In a landmark proposal, the Insolvency and Bankruptcy Board of India (IBBI) has suggested allowing operational creditors (OC) to explore voluntary mediation before initiating insolvency applications under Section 9 of the Insolvency and Bankruptcy Code (IBC). This is part of a new discussion paper aimed at reducing the burden on the Adjudicating Authority (AA) and expediting admissions.
Key Observations:
- Proposal Overview: The discussion paper recommends mediation as a tool to resolve disputes between operational creditors and corporate debtors at the earliest stage, facilitating faster admissions by the AA. The IBBI has invited public comments on the paper by November 24, 2024.
- Recurring Issues: Common disputes in Section 9 applications include disagreements on the quality or performance of goods/services, discrepancies over amounts owed, contractual disputes, and claims for damages or set-offs.
- Expert Opinions:
- Mediation can significantly reduce the burden on the National Company Law Tribunals (NCLTs), improving the efficiency of proceedings.
- Mediation could reduce litigation costs and suggests that IBC should be a last resort for small dues recovery.
- The proposal could lessen the AA’s burden since most OC-initiated cases aim for recovery rather than resolution.
- A significant number of cases are settled pre-admission, indicating a high settlement rate at this stage.
The IBBI’s proposal to introduce voluntary mediation aims to address the recurring issues in Section 9 applications and reduce the burden on the NCLTs. Expert opinions suggest that this step could lead to more efficient proceedings, lower litigation costs, and timely resolutions. With mediation, disputes could be resolved earlier, benefiting all stakeholders involved. The move to incorporate mediation into the insolvency process is a welcome change that promises to declog the system and promote faster, cost-effective dispute resolution. By shifting the focus from litigation to mediation, the IBBI aims to streamline the insolvency process, making it more efficient and less burdensome for all parties involved.
IFSCA’s Market Infrastructure Institutions (Amendment) Regulations, 2024
The International Financial Services Centres Authority (IFSCA) has introduced the Market Infrastructure Institutions (Amendment) Regulations, 2024, which bring substantial updates to the regulatory framework for market infrastructure institutions (MIIs) in India’s International Financial Services Centres (IFSCs). These amendments aim to reinforce governance, operational integrity, and risk management within MIIs, such as stock exchanges, clearing corporations, and depositories. Below is a summary of the key changes and their implications.
Key Amendments and Changes
- Expanded Definition of Clearing Corporations: The amendment broadens the definition of “clearing corporation” to include any entity engaged in the clearing and settling of trades in securities and approved financial products. This updated definition brings all institutions involved in settlement activities within IFSCs under the regulatory scope of the IFSCA, aligning IFSC clearing corporations with international standards in financial settlement infrastructure.
- Reclassification of Key Management Personnel (KMP): The amendment expands the definition of Key Management Personnel (KMP) to encompass a wider range of individuals with significant responsibilities, including managing directors, heads of core functions, and key decision-makers, as per the Companies Act, 2013. This reclassification ensures that all essential personnel involved in decision-making are held accountable under IFSCA’s regulations.
- Introduction of Non-Independent Directors: The amendment introduces the role of “non-independent directors,” who are elected or nominated by shareholders but have no direct ties with broker dealers, clearing members, depository participants, or their affiliates. This addition aims to mitigate conflicts of interest and enhance impartial governance within MIIs in IFSCs.
- Code of Conduct for MIIs: A new Code of Conduct mandates that MIIs uphold ethical and professional standards. Outlined in Part-A of Schedule-I, this code promotes integrity, transparency, and accountability, safeguarding the interests of all market participants.
- Clarification on Net Worth Requirements: The regulations now provide specific guidelines for calculating the net worth of recognized stock exchanges, depositories, and clearing corporations. For clearing corporations, net worth includes only “liquid assets” like cash, bank balances, fixed deposits, and government securities. This standardized approach to assessing financial stability boosts transparency in MIIs.
- New Rules for Directors and Committees: The amendment restricts eligibility for directors with affiliations to brokers or clearing members to minimize conflicts of interest. Additionally, it grants the IFSCA the authority to appoint up to three directors on an MII’s governing board, enhancing regulatory oversight and fostering a more impartial governance structure.
- Compensation and Committee Structuring: The amendment requires MIIs to form a Nomination and Remuneration Committee to oversee compensation for KMPs, with policies that align compensation with performance and risk. These policies must include “malus and clawback” arrangements to enforce accountability among senior management. Additionally, functional and oversight committees must be established to strengthen checks and balances within MIIs.
- Risk Management and Functional Segregation: MIIs are required to identify and separate critical functions such as compliance, risk management, and business development. This segregation protects essential operational functions from potential conflicts arising from business growth activities.
- Cybersecurity and Legal Risk Management: MIIs must now appoint a Chief Risk Officer, Chief Legal Officer, and Chief Information Security Officer, emphasizing risk management, legal compliance, and cybersecurity. These roles are designed to cover vulnerabilities comprehensively and uphold global standards.
- Extended Trading Hours and Dematerialization: The updated regulations allow trading hours of up to 23 hours and 30 minutes daily with mandatory settlements. They also enable the dematerialization of all securities under the Securities Contracts (Regulation) Act, 1956, as well as other approved financial products, facilitating secure and efficient transactions.
Draft Commercial Courts (Amendment) Bill, 2024
To expedite, streamline, and reduce the costs of commercial dispute resolution, the Government of India enacted the Commercial Courts Act in 2015, later amending it in 2018. Since then, the Government has implemented additional legislative and policy measures to strengthen the dispute resolution ecosystem in India. Currently, the Department of Legal Affairs is reviewing further amendments to the Commercial Courts Act, 2015.
The proposed amendments aim to promote faster and more specialized adjudication of commercial disputes and to simplify court procedures for commercial dispute resolution. Accordingly, the Commercial Courts (Amendment) Bill, 2024, along with a table comparing existing provisions to the proposed amendments, has been prepared.
Disclaimer: The information published in the above newsletter is collected from various sources in electronic medium and analyzed by the firm. The reader is advised to consult the attorney qualified in their jurisdiction, before acting on any information contained in this newsletter. India Juris excepts no liability what so ever in this regard.
