturing of small arms and ammunitions covered under Arms Act 1959.

Pharma

In the pharmaceutical sector: (a) 100% FDI in Greenfield pharma vide the automatic route has been permitted; and (b) 74% is automatic and government approval is required beyond 74% in Brownfield pharma. Further, FDI up to 100% under the automatic route is permitted for manufacturing of medical devices.

Agriculture and Animal Husbandry

100% FDI is allowed under automatic route in: (a) Floriculture, Horticulture, and Cultivation of Vegetables and Mushrooms under controlled conditions (i.e., where the rainfall, temperature etc. is artificially controlled); (b) development and production of seeds and planting material; (c) Animal Husbandry, Pisciculture, Aquaculture, and Apiculture; and (d) services related to agro and allied sectors. FDI is not allowed in any other agricultural sector/activity.

Airports

In case of both existing and greenfield projects 100% FDI is permitted under automatic route.

Air Transport

For Scheduled Air Transport Service/ Domestic Scheduled Passenger Airline and Regional Air Transport Services, up to 49% FDI is permitted under automatic route. Any FDI beyond 49% can be made subject to government approval. 

For Non Scheduled Air Transport 100% FDI will be allowed under automatic route.

However, there is no change in so far as investment that can be made by a foreign airline in case of Indian companies, operating scheduled and non-scheduled air transport services. Such foreign airlines (subject to other conditions as specified under the FDI Policy) are permitted to invest, up to the limit of 49% of their paid-up capital in the said Indian companies.

FDI upto 100% shall continue to be permitted in relation to ground handling services; and maintenance and repair organisations, flying training and technical institutions. 

Single Brand Retail

In case of single brand retailing 49% FDI is allowed through automatic route. Any FDI beyond 49% is allowed subject to government approval.

In case of investment beyond 51%, it is mandatory that 30% of the value of the goods will be sourced locally (i.e. from MSME’s, village and cottage industry, etc.). This local procurement requirement has to be met at the first instance as an average of five years’ total value of the goods purchased, and subsequently on an annual basis. However, an exemption for a period of three years (from the date of commencement of business) from this local sourcing requirement is granted to entities using ‘state of art’ and ‘cutting edge’ technologies.

Broadcasting

Teleports, Direct to Home (DTH), Cable Networks, Mobile TV and Headend-in-the Sky Broadcasting Service (HITS) have all been opened up to 100% FDI through the automatic route. 

For infusion of fresh foreign investment beyond 49% in a company not seeking license/permission from sectoral Ministry, resulting in change in the ownership pattern or transfer of stake by existing investor to new foreign investor, approval from the Foreign Investment Promotion Board (“FIPB”) will be needed. 

Private Security 

FDI up to 49% is now permitted under automatic route in this sector and FDI beyond 49% and up to 74% is permitted subject to government approval.[

Branch office / Liaison Office 

Another significant change that has been introduced vide the Press Note 5 is that the establishment of branch office, liaison office or project office for certain industries has been made easier. It has been provided that in case of the principal business of the applicant is Defence, Telecom, Private Security or Information and Broadcasting, and if an approval from FIPB or license/permission by the concerned Ministry/Regulator has already been granted then for the purposes of establishing a branch office, liaison office or project office or any other place of business in India no separate permission from the Reserve Bank of India or security clearance is required.

 

National Tariff Policy, 2016

Government of India has approved certain amendments to the National Tariff Policy on 20 January 2016 (“NTP, 2016”). The National Tariff Policy is formulated and notified in continuation of the National Electricity Policy (NEP) which in turn is notified under Section 3 of the Electricity Act, 2003. NTP, 2016 is primarily focused on renewable energy, (in particular solar energy) energy security and ensuring affordable tariffs.[

Overview of Amendments

Some of the important highlights of the NTP, 2016 are as follows:

Access to Affordable Electricity

  • Subject to conditions, power generation plants have been allowed to increase their capacity by up to 100%.
  • Power is to be provided to remote unconnected villages through micro grids with provision for purchase of power into the grid as and when the grid reaches there.
  • Affordable power is to be made available for people near coalmines by enabling procurement of power from coal washery reject based plants.
  • In the event the power is supplied through expansion of power plants, the benefit of sharing in of infrastructure of existing project and efficiency of new technology is passed on to consumers through tariff. This would result in reducing the cost to consumers.

It has also been provided that unless specifically exempted, inter-state transmission projects shall be developed through competitive bidding process.

Renewable Purchase Obligations (“RPO”)

The following amendments have been introduced in relation to RPO’s.

  • In order to promote renewable energy, NTP, 2016 provides that 8% of total consumption of electricity, excluding hydropower, shall be from solar energy by March 2022. As this is limited to solar energy, and therefore the actual impact and implementation of this amendment in relation to non-solar RPO needs to be analysed in the context of the Electricity Act, 2003, which requires that the RPO shall be calculated on the basis of total consumption. Further, the manner in which the DISCOMS calculate their respective RPO’s may also need to be reviewed as electricity sourced from hydro sources from RPO obligations is exempted.
  • RPO shall be applicable to cogeneration from sources other than renewable sources. This will provide impetus to RPOs.

Renewable Generation Obligation (“RGO”)

It has been provided under NTP, 2016 that the renewable energy produced by each generator may be bundled with its thermal generation for the purpose of sale. Further, it has been provided that in the event an entity procures such renewable power, then the SERCs “…will consider the obligated entity to have met the Renewable Purchase Obligation (RPO) to the extent of power bought from such renewable energy generating stations
”. Thus, the clarification regarding RGO makes it convenient for thermal generators to meet RPO.

Waste to Energy

State Distribution Licensee shall “compulsorily procure 100% power” produced from all the Waste-to-Energy plants in the State. It is further provided that this procurement shall be done in the ratio of their procurement of power from all sources including their own, at the tariff determined by the Appropriate Commission under Section 62 of the Act. Therefore, under NTP, 2016 procurement of power from waste-to-energy plants has been made compulsory.

Inter- State Transmission Charges

As per NTP, 2016 shall be no interstate transmission charges applicable in relation to electricity generated from solar and wind sources of energy. This will encourage inter-state transaction of power.

Procurement of Power

In addition to the above, NTP, 2016 also provides that in order to keep the tariff low, the States shall endeavor to procure power from renewable energy sources through competitive bidding. This means that the preferential tariff regime for Renewable energy sources is shall no longer be applicable.

It also provides that only a maximum of 35% of installed capacity can be procured by the State based on the SERC determined tariff. This cap governs also forms of generation including renewable energy.

Bundled Renewable energy with conventional energy

The power from plants of a generating company, where either the PPAs have expired or plants have completed their useful life, may be bundled with power from renewable generating plants through the process of bidding or for which the equipment for setting up such plant is procured through competitive bidding.

Cross Subsidy

In relation to cross subsidies, NTP, 2016 provides that the cross subsidy shall be an aggregate of weighted average cost of power; transmission and distribution losses; transmission, distribution and wheeling charges and per unit cost of carrying regulatory assets, if applicable. This is a change from the earlier methodology of using the cost of marginal power. This has been an introduced for protecting the interest of both open access consumers as well as distribution companies (discoms). It has also been provided that the cross subsidy surcharge shall not exceed 20% of the applicable tariff to the category of consumer seeking open access.

However, NTP, 2016 recognizes that the amended cross subsidy methodology provided may not work for all distribution licensee, and therefore the SERC may review and vary the same, taking into consideration different circumstances prevailing in the area of relevant distribution licensee. Therefore, SERC has been provided wide discretion to determine the actual methodology applicable in case of cross subsidy.

Competitive Bid Structuring

NTP, 2016 also provides that in case there is any change in domestic duties, levies, cess and taxes imposed by Government, or by any Government instrumentality which impacts the cost of power then the same may be treated as “Change in Law” unless provided otherwise in the PPA and subject to the approval of the appropriate commission. This will allow the producers to pass through for impact of any change in domestic duties, levies, cess and taxes in competitive bid projects to the consumers.

Role of Regulators

The role of CERC/SERC in relation to several issues has been clarified under NTP, 2016  in the following manner:  

  • CERC should lay down guidelines for pricing intermittent power, especially from renewable energy sources, where such procurement is not through competitive bidding. The tariff stipulated by CERC shall act as a ceiling for that category.
  • SERC should similar to the CERC develop regulations for the inter-State transmission duly considering factors like voltage, distance, direction and quantum of flow, etc.
  • CERC shall regulate the tariff of generating company, if such generating company enters into or otherwise have a composite scheme for generation and sale of electricity in more than one State, i.e. where more than 10% power sold outside State.

However, the NTP, 2016 provides that the CERC and SERC shall be guided by the tariff policy in discharging their functions including framing the regulations. There is no binding mandate under the NTP, 2016, which means that there is a wide leeway is available to the regulators in this regard.

Key Takeaways

The changes proposed in the policy can have positive impact on sectors such as renewable energy. However, as highlighted above the NTP, 2016 is a non-binding policy document. Therefore, the assessment of the impact of the changes will ultimately depend on the actual implementation of the said amendments by the various States.

Impact of the WTO Panel Ruling on the Solar Mission of India

This post briefly discusses the WTO ruling in a case initiated by the United States against India in relation to domestic content requirements for solar cells and modules under certain specific phases of the Jawaharlal Nehru National Solar Mission (“Mission”) . 

I. WTO Ruling

United States had filed a panel request on 6th February 2013, against the domestic content requirements for solar cells and modules in Phase I (Batches I and II) of the Mission. On 10 February 2014, the United States requested supplementary consultations concerning certain measures of India relating to domestic content requirements under the Phase II (Batch I) of the Mission for solar cells and solar modules.

The main crux of the argument advanced by the United States was that the local content requirements mandated under the Mission applied different conditions to domestic cells and modules than the imported cells and modules to the detriment of the latter. Under the said Phases of the Mission, the Government was to enter into power purchase agreement with selected solar power developer’s contingent on their agreement to use domestically produced solar cells and modules. Therefore, United States argued that this requirement accorded less favorable treatment to the imported cells and modules than to the like modules and cells of Indian origin. Hence, India violated its national treatment obligations.

In its defence, India argued that the:

  1. solar cells and modules of Indian origin are integral part of solar electricity generation, which is procured by the Government (and not used for commercial resale) and therefore, derogation to national treatment obligations under Article III:8(a) is applicable
  2. local content requirement was covered under the exception of Article XX (j) of GATT 1994. India argued that it lacked domestic manufacturing capacity of solar cells and modules, and was dependent on imported cells and modules, which meant that the said products were in ‘general or local short supply’, and therefore the domestic content requirements were justified under Article XX (j) of GATT 1994; and
  3. local content requirement mandating use of doemstically producedcells and modules help in achieving India’s objective of sustainable development and ensuring energy security, and therefore, the said requirements are justified under under Article XX (d) of GATT 1994.

The panel (the report was circulated on February 24, 2016) agreed with the arguments advanced by the United States, and held that the domestic content requirements under the Phase I (Batches I and II) and Phase II (Batch I) of the Mission result in “less favourable treatment” to imported cells and modules within the meaning of Article III:4 of the GATT 1994.

The three-member panel rejected the arguments advanced by India distinguishing Appellate Body report in the case of Canada — Renewable Energy / Feed-In Tariff Programme . In particular the panel held that the product procured by the Government is electricity whereas the product discriminated against for reason of its origin is generation equipment,” i.e., solar cells and modules, and that as seen in case of Canada — Renewable Energy / Feed-In Tariff Programme neither solar cells nor solar modules are in a competitive relationship with electricity. Therefore, the derogation provided under Article III:8(a) is not applicable in the present case.

In so far as the defence under Article XX(d) is concerned, the panel held that it was insufficient that the local content requirement merely ensures the attainment of the objective of sustainable development/ clean energy but it is necessary that the said measures enforce specific sustainable development/ clean energy obligations which are contained in the legal instruments. Therefore, as India had failed to demonstrate that the local content requirements were directly enforcing the said obligations, Article XX(d) was not applicable.

II. Way Forward

The Government of India’s target of achieving 100 gigawatts (GW) of solar power by 2022 shall not be really affected by this ruling. In fact, as a result of this ruling (subject to the ruling of an appeal, if filed) both domestically manufactured solar cells and modules and imported solar cells and modules shall be available at competitive prices, which may help in generation of green energy at affordable and lower costs.

However, the domestic manufacturing capacity of solar cells and modules (even though the percentage of the domestic manufactures covered under the local content requirement is a small percentage of the total domestic manufacturing capacity of India) will be adversely affected as an aftermath of this ruling.

It is plausible that the Government can use the ‘Make in India’ programme to provide other forms of incentives and assistance to the domestic manufacturers to turn India into a manufacturing hub of solar cells and modules.

India may file an appeal against the panel ruling. Therefore, the final impact may need to be assessed again based on the final finding of the Appellate Body in the said dispute.

Start Up Action Plan – A New Beginning

An update on the Start Up Action Plan released by the Government of India, outlining various incentives and mechanisms for enabling the start up environment.