Permissible Limit of Foreign Direct

Investment in Fin-Tech Sector

The term Fin-Tech is short for Financial Technology and could apply to any kind of technology that is
used to drive a financial transaction or service offered by an entity. In India there are no literal leaps
and bounds of laws governing Fin-Tech sector as there is no unified legislation, although it is
regulated by the likes of Reserve Bank of India, Securities and Exchange Board of India, Insurance
Regulatory and Development Authority of India and Pension Fund Regulatory and Development
Authority.

Fin-Tech companies raise funds either through debt financing rounds or equities and Foreign Direct
Investment. On October, 20th 2016 the Reserve Bank of India issued a notification RBI/2016-17/90
A.P. (DIR Series) Circular No. 8 concerning Foreign Investment in ‘Other Financial Services’.
Under this notification in Clause 3 there was a review, in consultation with the Government of India,
and it was decided to allow foreign investment up to 100% under the automatic route in ‘Other
Financial Services’. Other Financial Services will include activities which are regulated by any
financial sector regulator viz. Reserve Bank of India, Securities and Exchange Board of India,
Insurance Regulatory and Development Authority, Pension Fund Regulatory and Development
Authority, National Housing Bank or any other financial sector regulator as may be notified by the
Government of India in this regard. Such foreign investment shall be subject to conditionalities,
including minimum capitalisation norms, as specified by the concerned Regulator/ Government
Agency.

Clause 4(a) suggests financial services activities which are not regulated or partly regulated by any
financial sector regulator or where there is lack of clarity regarding regulatory oversight, foreign
investment will be allowed up to 100% under the Government approval route.
Foreign Investment is an activity which is specifically regulated by Foreign Exchange Management
Act, 1999(42 of 1999) and will be restricted to foreign investment levels/limits, if any, specified in the
statute. The directions contained in this circular were issued under section 10(4) and 11(1) of the
Foreign Exchange Management Act, 1999 (42 of 1999) and were without prejudice to permissions/
approvals, if any, required under any other law.

Hence, Foreign Direct Investment in Financial Technology sector is not limited but absolute at 100%.
Whether a clarificatory circular is
Prospective?

The word Retrospective denotes ‘looking back at’ whereas Prospective means ‘effective in future’,
the issue regarding application of Ex Post Facto laws were reiterated by the Hon’ble Apex Court in
the case of Commissioner of Income Tax (Central – I) v Vatika Township (P) Ltd, 2015 1 SCC 1.
The question before the Supreme Court was whether the surcharge levied by way of insertion of the
proviso to Section 113 of the Act, by the Finance Act, 2002 was to operate prospectively or was
clarificatory and curative in nature, to be applied retrospectively?

The Hon’ble Supreme Court overruled the decision of the Division Bench in the case of
Commissioner of Income Tax, Central II v. Suresh N. Gupta (2008) 4 SCC 362 which held the
proviso to be clarificatory in nature and therefore applied retrospectively.

On the general principles of Retrospectivity the SC held in Para 30 ‘One of the established rules of
interpretation was that unless explicitly stated, a piece of legislation is presumed not to be intended to
have a retrospective operation’ as held in the case of Govinddas v. Income Tax Officer [1976] 1 SCC
906 and CIT Bombay v. Scindia Steam Navigation Company Limited [1962] 1 SCR 788.
The idea behind such a rule was that a current law should govern current activities. The principle of
lex prospicit non respicit, which construes that ‘The Law looks forward and not backward’, was
upheld.

In the instant case, the proviso added to Section 113 was not beneficial to the taxpayer. On the
contrary, the provision was onerous to the taxpayer. Therefore, under the normal rule of presumption,
the proviso did not have a retrospective effect. In the absence of clear words indicating that the
amending Act was declaratory, retrospective effect could not be resorted to, particularly when the pre-
amended provisions were clear and unambiguous.

The charge in respect of the surcharge that was created by the Finance Act 2003 for the first time was
clearly a substantive provision, and hence had been construed as having prospective effect. There was
no intent of the Parliament to suggest otherwise, or any material which purported it to be clarificatory.

In determining whether a provision is applicable prospectively or retrospectively, attention would be

required to be paid to the language of the amending statute, the legislature’s intent, the memorandum
to the relevant Finance Act, and the hardship the amendment would cause to the taxpayer.
Suspension of SARFAESI Act in
Extraordinary Circumstances
The Insolvency and Bankruptcy Code, 2016 (“IBC”) was brought in to provide a single unified
framework to deal with bankruptcy and insolvency by persons other than financial institutions. It
consolidated the law relating to insolvency by amending 11 Laws. One of them is the Securitization
and Reconstruction of the Financial Assets and Enforcement of the Securitization Act, 2002
There is a major interplay of both the Statues and considering the issue of suspension of SARFAESI
in Extraordinary circumstances a link has to be established between IBC and SARFAESI to show the
ultimate result of how suspension of one might lead to the other statute.

It is clear that both, IBC as well as SARFAESI Act are directed towards recovery of bad debt, by the
way of identifying the assets of a debtor, which can be consequently used to fill in the default in the
form of bad debt. While identifying these assets and also under many other circumstances,
considering that these enactments are directed towards more or less the same objective in many areas,
it is inevitable to avoid the clash between the two.
The non-obstante provision of Sec. 238 in the IBC provides it supremacy over any other law for
matters which are overlapping. The preference of IBC over SARFAESI was first observed in the case
of M/S Unigreen Global Private Limited v. Punjab National Bank Company Appeal (At)
(Insolvency) No. 81 of 2017. It was held in this case that once the moratorium is imposed under the
IBC, then proceedings under Sec. 13(4) of the SARFAESI Act shall not proceed.
Furthermore, in another case of Rakesh Kumar Gupta v. Mahesh Bansal Company Appeal (At)
(Insolvency) No. 1408 of 2019, it was held that the pending proceedings under SARFAESI Act shall
not hinder the proceedings triggered by the financial creditor under the IBC. Therefore, even when
proceedings under SARFAESI Act have already been initiated, fresh proceedings under IBC can still
be accepted because of the non obstante clause. This concluded that the IBC will prevail over
SARFAESI.

On 24th March, 2020, the Indian Government, as a temporary measure to primarily safeguard the
Micro Small & Medium Enterprises (MSMEs), raised the threshold of default for initiating the
Corporate Insolvency Resolution Process (CIRP) under IBC from ₹ 1 lakh to ₹ 1 crore. Further, the
IBC (Amendment) Ordinance, 2020 was promulgated on 5th June, 2020 which inserted Section 10A
in IBC, according to which no application for initiation of CIRP will ever be filed, either by creditors
or corporate debtor, for defaults occurring on or after 25th March, 2020.

Additionally, the Ordinance also suspended the operation of Section 66 of IBC, pertaining to
fraudulent trading or wrongful trading. Even though there is a distinction between the offenses of
wrongful trading and fraudulent trading, the offense essentially pertains to the violation of a duty by a
director, if he/she has failed to file for insolvency of the corporate debtor, even though there were no
reasonable prospects of operating it, unless he/she exercised due diligence in doing so. The
suspension of such a duty would remove the anchor from the directors to file for insolvency and allow
them to be in charge of the business.
Even though this Ordinance effected changes for a period of 6 months, the IBC (Amendment) Act,
2020 later replaced the Ordinance and effectively extended the applicability of such suspensions to
25th March, 2021. It is also pertinent to note that the Insolvency & Bankruptcy Board of India (IBBI)
further amended the regulations, thereby inserting Regulation 47A in IBBI (Liquidation Process)
Regulations, 2016 and Regulation 40C in IBBI (CIRP) Regulations, 2016, to exclude the period of
lockdown from the timeline, within which the CIRP or liquidation of the corporate debtor has to be
completed.

The National Company Law Appellate Tribunal (NCLAT), in the case of Ramesh Kymal v Siemens
Renewable Power Private Limited 2020 SCC Online NCLAT 695 held that even though the
Ordinance was promulgated on 5th June, 2020, the bar on initiation will apply to all defaults on or
after 25th March, 2020, as is clear from the text of the Ordinance. However, the NCLAT further
clarified that such a bar does not apply to initiation applications which are pertaining to defaults
before 25th March, 2020, but have been filed after 25th March, 2020.

IBC’s suspension has been slated to be a relief measure but the fact remains that IBC process not only
provides for revival of the corporate debtor but also provides for all stakeholders of the corporate
debtor in a time bound manner. The suspension of IBC will not stop creditors from attempting to
recover their capital but the alternative means that the creditors would resort to might lack the protean
nature of the IBC process. Moreover, those mechanisms may not lead to an efficient resolution of
stress which is the need of the hour during this economic slowdown. Another factor to consider is that
the deterrent effect typically attained by lenders by threatening IBC action would no longer remain
leading to at least some mala fide gaming of the system. Covid times have been really challenging for
the market and the relief measure by the government has been a stalled measure to avert the crisis for
the time being.

SARFAESI’s suspension has not been officially penned down anywhere by the Legislature or by the
Judiciary so it is still open for interpretation, the hierarchy and link-up of these two statutes has
resulted in the execution of the Non- Obstante Clause and assuming IBC’s suspension would lead to
SARFAESI’s suspension in the Extraordinary circumstances of a Pandemic which has rattled the
whole world by suspension of all activities creating a scenario when a ship drops it anchor and
everything is stalled .