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The fate of NPA’s after the Bankruptcy Code

Ali Azar

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The Insolvency & Bankruptcy Code (IBC) was passed in the Lok Sabha on 5th May 2016 & received the assent of the President of India on 28th May 2016. Nobody knew what to expect, least of all, debt-burdened promoters of corporate India who weren’t expecting a one-stop shop for all things that spell “resolution”. The IBC ushered in a new era of accountability and gave a clear message to over-leveraged promoters, who for decades have got away with manipulating banks into providing finance to their ambitious and often unviable plans. Such loans, more often than not, ended up as Non-Performing Assets (NPA’s) in the books of the banks. Slowly, but surely, India’s mountain of debt grew taller and according to a report by CARE ratings published in December of last year, India had the highest level of NPA’s among the BRICS nations and is ranked 5th worldwide behind Greece, Italy, Portugal & Ireland.

With banks having to accept massive haircuts to resolve the largest NPA accounts in the country, the so-called “Dirty Dozen” (12 largest NPA accounts that constitute 25% of the country’s bad debts), IBC has made it aptly clear that promoters of the beleaguered companies i.e. those who contributed to the default of a company, or are otherwise undesirable, should be ineligible from bidding for stressed assets. This triggered a fear among promoters of losing control of their firms, and of being banned from bidding for other distressed assets. A report published last quarter suggests that over 2,100 companies settled  Rs 83,000 crore worth bank dues for fear of losing control over their companies before action was initiated under IBC. This sends a clear message to the promoters, that lawmakers are serious about holding them accountable for their frivolous and fraudulent borrowings and does not intend to give them the slightest leeway even though it may come at the cost of improved recovery.

The recent arrest of Neeraj Singhal, promoter of Bhushan Steel, has proved that even the most influential promoters can be made to part with their beloved companies and the past sins of these promoters will not be forgotten even after the company has undergone resolution/liquidation under IBC. Sale to buyers will not mean the closure of the case. With forensic audits and rigorous investigations being conducted by various agencies such as CBI, ED, SFIO, IT Authorities etc. the noose can be felt tightening around the neck of willfully defaulting promoters.

As we usher in this new era of debt resolution and accountability to stakeholders, the ground realities of borrowing money will see a massive transformation, where bankers will insist on the full value of the security for assets, increased mortgage coverage & promoter guarantees before disbursement of funds. The age-old adage, once bitten twice shy, will hold true going forward.

Things will see an improvement on the procedural side as well, with the law getting clearer & frivolous petitions being avoided going further. Better valuations are also more likely to be offered, meaning less haircut for banks. The overall recovery process is set to become more transparent and regulatory authorities will have a better understanding of the problems faced by banks, promoters and recovery agencies which will lead to a smoother transition of the bankruptcy law.

On the recovery front, while banks are now assured that promoter frauds will not go unpunished, they will also have to be pragmatic in their expectations of recovery and will be willing to accept haircuts if reasonable amounts can be guaranteed in a time-bound manner. Offers from prospective buyers will not always meet the banks’ forecast and immediate offers will come only where stalled plants can be revived.

The culture of borrowing & lending is changing because of IBC. It has the potential to bring about a seismic change in the landscape of corporate accountability, but like any massive system overhaul which has long-term benefit as its objective, the code will have its fair share of trial & error which might expose chinks in the IBC’s armour. This major step taken by the NDA government is in the right direction, though only time will tell if it can be implemented effectively in a country whose borrowers are not accustomed to such strict scrutiny.

 

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Indian Economy

Rupee spurts 48 paise to close at 1-month high

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Nepal rupee

Mumbai | Indian rupee appreciated by 48 paise to close at one-month high of 70.70 against the US dollar on Tuesday, registering its sixth straight session of gain on hopes of weak inflation data for December.

In the six trading sessions, the rupee has gained 110 paise.

At the Interbank Foreign Exchange, the rupee opened stronger at 71.21 a dollar. The local unit moved in a range of 71.21 to 70.69 before finally ending at 70.70, showing a gain of 48 paise over its last close.

This is the highest closing level since January 11 when the rupee had closed at 70.49.

On Monday, the rupee had ended higher by 13 paise to close at 71.18 against the dollar on easing crude oil prices.

According to forex traders, optimism ahead of index of industrial production (IIP) numbers for December and retail inflation for January supported the rupee.

At the end of Tuesday’s trading session in the forex exchange, market was awaiting retail inflation and Industrial output numbers.

According to the official data released after market hours, retail inflation eased further to 2.05 per cent in December from 2.11 per cent in November, raising hopes of further rate cut by the RBI to boost growth.

Industrial production growth, on the other hand, remained subdued at 2.4 per cent in December due to weak performance of mining and manufacturing sectors.

Rising crude prices, foreign fund outflows and heavy selling in domestic equities, however, capped the gains for the domestic market, dealers said.

Brent crude, the global oil benchmark, was trading at USD 62.74 per barrel, higher by 2 per cent.

The BSE Sensex dropped over 200 points, ending in the negative terrain for the fourth straight session Tuesday. The broader Nifty finished at 10,831.40, down 57.40 points, or 0.53 per cent.

Meanwhile, the dollar index, which gauges the greenback’s strength against a basket of six currencies, fell 0.04 per cent to 97.01.

Foreign portfolio investors (FPIs) sold shares worth Rs 466.78 crore, and domestic institutional investors (DIIs) sold shares to the tune of Rs 122.64 crore Tuesday, provisional data showed.

The Financial Benchmark India Private Ltd (FBIL) set the reference rate for the rupee/dollar at 70.9353 and for rupee/euro at 80.0259. The reference rate for rupee/British pound was fixed at 91.2620 and for rupee/100 Japanese yen at 64.15.

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Indian Economy

Income Tax sleuths bust hawala operation worth ₹ 20,000 crore

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Income Tax

Incidentally or co-incidentally, as the general elections come closer, the Income Tax department seems to be swinging more into action. Perhaps in his attempt to prove that he is truly a crusader against black money, the IT Dept. under the Modi administration has regularly been conducting raids and unearthing black money more than ever. In its latest series of raids and surveys over the last few weeks in Delhi, the sleuths of the Delhi investigation unit of the IT Dept. have unearthed illegal financial activities of 3 groups of operators and busted a nexus of hawala operators and massive money laundering racket with a total value of a staggering 20,000 crore ₹.

The 1st  such case relates to fake billing racket where the illegal operators had floated a dozen or so bogus entities to generate such fake bills and book bogus expenses to avoid tax. The operators were busted after a survey was conducted in the Naya Bazar area of the National Capital and the racket was estimated to be around 18,000 crore ₹

In the second case, a highly organised “money laundering” racket was busted where transactions in well known shares were fraudulently carried out and beneficiaries were found to be claiming bogus “long term capital gains”. The taxman suspects this scam to have netted over a 1,000 crores. However, they believe that it has been going on for years and this figure of 1,000 crores is just the tip of the iceberg.

The final racket was discovered when the IT Dept. conducted searches against a group and found undisclosed foreign bank accounts and a well established network of claiming bogus duty draw back relating to customs and GST taxes through over-invoicing of exports and estimates of this scam was upwards of 1,500 crore ₹.

The identities of the accused are not disclosed till now until a further investigation is carried out.

 

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Indian Economy

RBI raises collateral-free farm loan limit to Rs 1.6 lakh

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Farmers

Mumbai | The Reserve Bank of India (RBI) on Thursday raised the limit of collateral-free agricultural loans to Rs 1.6 lakh from the current Rs 1 lakh with a view to help small and marginal farmers.

The central bank also decided to set up an internal working group (IWG) to review agricultural credit and arrive at a workable policy solution. The Union Budget had also announced measures to farming sector in addition annual payment of Rs 6,000 to small and marginal farmers.

Currently, the banks are mandated to extend collateral-free agricultural loans up to Rs 1 lakh. This limit was fixed in the year 2010. “Keeping in view the overall inflation and rise in agriculture input costs since then, it has been decided to raise the limit for collateral free agriculture loans from Rs 1 lakh to Rs 1.6 lakh.

“This will enhance coverage of small and marginal farmers in the formal credit system,” said the central bank’s ‘Statement on Developmental and Regulatory Policies’. A circular in this regard will be issued shortly, it added. It further said agricultural credit growth has been significant over the years.

In spite of this, there remain issues related to agricultural credit such as regional disparity and the extent of coverage, among others. “There is also the issue of deepening long-term agricultural credit for capital formation,” the RBI said while announcing setting up of the IWG.

The IWG will examine issues related to agricultural credit and arrive at workable solutions and policy initiatives.

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