The Insolvency and Bankruptcy Code, 2016 was enacted with a primary objective of reviving a debt-ridden corporation. Subsequently and only upon failure, of these efforts in revival, has the Code prescribed provisions for liquidation of the said company. In accordance with Section 4 of the Code, to initiate the insolvency process, the amount defaulted should be in excess of INR 1,00,000. This threshold amount is a meagre sum to the large corporations which file financial statements running into several thousand crores.

The Government via the Banking Regulation Act (Amendment), 2017 has empowered the Reserve Bank of India to issue directions to banks for resolving stressed assets.[1] Consequently, the Reserve Bank of India has been issuing directions to the leading banking companies to initiate the Corporate Insolvency Resolution Process against the corporations whose accounts have been declared as non-performing assets. With an apprehension of insolvency process being initiated, large corporations have approached foreign entities for a bail-out plan – either for an acquisition or a merger.

The most relatable instance is that of the $16 billion acquisition of Flipkart Pvt. Ltd. by Walmart Inc, which was finalised on 18^th August, 2018. The history of Walmart in India dates all the way back to 2007 when it entered into Indian market via a Joint Venture with Bharti Enterprises. However, upon the disclosure made by the company of having spent $25 million for lobbying Indian authorities, Bharti Enterprises ended their ties with Walmart Inc.

Flipkart Pvt. Ltd., on the other hand, registered losses consecutively for three financial years – 2015, 2016 and 2017. With the risks of default in payment to the banks, financial institutions and other investors, Flipkart conceded to the acquisition of 77 percent stake by Walmart Inc. This backdoor entry of Walmart Inc. was greatly objected by the traders of brick and mortar stores; however, the Competition Commission of India granted the required sanction for the acquisition.

Similarly, Aditya Birla Retails Ltd.’s ‘More supermarket’ chain, has been registering losses since 2016, and consequently shut down many of its stores owing to these losses.

Amazon Inc. along with Samara Capital are planning on a complete buyout of this loss making ‘More supermarket’ and further, to venture into offline business in the Indian retail market. Likewise, another loss-making retail business, the Future Retail Ltd., has approached the Alibaba Group Holding Ltd., for an investment in the company to streamline the operations and increase profitability.

A peculiar trend is visible in the above acquisitions – a financially sound entity (specifically foreign entity looking for entry into Indian market) has taken advantage of the stringent Code, 2016 and has provided lucrative alternative to the ailing company. This new trend, has seen many Multi-National Companies make hay and utilize their superior financial, economic and human resources to gain efficient control of the Indian market by buying off loss-making companies. A legal mechanism formulated to help revive an insolvent entity, has forced many companies on the verge of becoming insolvent to submit themselves to foreign entities as an alternative to facing the procedures mentioned under the Code and lose control over company to subsequently appointed Resolution Professional. The drawback of legal mechanism does not lie with only the Bankruptcy Code, but is also prevalent amongst the various Merger and Acquisition deals in India.

Involuntarily and indirectly, the Indian Government has opened the doors of the Indian economy to foreign investors. Even before the Bankruptcy Code was enacted, many companies registered under the Companies Act, 2013 or Companies Act, 1956 have merged with or acquired by foreign companies. Further owing to the initiation of insolvency proceedings under IBC, 2016, companies have turned towards foreign companies for investment or acquisitions as a bail-out mechanism. This has been made easier by the fact that the mergers and acquisitions laws in India are substantially weaker as comparison to her counterparts.

The jurisprudence of the company law in India is inclined towards the principle of businessman’s prudence, giving wide discretions to the company and its Board of Directors. The Insolvency and Bankruptcy Code, 2016 while trying to solve the problem of stressed assets, has paved way for the acquisition of the failing companies by foreign investors. The promoter directors are willing to sell their company to foreign investors at a substantial value and in some cases, retain a fraction of control over their company (as seen in Walmart-Flipkart deal), rather than leading the company into insolvency proceedings under the Code, 2016, consequently losing control over the company to Resolution Professional for a period of moratorium.

The change in economic policy adopted by India in 1991 has a substantial impact on the same. This concept of economic liberation is largely prevalent in the economies of developing or emerging nation, usually across Asia and Africa. India, famously liberalized its economy in the year 1991. The primary goal of the said liberalization was to make the economy more market and service oriented; and tap into the vast human resources our nation possesses. In lieu of the same, new industries have been established such as the Information technology, online retailers and so on, which have contributed largely to the total GDP of India. However, the object of this opinion is not to gauge the economic ramifications of liberalization, but to check and evaluate the effect that economic liberalisation has on the health of competition in the market and steady decline in Young Indian Companies in the said market.

The economic liberalization was brought about with the assumption of the Indian companies and players being capable of facing the international competition and their methods. However, the above examples prove to the contrary. With Walmart Inc. substantially acquiring Flipkart Pvt. Ltd., the online retail market is effectively left to two foreign players, both of which are foreign entities.

The above-mentioned instances are not the first of their kind. Indian brands such as Gold Spot, Thumbs Up and Limca, started by Parle Ltd. were all bought either by Coca Cola or Pepsi Co. Gillette India Ltd., who’s parent organisation is well known Procter & Gamble Corporation, also followed suit in the market for shaving blades. What can be observed is the usage of the legal mechanism, to achieve individual goals of a certain companies to eliminate competition.

Companies have used a liberal Government policy to circumvent the anti-trust and competition laws in India. Previously, the Sick Industrial Companies (Special Provisions) Act, 1985 was misused by the sick companies by submitting themselves to the Board for Industrial and Financial Reconstruction. Now, the Insolvency and Bankruptcy Code, 2016 has also been used as a backdrop to amalgamate or merge with an ailing company at a diminished sale price. This not only provides for a better user base after acquiring company, but ensures another competitor’s elimination in the market and thus a larger market share for the acquirer.

It is thus suggested that certain economic and trade barriers have to be put in place, to prevent the easy entry of foreign players and utilization of existing legal mechanisms to eliminate competition. Further, restrictions can be placed on the Indian Companies from approaching a foreign entity for a bail-out plan. Also, it is advisable that the Government needs to increase the threshold amount mentioned under Section 4 of the Code, 2016 to a more workable sum for large corporations to make good on meagre debts. It can be noted that these barriers still have a prominent role and presence in market sectors in which the government has substantial interest. Such industries include – insurance, banking, securities, accounting, legal services and so on. In Bar Council of India v. A.K. Balaji and Ors[2]the Supreme Court refused to allow foreign law firms to set up institutions and firms in India, but allowed “Fly in and Fly out” of such foreign law firms. Thus, protecting the interests of the litigation community from being possibly engulfed by large foreign law firms who will not reconsider swallowing a smaller fish so as to be the dominant fish themselves. It is thus evident that the economic policy of Liberalization, Privatization and Globalization of 1991 needs to be revisited in light of the increasing acquisition of Indian companies by foreign entity – in the back drop of the problems pointed out in the Insolvency and Bankruptcy Code, 2016.

[1] Section 35AB of Banking Regulation Act, 1949.

[2] Civil Appeal No. 7170 OF 2015

Authors:

Shyam Harindra & Manoj Raikar, 4^th Year B. A. LL. B, School of Law, Christ (Deemed to be University)

Disclaimer: The views expressed in this article are solely of Authors.