Default, not distress: profits will not keep a borrower out of the NCLT
The Court holds EBITDA irrelevant at the Section 7 stage and puts information-utility records at the top of the evidence ladder. Days later, the NCLT's President asks for a higher filing threshold.
A company's profits are no answer to an insolvency petition. In a ruling dated 15 October and reported this week, a bench of Justices Dipankar Datta and Augustine George Masih dismissed appeals by Deepak Raheja and another against the admission of GSTAAD Hotels Pvt Ltd and Neo Capricorn Plaza Pvt Ltd into the corporate insolvency resolution process. Omkara Assets Reconstruction had filed as assignee; NCLT Mumbai admitted and the NCLAT upheld.
The bench restated the admission test in terms creditors will welcome. What must be shown is that a default occurred — a fixed, historical fact — not the precise amount outstanding. Quantum disputes do not block admission once the Section 4 threshold is crossed. Profitability measured by EBITDA, the Court said, is neither legally relevant nor a reliable guide to a debtor's ability to pay; the Code steps in on default, not on balance-sheet insolvency.
An evidence hierarchy. A record of default from an information utility sits at the top and raises a presumption that only clear and compelling material can displace. Loan agreements, statements and balance confirmations form a second tier.
A warning on research. The appellants' compilation of authorities included AI-generated citations to judgments that do not exist. Costs were proposed, then dropped after the first appellant died.
Threshold debate. Speaking at an "IBC Turns 10" conference in Chandigarh on Saturday, NCLT President Justice Anupinder Singh Grewal said many creditors file only to recover dues, and suggested raising the ₹1 crore default threshold to ₹2 crore, ₹5 crore or ₹10 crore. The tribunal has approved 1,748 plans worth about ₹4.90 lakh crore and settled 25 matters through pre-CIRP mediation.
Exchanges and depositories may soon invest without asking SEBI first
A consultation paper dated 22 October proposes an "automatic route" letting stock exchanges and depositories — but not clearing corporations — take up activities tied to their core functions without prior approval. Route A covers activity done under SEBI directions, certain intra-group share transfers, and spending by an operating subsidiary out of its own operating earnings. Route B covers activity SEBI has already approved, carried on through an entity regulated by another financial-sector regulator.
Annual deployment would be capped at the lower of 5% of net worth or the regulatory minimum net worth, and net worth after deployment must stay at least 1.5 times the minimum. Board approval, fit-and-proper checks and half-yearly reporting apply. Comments close on 12 November.
Early pay-in now frees up margin for the next trade too
Under a 22 October circular, clearing corporations will not collect margin on a client's subsequent buy or sell positions in the cash segment, up to the value of securities for which an early pay-in (EPI) has been accepted, provided the client has a net sell obligation. The usable benefit is the lower of the EPI value and the value of securities sold.
If the original sale is squared off, the EPI value is withdrawn and any client shortfall is blocked from the trading or clearing member's own collateral. Trade-for-trade securities are excluded, and brokers may allow such positions only where the client's margin is already in hand. The circular takes effect within four months of issue.
Pro-rata rights shares below fair value are not taxable "income" by default
On 22 October a Division Bench of Justices B. P. Colabawalla and Farhan P. Dubash quashed reassessment proceedings against Grasim Industries over an alleged ₹329 crore benefit from subscribing to Vodafone Idea's rights issue at ₹12.50 a share, against a departmental value of ₹13.925.
The gap between issue price and fair market value cannot, on its own, be taxed under Section 56(2)(x) where the shareholder's percentage holding is unchanged and no disproportionate benefit is identified — a rights issue also dilutes the value of the shares already held. The Court also found the reassessment out of time. It expressly confined its finding to those facts, so renunciations and uneven take-ups remain open.
FEMA compounding for ODI, borrowing and guarantees moves to RBI regional offices
A.P. (DIR Series) Circular No. 28 of 23 October delegates compounding of contraventions relating to overseas investment, borrowing and lending, and guarantees to select regional offices. ODI cases route by the UIN prefix of the overseas entity: BL, BY or PJ to Mumbai; AH to Ahmedabad; ND and six others to New Delhi. Borrowing, lending and guarantee cases go to the office with jurisdiction over the applicant's registered office or domicile. Cases without a UIN, or spanning several categories, stay with CEFA at the Central Office in Mumbai.
Lighter process, harder substance. Regulators removed friction this week; the courts held parties to substance. Plan for both.
The Raheja ruling closes a defence borrowers still reach for: that healthy operating numbers prove there is no real insolvency. At admission the only question is whether money fell due and went unpaid. For promoters, the time to cure or restructure is before the record of default is filed — not at the NCLT hearing. With the NCLT President seeking a higher threshold, the message is plain: the Code is for defaults of size, applied briskly.
Grasim helps capital-raising, but narrowly. Discounted rights issues remain a sound tool where take-up is pro-rata; the risk returns where promoters absorb renounced or unsubscribed entitlements and their stake rises. And the FEMA delegation is the practical win of the week: legacy ODI and borrowing lapses can now be compounded faster and closer to home — clean them up before signing, not after closing.
- Lenders and ARCs: make sure defaults are recorded with an information utility before filing under Section 7.
- Borrowers: treat any default above ₹1 crore as live insolvency risk, whatever the P&L says; restructure early.
- Rights issues: model promoter take-up and renunciation; document pro-rata allocation.
- Cross-border: sweep ODI, ECB and guarantee filings in targets; compound at the right office by UIN prefix.
- Dual-listed issuers: build the 1 November SOP into QIP and preferential timetables.