IBC proceeds formula may be reworked to avoid squabbles, legal delays

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The Centre is looking at further changes to the IBC as it doesn’t want to leave any room for litigation on the distribution of proceeds.

The government is considering a formula for distributing the proceeds of insolvency resolution among financial and operational creditors in a fixed proportion, said people with knowledge of the matter. The goal is to protect the interests of operational creditors and reduce delays due to litigation, ensuring that the objective of the Insolvency and Bankruptcy Code (IBC) is preserved.

“This is one of the solutions that is being looked at,” an official said. The government will take a final call only after extensive deliberations, he added.

Distribution of resolution proceeds has emerged as one of the key factors behind the extended litigation, delaying major insolvency cases. Dissatisfied operational creditors have been the source of such cases in some instances.

The Supreme Court is currently deciding on the distribution of proceeds in the case of Essar Steel, which entered the National Company Law Tribunal (NCLT) system in August 2017. The process was thought to have ended when Arcelor Mittal’s Rs 42,000-crore bid for the debt-ridden steel manufacturer was approved in March 2019. But the original promoters, the Ruias, opposed approval of the plan, questioning Arcelor Mittal’s eligibility.

Operational creditors rejected the plan on the grounds of discriminatory treatment. Financial creditor Standard Chartered Bank has also gone to court against the resolution plan on the same grounds. Financial creditors moved the Supreme Court after the National Company Law Appellate Tribunal (NCLAT) ordered proportional recovery for both financial and operational creditors. Under the IBC, cases have to be decided within a 330-day window.

The decision to change the rules to grant greater protection to operational creditors had come from the “highest levels of the government,” said one of the persons.

The Centre is looking at further changes to the IBC as it doesn’t want to leave any room for litigation on the distribution of proceeds, the person said. The IBC is regarded as one of the signal reforms of the first Narendra Modi government. The process got bogged down in litigation over some of the biggest cases, blunting the IBC’s aspiration of speeding up bankruptcy resolution and cleaning up banks’ books. The 2016 IBC has already been tweaked several times toward this end.

Operational creditors had slightly higher recoveries than financial creditors, according to data available with the government, said the person cited above. The Insolvency and Bankruptcy Board of India has pegged the average recovery for financial creditors in cases where there was successful resolution at 41.5% at the end of the September quarter.

In the latest set of amendments to the IBC, carried out in the budget session of parliament, the government had clarified that the CoC would have the right to decide on the distribution of proceeds but that all creditors must receive liquidation value or the amount they would receive if resolution proceeds were distributed according to the ‘waterfall mechanism,’ whichever is higher.

The waterfall mechanism under the IBC outlines the order of priority for repayment to creditors in the event of liquidation.

Under this, secured creditors have to be paid fully before any payments can be made to unsecured financial creditors who in turn have priority over operational creditors.

Experts said the government will have to come up with a balanced formulation. Setting a high fixed proportion for operational creditors could prompt CoCs to opt for liquidation instead of resolution. “At present, in many cases, operational creditors are not getting anything,” said Manoj Kumar, partner at Corporate Professionals.

Source: Economic Times

MCA sees Rs 2.8 lakh cr recovery from IBC-led resolution process

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Section 12 (A) of IBC allows for a withdrawal of an insolvency application if 90% of the creditors’ committee (CoC) by voting share approving it.

Terming the current insolvency process and its outcomes as ‘super success, Ministry of Corporate Affairs sees total recovery amount touching Rs 2.8 lakh crore through resolutions with the settlement of two key accounts, including some others — Essar Steel, where financial creditors have approved the resolution and Bhushan SteelNSE 5.27 % and Power.

“The 100 cases that have been settled through resolution accounts, Rs 1.8 lakh crore have been netted which is not a small amount and the accounts sitting on margin (Bhushan Steel and Power & Essar Steel), another Rs 1 lakh crore along with some other mid-sized resolutions can come, so Rs 2.8 lakh crore out of Rs 10 lakh crore of NPA that time is not a small amount, IBC is a super success”, says MCA senior officials on the insolvency processes

In case of Essar Steel, the CoC has approved the resolution process but the process got stuck after operational creditor Standard Chartered moved NCLAT for higher share from the funds. The debt-ridden steel firm had Rs 42,000 crore coming from the resolution plan of global steel major ArcelorMittal.

JSW Steel had revised its offer for Bhushan Power & Steel from Rs 11,000 crore to Rs18,000 crore and later to over Rs 19,000 crore which the CoC had approved.

And it is not just resolution process-led recoveries, the official said pre-resolution processes have also yielded results in 6,500 cases netting Rs 3 lakh crore on dead assets.

“6500 cases settled involving claims of close to Rs 3 lakh crore where they have been have settled before admission. And now after 12 (A) has been introduced, another 100 cases which are at stages of 90% CoC approval are moving towards out of court settlements. Both (in and outside resolutions and NCLT) are happening. About 500 cases have got settled through the court process and 6,500 cases settled even before admission”, said the officials.

Section 12 (A) of IBC allows for a withdrawal of an insolvency application if 90% of the creditors’ committee (CoC) by voting share approving it.

MCA officials dismissed the notion of high haircuts through resolution process. They said: “It (IBC) is super success. There should not be any brouhaha over haircuts. Will anybody pay more than what is the value? Suppose an asset is used for 20 years, there is nothing more to it, there is a Rs 50,000 crore loan, liquidation value is Rs 1,000 crore, so you get (the creditors) Rs 1,000 crore only.”

“Wherever a resolution has taken place, creditors are getting 200% of the liquidation value. So definitely value maximisation is the context, demand and supply will fix the value”, the officials said.

Source: Economic Times

MSME credit to grow at 12-14% over next 5 years: ICRA

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The credit to micro, small and medium enterprises (MSMEs) is expected to grow at 12-14 per cent over the next five years, helped by higher lending by non banking finance companies (NBFC) to the segment, says a report.
As on March 2017, credit to MSMEs stood at Rs 16 trillion.

NBFC and housing finance companies are expected to expand at about 20-21 per cent compounded annual growth rate (CAGR) in this space during the period, while bank credit to this segment, which accounted for about 84 per cent of total MSME credit, is estimated to grow at a lower CAGR of 9-11 per cent, according to a report by Icra.

“Non-banks share in the MSME credit pie should expand to 22-23 per cent by March 2022 compared to 16 per cent in March 2017. Non-banks, with their niche positioning, differentiated product offering, good market knowledge and large unmet demand, would be able grow at a healthy rate vis-a-vis banks,” the rating agency’s assistant vice president and sector head, A M Karthik said.

He added there is large unmet credit demand in the MSME segment, which was estimate to be about Rs 25 trillion in FY2017.

“Notwithstanding the estimated growth, the unmet credit demand quantum is likely to increase further, going forward,” he said.

With large corporate credit expected to remain sluggish, at least over the next one-two years, the bank credit to the MSME segment is expected to be around 9-11 per cent with public sector banks growing at 7-9 per cent and private banks at 16-18 per cent, the report said.

Banking NPAs in the MSMEs segment stood high at about 8.4 per cent in March 2017 while that of non-banks stood at about 3 per cent as on that date.

The report said notwithstanding the moderate seasoning of the portfolio, non-banks have a more flexible and customised credit assessment for this segment and have steadily been moving to lower ticket loans, in view of the asset quality pressure in the large ticket loans and better yields in the smaller ticket loan categories.

“While non-bank asset quality is expected to worsen from current levels, the extent of deterioration may be lower than that witnessed in banks,” the report said.

Source: Times of India

Investment in participatory notes hits 6-month high of Rs.1.5 lakh cr in December

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According to SEBI data, the total value of P-note investments in Indian markets – equity, debt, and derivatives – increased to ₹1,52,243 crore at December-end from ₹1,28,639 crore at the end of November.

Investments in domestic capital markets through participatory notes (P-notes) surged to a six-month high of over ₹1.5 lakh crore at December-end despite stringent norms put in place by regulator SEBI to check their misuse.

P-notes are issued by registered foreign portfolio investors to overseas investors who wish to be part of Indian stock markets without registering themselves directly. They, however, need to go through a proper due diligence process.

According to SEBI data, the total value of P-note investments in Indian markets – equity, debt, and derivatives – increased to ₹1,52,243 crore at December-end from ₹1,28,639 crore at the end of November.

This is the highest level since June when the cumulative value of such investments stood at ₹1.65 lakh crore.

Of the total investments in November, P-note holdings in equities were at ₹1.2 lakh crore and the remaining in debt and derivatives markets.

Besides, the quantum of FPI investments via P-notes surged to 4.6% during the period under review from 4% in the preceding month.

Prior to the recent surge, P-note investments were on a decline since June and hit an over eight-year low in September. However, these investments slightly rose in October but fell in November.

These declines could be attributed to several measures taken by markets regulator Sebi to stop the misuse of the controversy-ridden participatory notes.

In July, SEBI notified stricter P-notes norms stipulating a fee of $1,000 that would be levied on each instrument to check any misuse for channelising black money.

Also, SEBI prohibited FPIs from issuing such notes where the underlying asset is a derivative, except those which are used for hedging purposes.

The move was a follow-through of the SEBI board’s approval of a relevant proposal in June. These measures were an outcome of a slew of other steps taken by the regulator in the recent past.

In April, SEBI had barred resident Indians, NRIs and entities owned by them from making the investment through P- notes.

The decision was part of efforts to strengthen the regulatory framework for P-notes, which have been long seen as being possibly misused for routing black money from abroad.

Foreign investors pump $3 billion into capital markets, forex at record high in January

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Foreign portfolio investors (FPIs) have invested a phenomenal $3 billion (close to Rs 18,000 crore) in India’s capital markets this month on expectations of high yields as corporate earnings are expected to pick up with the economy gathering momentum after the slowdown due to the chaotic implementation of GST.

 

The sharp increase in inflows comes after an outflow of over Rs 3,500 crore by foreign portfolio investors (FPIs) from the capital markets in December, data compiled by depositories shows. According to market analysts money pumped in by FPIs has played a key role in fuelling the bull run in the stock markets that saw both the Sensex and Nifty on a record breaking spree in recent weeks.

 

FPIs infused a net amount to the tune of Rs 11,759 crore in stocks and Rs 6,127 crore in debt during January 1-25 — translating into net inflows of Rs 17,866 crore. For the entire 2017, FPIs invested a collective amount of Rs 2 lakh crore in the country’s equity and debt markets.

 

The inflow in the current month can be attributed to anticipation of earnings recovery and attractive yields which is expected to further strengthen inflow from foreign investors in the current financial year, said Dinesh Rohira, CEO of 5nance, an online platform providing financial planning services.

 

However, Quantum MF Fund Manager-Fixed Income Pankaj Pathak believes that FPIs may not be able to repeat this showing in 2018 as withdrawal of liquidity and rate hikes in developed economies pick up. This would provide them with alternative avenues of investment.

 

The FPI investments have also helped to bolster the country’s foreign exchange reserves which touched an all-time high of USD 414.784 billion in the week to January 19, Reserve Bank data showed. The RBI data showed that the forex reserves rose by USD 959.1 million to touch a record high during the reporting week. In the previous week, the reserves had touched USD 413.825 billion after it rose by USD 2.7 billion.

 

The reserves had crossed the USD 400-billion mark for the first time in the week to September 8, 2017 but have since been fluctuating. But for the past four weeks the figure has shown a continuous rise. Higher foreign exchange reserves lead to a stronger rupee which in turn reduces the cost of imports as fewer rupees have to be paid to buy the same amount of dollars to pay for items such as crude oil.

 

A higher foreign exchange kitty also provides a comfortable cushion to finance imports especially at a time when crude prices are shooting up in the international market and the country’s trade deficit has been growing. However, while FPI inflows add to the forex reserves they are considered “hot money” as they can leave Indian shores at short notice and this could send the rupee into a tailspin.

 

A senior finance ministry official said that foreign direct investment (FDI) is a more stable source of funding for the economy and since it also creates jobs and incomes the government is keen to see an increase in such investments. The Prime Minister’s trip to Davos was aimed at achieving this goal, he pointed out. He said that the government has been working on the ease of doing business which has seen a sharp increase in FDI inflows and this policy will continue in the forthcoming budget. At the same time the government is keen FPI inflows are not disrupted due to tax levies on stocks that create uncertainties, he added.

 

Source: Business Today

Credit growth gathering steam: RBI

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Year-on-year disbursements up 10% as of November 24

Credit offtake from banks is gradually gathering steam, going by Reserve Bank of India data. This is underscored by the fact that year-on-year credit growth nudged closer to 10 per cent as on November 24, 2017.

Given the overhang of bad loans, especially in the case of public sector banks, market experts are of the view that these banks had turned risk-averse and reined in lending. However, banks seem to be slowly shrugging off their risk aversion.

In its fifth bi-monthly monetary policy statement, the Reserve Bank of India said: “On the positive side, there has been some pick-up in credit growth in recent months. Recapitalisation of public sector banks may help improve credit flows further.” After plunging to a multi-decade low of 4.1 per cent in May 2017, non-food bank credit has witnessed a rising trajectory every month since June, although it has been lower vis-a-vis the year-ago period.

In June, non-food bank credit growth rose to 4.8 per cent and increased in the following months — July (5.3 per cent); August (5.5 per cent); September (6.1 per cent); October (6.6 per cent). In the fortnight ended November 24, 2017, the banking system’s deposits declined by ₹41,164 crore while credit nudged up by ₹3,524 crore.

 

Source: The Hindu Business Online

FPIs pump over Rs 19,700 crore in November, highest in eight months

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After taking a break from buying into Indian equities in August and September, FPIs bought equities in abundance in November.

Foreign investors pumped over Rs 19,700 crore into the country’s stock markets in November, the highest in eight months, mainly due to government’s plan to recapitalise PSU banks and surge in India’s ranking in the World Bank’s ease of doing business.

In addition, such investors put in Rs 530 crore in the debt markets during the period under review.

According to depositories data, foreign portfolio investors (FPIs) invested a net amount of Rs 19,728 crore in equities last month.

This is the highest net investment by FPIs since March, when they had poured in Rs 30,906 crore in the equity market.It has been a tremendous journey for the Indian equity markets in 2017. After taking a break from buying into Indian equities in August and September, FPIs bought equities in abundance in November.

The strong inflow could be largely attributed to the government’s decision to recapitalise public-sector banks, which is expected to enhance lending and propel economic growth, said Morningstar India’s senior analyst manager (research) Himanshu Srivastava.

“This is particularly seen as a positive step after the questions have been raised from various quarters on the government’s ability to effectively implement economic reforms. Further, the slow pace of economic growth was also believed to be due to rising non performing assets (NPAs) problem in public sector banks, hence this decision provided a much-needed impetus to FPIs to again look back at Indian equity space,” he added.

Finance Minister Arun Jaitley had announced the PSU bank recapitalisation plan of Rs 2.11 trillion, out of which Rs 1.35 trillion will come from recapitalisation bonds, and the rest from markets and budgetary support.

Additionally, the news about India faring well in the World Bank’s Ease of Business index and a jump in core sector growth also turned the tide in India’s favour, Srivastava said.

India gained 30 places in the World Bank’s ease of doing business index for 2018 to 100th among 190 nations.

“These (bank’s recapitalisation plan and world bank’s ranking) and positive developments in the recent times provided a much-needed breather to FPIs who were concerned about the short-term impact of demonetisation and goods and services tax (GST) on the domestic economy and sluggish pace of economic recovery,” he added.

Yet another positive piece of news has come from Moody’s Investor Services, which upgraded its India rating by a notch to ‘Baa2’ from ‘Baa3’ with a stable outlook, citing improved economic growth prospects driven by the government reforms.
Overall, FPIs have invested Rs 53,800 crore in equities so far in 2017 and another Rs 1.46 lakh crore in debt markets.