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Indian Economy

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.

 

Indian Economy

Practice First, Then Preach

Akhilesh Bhargava

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A recent issue of the Financial Express carried a few interesting news items. In an address to the Bohra Muslim community, the PM preached or rather warned that business should be done within the rules and laws. Good advice, but looks to be one-sided for sure. Another news item on the same page said that even if someone who has inadvertently claimed a wrong GST credit, has on his own noted the error and has rectified it, he will yet be liable to pay penalty for putting up a wrong claim. An innocent unintentional error rectified by a person on his own should be pardoned and be not visited with a penalty, but it yet is. Yet another news item was about the fact that the government does not make timely payments towards power purchased from power producers under agreements signed, due to which they face severe financial problems and perhaps bankruptcy too. The government merrily defaults, only to put these power producers in a severe crisis, with no practical recourse but go with a begging bowl. And yet another news item is that government tenders worth over Rs.15000 crore were canceled due to highly discriminatory conditions against domestic companies. So while the government talks about make in India on one hand, on the other, its very purchase tenders discriminate against the domestic enterprises. It smacks of hypocrisy at the government level, which is the one that should actually be the role model and paragon of sincerity and fairness.

The fact is that dealing with the government is a totally one-sided process, where the government has only rights and no responsibilities, which it enforces with brute power. You are required to file your tax return on time, but there is no timeline whatsoever for the receipt of refunds due to you. A small innocent error in your returns results in heavy fines and penalties, but no compensation is received if the government commits errors, often deliberate. A single window timely clearance from the government is an utter myth and even if the law guarantees timely approvals, it is never so. High pitched demands from the government that can prove fatal to enterprises are a routine matter and the system is devoid of any sensitivity to even give you on time, what is legally due to you. And if you want to beat red-tapism, the only way out of it is corruption. This list of woes of the common man is endless, but it cannot stand against the might of the government. It builds resentment and impacts growth, but the government which holds all the cards does nothing in this regard.

So the Hon. PM is no doubt correct in demanding/warning that business should be done within the rules/laws, but the reality is that the law is not followed in spirit at the other side of the table where he stands at present, with no recourse whatsoever to the common man.

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Indian Economy

RCom to exit telecom fully to focus on realty: Ambani

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RCom

RCom owes over Rs 40,000 crore to a group of 38 lenders, including Chinese banks, and was resolving the debt through a strategic debt restructuring (SDR) process.

 

Mumbai, Sep 18 (PTI) Billionaire Anil Ambani Tuesday announced that the cash-strapped Reliance Communications will be completely exiting the telecom business to concentrate on real estate in future.

The first priority for RCom, which is credited for democratizing telecom services through cheaper offers in the early 2000s, is to resolve its over Rs 40,000 crore debt, he told shareholders at the company’s 14th annual general meeting here.

“We have decided that we will not proceed in this sector. And many other companies have taken a similar call. This is very much a writing on the wall, the future.”

“As we have moved out of the mobile sector, we will monetize at an appropriate stage our enterprise business. Reliance Realty will be the engine of growth for the future of this company,” Ambani said.

Pointing out to the 133-acre Dhirubhai Ambani Knowledge City (DAKC) on the outskirts of the financial capital, he said there is huge realty play opportunity that RCom’s erstwhile corporate headquarters possesses, and pegged the potential value creation at the site at Rs 25,000 crore.

RCom owes over Rs 40,000 crore to a group of 38 lenders, including Chinese banks, and was resolving the debt through a strategic debt restructuring (SDR) process.

Ambani said he is confident of getting a resolution in the next few months, and added that other monetization measures, including the sale of telecom infrastructure and fiber to Reliance Jio, are at an advanced stage of closure.

He said the company is awaiting final approvals for spectrum sharing and trading from the Department of Telecom.

Anil Ambani also thanked his elder brother Mukesh Ambani, who is credited with conceptualizing the undivided group’s telecom foray and also bought the assets as part of the beleaguered RCom’s monetization efforts.

“It would be most appropriate for me to thank and acknowledge the support (and) guidance extended to RCom and me personally by my brother Mukesh bhai Ambani,” the younger sibling told shareholders.

It can be noted that Mukesh Ambani re-entered the telecom sector by buying out a company which had successfully bid for 4G spectrum, along with which he also announced the end of a no-compete pact.

His company Reliance Jio’s aggressive play is widely blamed for wrecking the telecom sector, which has seen an erosion of profits, asset sales, bankruptcies and consolidation following the entry of the deep-pocketed new entrant.

Anil Ambani Tuesday said there has been a “creative destruction” of the telecom sector that has resulted in the creation of oligopoly which is going towards a duopoly and maybe even a monopoly in the future.

Banks are saddled with over Rs 7.7 lakh crore in debt and the financial troubles of operators have resulted in over 20 lakh job losses, he said.

He said the residual company will serve 35,000 businesses through the enterprise, data centers, undersea cables and international voice calling verticals and will get half of its revenues from abroad.

RCom is “committed” to exit these verticals as well to pay-off banks and will take a call on the same at an appropriate time, Ambani said.

Reliance Realty is a wholly-owned subsidiary of RCom, which will develop the DAKC in Navi Mumbai, he said, adding that it is an already registered IT and fintech park.

The company already has three million sq ft of built-up space, which will be leased out to multi-nationals, Ambani said, adding that he expects revenue accruals through it this year itself.

Some of the shareholders appreciated efforts taken by the company while wading through choppy waters, but there were a few critical ones as well.

When one such shareholder persisted, a company official patted him on the back, probably pointing to the time constraints.

When he complained, Anil Ambani said from the stage this is a pat and not a stab, and asked him to continue with the question.

The mention of the Rafale controversy prompted Anil Ambani to stop him from speaking further.

“Shailesh bhai, who is a very educated person and comes with non-facts, half-baked facts, untruth, lies, is in my father’s words, a true well-wisher of all of you. I do respect, in a democratic world, his comments. But none of them have any relevance to what is in front of us today as a company and for all of you shareholders,” Ambani said.

The RCom scrip was trading 6.10 percent down at Rs 16.15 apiece on the BSE at 1242 hrs as against a marginal correction in the benchmark.

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Indian Economy

CAD Band-Aid

Ali Azar

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CAD

A depreciating rupee, widening current account deficit (CAD), rising oil and fuel prices, hardening bond yields, no visible solution for global trade war concerns, US Fed increasing rates, FII’s pulling out money from emerging markets and the list of the headwinds goes on. You may have to rewind the clock at least to a decade ago, just after the global financial crisis of 2008 to when the macroeconomic conditions were as bad. The government and RBI have to tread a thin line in these times of concern. Intervention may be the outcry of the public at large, but such intervention at the cost of an increased fiscal deficit could be damaging in the larger scheme of things, especially since the fiscal deficit has already touched 86.5% of the budgeted estimate in the first four months of the current financial year itself.

A crisis of this magnitude requires an equally innovative solution. With this in mind, the country’s two top politicians i.e. PM Narendra Modi and FM Arun Jaitley met with the country’s top banking official, RBI governor Urjit Patel and several other important policymakers such as Economic Affairs Secretary, Subhash Chandra Garg to chart out a plan of action to encourage more dollar inflows and to curb the ever-widening CAD. A five-step plan was drafted and announced by the Finance Minister on Friday night after market close. We take a look at the fine print of this five-point plan.

 

  • Manufacturing sector entities can now avail external commercial borrowings of up to 50 million $ with a minimum maturity of one year. Until now it was three years. Companies will now be able to raise dollar-denominated loans at a cheaper cost and roll it over quicker.

 

  • Earlier the limit for foreign portfolio investors (FPI’s) to invest in debt securities/bonds of a single corporate group was 20% and that of a single issuance of corporate paper was 50%. These restrictions have been lifted. These limits were looked upon as restrictive and now funds can invest in debt securities with renewed interest and in accordance with their risk profile.

 

  • Mandatory hedging conditions in case of external commercial borrowings for infrastructure loans will be reviewed. Presently hedging costs are approximately 4 – 4.5% of cost of borrowing. A revision of this condition will enable companies to raise dollar-denominated loans more comfortably.

 

  • Withholding Tax requirement of 5% for Masala Bonds (rupee-denominated overseas bonds) are done away with for the current year ending 31st Mar 2019. Investors in overseas markets can now invest without worrying about the tax cut and the cost of issuing such bonds also reduces.

 

  • There will be a removal of restrictions for market making in Masala Bonds including underwriting of such bonds by Indian banks. Indian companies can now go to local branches of Indian banks to manage masala bond issuances, also investor base for such bonds would widen.

Other than these five specific measures, the government has also decided to cut non-essential imports in consultation with other ministries and shore up exports to give the CAD a shot in the arm. These measures, according to the Economic Affairs Secretary Mr. Garg, were expected to increase inflows by $ 8 – 10 billion and let the public at large know that the government does not intend to leave them at sea and is serious about implementing measures to stabilize the rupee. Stock markets being the economic barometer of the country were expected to show buoyancy on the back of this crucial announcement. To the government’s dismay though, it didn’t go as per plan as the BSE fell 505 points and NSE fell 137 points which translates into a fall of greater than 1.2% on both indices after Monday’s trade. To add to the government’s woes the rupee did not see any significant change and is still hovering the 72.50 mark per dollar.

With so many macro concerns thrown into the foray at once, perhaps market participants only viewed these measures as the government signalling its intentions to curb speculation driving the rupee down and did not consider it to be big enough to calm their aspersions about the state of the economy as a whole.

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