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

Jewellery Export Council may cancel Firestar, Gitanjali Gems’ membership

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The Mumbai-based council said earlier that the Nirav Modi/Gitanjali Gems incident is of concern to the industry and had condemned any sort of unlawful action.

The Gems & Jewellery Export Promotion Council may cancel the membership of Nirav Modi, Gitanjali Gems and related companies after Punjab National Bank named them in a complaint of alleged fraud.

“Their companies are registered with us. Nothing is known as of now but if something comes out, we will take disciplinary action against them,” said Praveenshankar Pandya, immediate past Chairman of the council. Firestar Diamond, owned by Nirav Modi, and Gitanjali Gems, which belongs to his uncle Mehul Choksi, are members of the council, the apex body of the gems and jewellery industry that represents almost 6,000 exporters.

According to a council official, cancellation of membership can cause problems for exporters as banks and suppliers often ask for certificates and membership details. “Our cancellation will reflect poorly on them in the global market,” the official said. The council hasn’t cancelled a membership in at least a decade, he said.

The Mumbai-based council said earlier that the Nirav Modi/Gitanjali Gems incident is of concern to the industry and had condemned any sort of unlawful action. “The council strongly believes that this incident will not have any contagion effect on the gems and jewellery export industry,” it said in a statement on February 17. Pandya sought an investigation into alleged irregularities by the two companies in their bank dealings. He said small exporters were now facing difficulty in securing loans worth Rs 20-30 crore from banks.

“There is a shortage of finance for small and medium diamond exporters. They are made to run from pillar to post, asked for collateral and other details like credit ratings by the banks,” Pandya said. India’s diamond exports stand at $23 billion with value addition in excess of $7 billion.

 

Source: The Economic Times

 

 

PNB fraud fallout: RBI tells banks to link SWIFT with CBS by 30 April

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The PNB fraud, which happened via SWIFT, went undetected since it was not linked to core banking solutions (CBS) and because checks failed at several levels
RBI has announced the setting up of a panel under the chairmanship of Y.H. Malegam to study rising cases of bank fraud and set out a blueprint to curb them.

The Reserve Bank of India (RBI) has set 30 April as the deadline for banks to integrate SWIFT (Society for Worldwide Interbank Financial Telecommunication) with core banking solutions (CBS) as it looks to strengthen internal controls in banks following the Rs11,400 crore PNB fraud.

“That (30 April) could be a deadline but it is an outer limit. Today, the urgency is such that everyone wants this project to be on fast track,” Usha Ananthasubramanian, managing director and chief executive officer of Allahabad Bank, and chairman of the Indian Banks’ Association (IBA), said on the sidelines of an IBA event on Friday.

“There is already a mandate from RBI that you need to comply with this straight through processing and combining SWIFT with CBS… Everybody has started…” she added.

The PNB fraud revolves around SWIFT. Branch officials of the lender fraudulently issued letters of undertaking, basically guarantees, to jeweller Nirav Modi-linked companies without getting proper approvals and without making entries in CBS, the software used to support a bank’s most common transactions.

The scam that happened via SWIFT went undetected since it was not linked to CBS and because checks failed at several levels, say experts.

RBI announced the setting up of a panel under the chairmanship of Y.H. Malegam, a former member of its central board of directors, to study rising cases of bank fraud and set out a blueprint to curb them.

In a letter to banks, RBI also reiterated that they must strictly comply with the principle of “four eyes”—that each SWIFT message must be processed by four bank officials: a maker, a checker, a verifier and an authorizer—two people who have seen the letter said on condition of anonymity.

“Apart from talking about maker-checker concept, RBI has asked banks to maintain a Chinese wall between officials dealing with SWIFT and CBS,” said a senior official at Mumbai-based bank, one of the two people cited above.

Source:  The Economic Times

World Bank says India has huge potential, projects 7.3% growth in 2018

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World Bank says India has huge potential, projects 7.3% growth

India’s growth rate in 2018 is projected to hit 7.3 per cent and 7.5 per cent in the next two years, according to the World Bank, which said the country has “enormous growth potential” compared to other emerging economies with the implementation of comprehensive reforms.

India is estimated to have grown at 6.7 per cent in 2017 despite initial setbacks from demonetisation and the Goods and Services Tax (GST), according to the 2018 Global Economics Prospect released by the World Bank here yesterday.

“In all likelihood India is going to register higher growth rate than other major emerging market economies in the next decade. So, I wouldn’t focus on the short-term numbers. I would look at the big picture for India and big picture is telling us that it has enormous potential,” Ayhan Kose, Director, Development Prospects Group at the World Bank, told PTI in an interview.

He said in comparison with China, which is slowing, the World Bank is expecting India to gradually accelerate.

“The growth numbers of the past three years were very healthy,” Kose, author of the report, said.

India’s economy is likely to grow 7.3 per cent in 2018 and then accelerate to 7.5 per cent in the next two years, the bank said.

China grew at 6.8 per cent in 2017, 0.1 per cent more than that of India, while in 2018, its growth rate is projected at 6.4 per cent. And in the next two years, the country’s growth rate will drop marginally to 6.3 and 6.2 per cent, respectively.

To materialise its potential, India, Kose said, needs to take steps to boost investment prospects.

There are measures underway to do in terms of non- performing loans and productivity, he said.

“On the productivity side, India has enormous potential with respect to secondary education completion rate. All in all, improved labour market reforms, education and health reforms as well as relaxing investment bottleneck will help improve India’s prospects,” Kose said.

India has a favourable demographic profile which is rarely seen in other economies, he said.

“In that context, improving female labour force participation rate is going to be important. Female labour force participation still remains low relative to other emerging market economies,” he said.

Reducing youth unemployment is critical, and pushing for private investment, where problems are already well-known like bank assets quality issues…If these are done, India can reach its potential easily and exceed, Kose asserted.

“In fact, we expect India to do better than its potential in 2018 and move forward,” he said.

India’s growth potential, he said would be around 7 per cent for the next 10 years.

The Indian government is “very serious” with the GST being a major turning point and banking recapitalisation programme is really important, Kose said.

“The Indian government has already recognised some of these problems and undertaking measures and willing to see the outcomes of these measures,” he said.

“India is a very large economy. It has a huge potential. At the same time, it has its own challenges. This government is very much aware of these challenges and is showing just doing its best in terms of dealing with them,” the World Bank official said.

The latest World Bank growth estimate for 2017 is 0.5 per cent, less than the previous projection, and 0.2 per cent less in the next two years.

“It is slightly lower than its previous forecast, primarily because India is undertaking major reforms,” Kose said.

These reforms, of course, will bring certain policy uncertainty, he said, “but the big issue about India, when you look at India’s growth potential and our numbers down the road 2019 and 2020, is that it is going to be the fastest growing large emerging market.”

“India has an ambitious government undertaking comprehensive reforms. The GST is a major reform to have harmonised taxes, is one nation one market one tax concept. Then, of course, the late 2016 demonetisation reform was there. The government is well aware of these short-term implications,” Kose said.

He said there might have been some temporary disruptions but “all in all” the Indian economy has done well.

“The potential growth rate of the Indian economy is very healthy to 7 per cent. I think the growth is going to be at a high rate going forward,” the World Bank official said.

In a South Asia regional press release, the World Bank said India is estimated to grow 6.7 percent in fiscal year 2017-18, slightly down from the 7.1 percent of the previous fiscal year.

This is due in part to the effects of the introduction of the Goods and Services Tax, but also to protracted balance sheet weaknesses, including corporate debt burdens and non- performing loans in the banking sector, weighing down private investment, it said.

Read more at: Economic Times

Demonetisation, GST will bring long-term benefits for Indian economy: IMF on Narendra Modi’s one-off policy moves

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The disruptive impact of demonetisation announced last year is a temporary phenomenon and the scrapping of the high-value currency would bring “permanent and substantial benefits”, according to the International Monetary Fund (IMF).

In an interview to CNBC TV18, IMF Economic Counsellor and Director of Research Maurice Obstfeld said that although demonetisation, as well as implementation of the Goods and Services tax (GST) caused short-term disruptions, both measures would bring long-term benefits.

“The costs of demonetisation are largely temporary and we see permanent and substantial benefits accruing from the move,” Obstfeld said.

Demonetisation caused long queues outside banks.

Demonetisation caused long queues outside banks.

“Both demonetisation and the GST introduction will bring long-term benefits, though these caused short-term disruption,” he said.

The IMF Chief Economist described GST as a “work in progress” to which the Indian economy is “gradually adjusting”.

With businesses going into a “destocking” mode on inventories in anticipation of the GST rollout from July 1, sluggish manufacturing growth, among other factors, pulled down growth in the Indian economy during the first quarter of this fiscal to 5.7 percent, clocking the lowest GDP growth rate under the Narendra Modi dispensation.

Breaking a five-quarter slump, however, a rise in manufacturing sector output pushed the growth rate higher to 6.3 percent during the second quarter (July-September) of 2017-18.

Obstfeld also listed some of the reforms being undertaken by the Indian government that have impressed the multilateral agencies.

“The government has taken important first steps like bringing in the Insolvency and Bankruptcy Code, which helped India improve its position substantially in the World Bank’s ‘Ease of Doing Business’ rankings,” he said.

He also mentioned the recent recapitalisation plan for state-run banks announced by the government and the Asset Quality Review of commercial banks earlier ordered by the Reserve Bank of India (RBI).

Both measures are designed to address the issue of massive non-performing assets (NPAs), or bad loans, accumulated in the Indian banking system that have crossed a staggering Rs 8.5 lakh crore.

In a report released in Washington on Thursday, the IMF cautioned that the high volume of NPAs and the slow pace of mending corporate balance sheets are holding back investment and growth in India even though structural reforms have helped the nation record stronger growth.

The IMF’s Financial System Stability Assessment (FSSA) for India said that overall “India’s key banks appear resilient, but the system is subject to considerable vulnerabilities”.

“The financial sector is facing considerable challenges, and economic growth has recently slowed down,” the report said.

“High non-performing assets and slow deleveraging and repair of corporate balance sheets are testing the resilience of the banking system, and holding back investment and growth.”

“Stress tests show that… a group of public sector banks are highly vulnerable to further declines in asset quality and higher provisioning needs,” it added.

Source: FirstPost