The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2017 (IBC) A view

The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2017 (IBC)

The Financial sector is facing a crisis of mounting Non-performing assets and the initiatives taken by the Government to speed up the process of recovery through DRTs and SARFAESI Act has not effectively addressed the Problem. Gross NPA ratio was 2.7 per cent in 2011, 3.4 per cent in 2012 and 4 per cent in 2013. In 2014 it rose to 4.3 per cent, and further to 5.9 per cent in 2015 and peaked to 9.2 per cent in 2016. With 470 cases admitted by the National Company Law Tribunal (NCLT) under the IBC, most experts are keenly watching the outcome of the first set of 12 big corporate defaulters that lenders have sought to resolve under the RBI’s directive in June this year. RBI will release the next 12 default companies list with a deadline to resolve the same before Dec 2018.

Hence, the Government proposed to amend the Insolvency and Bankruptcy code to give more teeth to the Bankers.

Highlights of the Ordinance

Ø  Prohibit the wilful defaulters, disqualified directors, promoters or management of the defaulting company, and any person who has committed these activities abroad from submitting a resolution plan for restructuring the debt.

Ø  Bars an insolvency professional from selling the property of a defaulter to any such person during liquidation.

Key Issues and Analysis

  

ü  Resolution applicant:  The Ordinance amends to define a resolution applicant as a person who submits a resolution plan after receiving an invite by the insolvency professional to do so.

ü  Eligibility for resolution applicants:  It amends a resolution professional/ Insolvency and Bankruptcy Board will only invite those resolution applicants to submit a plan, subject to certain condition.

ü  Ineligibility to be a resolution applicant:  The amendment prohibits the following persons from submitting resolution plan .

(i)              he is an undercharged insolvent (individual unable to repay his debt),

(ii)                    he is a wilful defaulter identified by the Reserve Bank of India,

(iii)            his account has been identified as a non-performing asset for more than a year,

(iv)                he has been convicted of an offence punishable with two ormore years of imprisonment,

(v)                he has been disqualified as a director under the Companies Act, 2013,

(vi)               he has been prohibited from trading in securities,

(vii)               he has indulged in undervalued or fraudulent transactions,

(viii)             he has executed an enforceable guarantee in favour of a person who is a creditor to a defaulter undergoing a resolution process,

(ix)               he is connected to any such person mentioned above (including promoters or people in control of the defaulting firm during the implementation of the resolution plan), or

(x)                he has indulged in any of these activities outside India.

ü  Approving resolution plan: The Ordinance amends to state that the committee will approve this resolution plan by 75% majority subject to any other conditions specified by the Insolvency and Bankruptcy Board.

ü  The Ordinance prohibits the committee of creditors from approving a resolution plan submitted before the promulgation of this Ordinance, where the plan has been submitted by a person ineligible to be a resolution applicant.

ü   Liquidation: Ordinance prohibits the insolvency professional from selling the property to any person who is ineligible to be a resolution applicant.

ü  Penalties: Provision to specify that any person contravening provisions of the Code for which no penalty has been specified will be punishable with a fine ranging between one lakh rupees to two crore rupees.

ü  Loan defaulters can not participate in bidding under the insolvency proceedings after paying due interest and making their bad loan accounts operational,

What is in it for banks?

At present the bank has to get a buyer and accept a huge haircut to get ride of the NPA otherwise they will be left with nothing if the company goes into liquidation.  Insolvency & Bankruptcy Code is likely to play an important role in addressing the non-performing assets (NPA) of the banking sector. The NPA affects the CRAR of the banks thereby affecting the economic growth due to poor credit off take.  

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1.   In terms of Section 14(1)(c) of the Insolvency and Bankruptcy Code, 2016 the Code takes  precedence over the DRT Act and SARFAESI Act that during the insolvency resolution process

2.   “All pending proceedings are stayed for a period of 180 days from the date of admission of the application to initiate such proceeding in terms of Section 12 of the Code”

3.    The Code devises two separate processes for corporate insolvency matters and individual/ un-incorporated bankruptcy matter. Part II of the Code deals with corporate insolvency mechanism pertaining to companies incorporated under the Companies Act, 1956 and 2013 and limited liability partnership incorporated under the Limited Liability Partnership Act, 2008; matters in this regard will be dealt by the National Company Law Tribunal. Part III deals with the bankruptcy process for individuals and partnership firms (unincorporated entities) and is maintainable before the Debt Recovery Tribunal. Both Parts II and III provide a detailed procedure for declaring a company, LLP, individual, or unincorporated entity.

4.   Section 14 of the Code the Adjudicating Authority shall by order declare moratorium for prohibiting all of the following, namely:, on the insolvency commencement date        

(a)        The institution/ continuation of any pending including execution of judgment or decree..

(b)         Transferring, encumbering, alienating, or disposing of corporate debtors assets.

(c)          Any action to foreclose, recover, or enforce any security interest created by the corporate debtor in respect of its property including SARFAESI act

(d)         The supply of essential goods or services to the corporate debtor as may be specified shall not be terminated or suspended or interrupted during moratorium period.

(e)         The provisions shall not apply to such transactions as may be notified by the Central Government in consultation with any financial sector regulator.

(f)           The order of moratorium shall have effect from the date of such order till the completion of the corporate insolvency resolution process except liquidation process.

(g)        that all pending proceedings are stayed for a period of 180 days from the date of admission of the application to initiate such proceeding.

(h)         The second stage that the security held by a creditor may be affected with respect to a corporate debtor is under the liquidation order. The Secured creditor will have two option

(a)        A secured creditor can choose to relinquish his/her security interest and be part of the liquidation process with preference of distribution; or

(b)        A secured creditor can choose to stay outside the liquidation process and enforce his/her security interest.

Concerns ahead:

Though the legislature has made extensive efforts to bring harmony between these laws, it is yet to stand the test of implementation. Some immediate concerns are as follows:

1. Time-bound insolvency resolution requires the establishment of several new entities.

2. Interpretation and harmonization of various laws, leading to delay in insolvency proceedings.

3. Harmonization for the interplay of the different laws will have to be done.

4. Applicability of the CDR and JLF proceedings on the Code will have to be addressed separately.

Though the provisions are yet to be examined by the courts of law, Section 14(1)(c) of the Code clearly provides that during the insolvency resolution process as defined in the Code, the Code takes precedence over the DRT Act and SARFAESI Act.

Conclusion

We trust and hope that the NCLT and Debt Recovery Tribunal under the Code will function effectively and follow the timelines.  However, it is our experience that the objectives were not achieved due to the delayed legal process, ignorance of the banks, in case DRT act and SARFAESI act and the same should not happens in IBC also.

BASED on the Governement notifications and selected readings in Internet

Important points in the midterm review of Foreign Trade Policy 2015-2020 (DEC 2017)

Important points in the midterm review of Foreign Trade Policy 2015-2020

 Union Commerce and Industry Minister Suresh Prabhu on Tuesday unveiled the Mid-Term Review of Foreign Trade Policy 2015-20 by announcing a slew of incentives to boost country's exports. The mid-term review of FTP will leverage the long-term advantages of GST in terms of reduced compliance and logistics costs.

Mid-term review of Foreign Trade Policy will focus on finding new markets and new products as well as increasing India's share in the traditional markets and products, the minister said. To achieve Prime Minister Narendra Modi's vision of doubling farmers' incomes, FTP will have a focused policy for agricultural exports.

The salient features of the midterm review as under:

*Scope of Merchandise Exports from India Scheme (MEIS) and Service Exports from India Scheme (SEIS) enhanced.

*MEIS incentive raised for ready-made garments and made-ups by 2% (additional annual outgo Rs 2,743 crore).

*Across-the-board increase of 2 percent in existing MEIS for exports by MSMEs/ labor incentive industries (Rs 4,567 crore).

*Annual incentive increased by 34 percent to Rs 8,450 crore.

*SEIS incentives raised by 2 percent with a view to boosting services sector exports (Rs 1,140 crore).

*Validity of Duty Credit Scrips increased from 18 months to 24 months to enhance their utility in GST framework.

*To focus on improving ease of trading across borders for exporters and importers.

*Professional team to handhold, assist and support exporters in accessing markets, meeting regulatory norms.

*New Logistics Division to promote integrated development of the logistics sector.

*State-of-the-art trade analytics division in DGFT for data-based policy actions.

*New agricultural exports policy to focus on increasing exports of value-added agri products.

*New Services Division in DGFT to examine Exim policies and procedures to push services exports.

*Supplies of goods and services to SEZs to be treated as zero-rated under GST.

*Import of second-hand goods for repair/refurbishing/reconditioning/re-engineering made free.

*Increase focus on exploring new markets and products, raising share in traditional markets and products.

*Promotion of exports by MSMEs and labor intensive sectors to increase employment opportunities for youth.

*To enhance participation of Indian industry in global value chains. RSN NKD CS ARD

·         The Ministry has increased rates of rewards for some products of MEIS by 2%. The major sectors that will be benefited by this raise will be the sectors of ready-made garments and made-ups, leather, agriculture, ceramic, sports goods, medical and scientific products, electronic and telecom components, and so on. These revised rates are applicable from 1^st November 2017 until 30^th June 2018

·         The SEIS has incurred raised rates of rewards by 2%. The services of professional services, management consulting, entertainment, transportation and so on. The capitation fees of educational institutions are exempt from this reward. The Ministry has also notified the list of foreign exchange remittances that are not eligible for entitlement under SEIS. The applicability of this notification is from 1^st November 2017 until 31st March

·         The Ground Handling services are also classified as Foreign Exchange in addition to certain services that were classified as foreign exchange for SEIS even though the payments were made in INR.

·         The valid period of Duty Credit Scrips is increased from 18 months to 24 months to augment their efficacy in the GST framework.

·         GST rate for transfer or sale of scrips has been reduced to zero from the earlier rate of 12%.

·         The minimum export performance clause has been revised 2 out of 4 years than the earlier requirement of 2 out of 3 years to facilitate the “Status ”

The Self-ratification scheme of AEO:

There is an allowance of duty-free-export production under duty exemption scheme with a self-declaration. The self- ratification for exporters to apply for advance authorization if the Standard Input Output Norms (SION) or valid ad-hoc norms are not notified. This facility also extends to exporters to holding Authorised Economic Operator status with Customs.An exporter who is either a manufacturer or merchant and holds Authorised Economic Operator (AEO) certificate under the Common Accreditation Programme of CBEC are also eligible to opt for this scheme.The scheme will accelerate export of new products by decreasing product turn-around time, mainly in sectors such as pharmaceuticals, chemicals, textiles, engineering and high technology which have dynamic raw material requirements.

Export Promotion Capital Goods (EPCG) Scheme:

·         Specific capital goods cannot be imported according to Export Promotion Capital Goods scheme, and the negative list is yet to be notified.

·         The specific restriction that has been imposed on second-hand capital goods is removed.

·         The unit stock transfer of EPCG imported goods is allowed between the same company.

Export-oriented Unit (EOU) Scheme:

·         The earlier limit of domestic traffic area sale up to 50% for the Free on Board(FOB) value of exports has been canceled with or units operating under theExport Oriented Unit (EOU) scheme.

·         Except for the units that are involved in the process of packaging, labeling, segregation or granulation can supply its products or services without any ceiling. However, they should fulfill the requirement of positive net foreign exchange earnings (NFE).

·         The procurement provisions of EOU has been matched with the GST provisions by Notification 48/2017-Central Tax about deemed exports.

·         The procedure regarding the transfer of manufactured goods, capital goods and goods of EOU’s units will be subjected to compensation and cess.

Deemed Exports:

·         The definition of “Deemed” has been modified to include the supplies coming under the GST purview under Section 147.

·         The aids of the Deemed Exports will be available for supplies from 30^th These provisions are also applicable to the said supplies made after the date above.

Modifications in the rules of import and export:

·         Importers approved by the AEO programme (Tier-II and Tier-III) can avail the benefit under Deferred Payment of Import Duty Rules, 2016. This facility also has been introduced in FTP.

·         The clearance of warehoused goods has been incorporated into the Customs Law.

·         The importers good if found defective or as not per specifications, then the importer can re-export as per law.

·         The Import-Export Code (IEC) has been aligned with PAN and will be separately issued by DGFT when applied.

·         The exporters can self-certify their product’s place of origin according to the self-certification scheme.

DGFT PORTAL:

The Directorate General of Foreign Trade has introduced a portal for the import-export traders to register their grievances or any suggestions. They can also track down their application status via this portal by using their assigned reference number. This portal help to high-level tracking and monitoring the queries raised by the traders.Exporters or Importers can also voice their concerns or suggestions on DGFT portal at Contact@DGFT.

The changes in GST:

·         There has been an introduction of E-wallet for enabling more liquidity to the traders.

·         Merchant exporters can pay a nominal GST of 0.1% for procuring goods from domestic suppliers for export.

·         A message exchange system has been introduced and will include message between Goods and Service Tax Network (GSTN) and the RBI.

·         The issue of working capital blockage for the exporters due to upfront payments of GST has been relaxed. By the Advance Authorisation, Export Promotion of Capital Goods and 100% EOU scheme, exporters have been enabled to source inputs/capital goods from abroad and from domestic suppliers for exports without upfront payment of GST.

·         The flat rates of GST have brought a considerable saving in the logistics and transaction cost and have facilitated ease of businesses.

·         The Gold availability issue has been resolved as a Specific Nominated Agency has been appointed to import Gold without

·         A new IT-based system is fielded by the Reserve Bank of India called the Export Data Processing and Monitoring System (EDPMS) for the supervising of export and simplifying Authorised Dealer Banks set up.

Other important points to note:

·         Revised guidelines and procedure notified for approaching Policy Interpretation Committee and Policy Relaxation Committee

·         As part of trade assistance, an expert team has been envisioned to support exporters on specific issues.

·         A newly created Logistics Division is to be established to assist in removing obstructions and improving trade-related set-up through a partnership with stakeholders.

Revising export strategy:

·         Enabling continued support for multilateral trade,

·         Unrelenting efforts to integrate with significant

·         Grow trade by focusing on new markets and their unexplored potential.

·         Availing the leveraging benefits of GST

·         Active monitoring of exports performance and taking speedy remedial measures through state-of-the-art data analytics

·         Facilitating ease of trading across global borders through trade facilitation

·         Enhancing participation of Indian industry in universal value chains

·         Improving farmers’ incomes through an agri-centric policy for agrarian exports

·         Promoting exports by MSMEs and labor-intensive sectors to increase occupation openings for the youth.

The mid-term review of FTP has not formed any new schemes, however, has realigned the policy with GST and has consequently provided relief to exporters through augmenting benefits under MEIS/ SEIS schemes. The emphasis of the introduced initiatives focuses on MSMEs, agro sector, and small exporters. Explicit procedural relaxation and trade simplification measures have been added to help exporters. Further, the assurance to use data analytics for continuous observing of trade performance and take on the real-time policy intervention is a proactive approach which will lead to the superior impact of global trade in the Indian export-import trade.The mid-term review is seen as a game changer and to provide the much –needed relief for exporters and will help in the advancement of trust based partnership.

Conclusion:

It is expected that the incentive proposed and adjustment in GST, will help the Indian exporters to compete in the world of business and increase their share substantially to contribute to the country’s trade. This is also expected to close the trade gap.

(Based on the Goverment notification and selected articles on internet)

PROJECT FINANCE -- SIMPLE UNDERSTANDING

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How strong our banks are? What is the need of the hour

How strong our banks are? What is the need of the hour based on RBI's Financial Stability Report for SEPT-2017.

Banking is a backbone of the country and their strength reflect the strength of the country and its rating in the international market. A better rating by the Rating agencies viz. Moody, Standard and poor, will help the country, its corporate and financial institutions to raise funds from the international market at a cheaper rate.

RBI has released the financial stability report for the half year ended Sept 2017 wherein they have vividly brought out the issues faced by the financial system in India. We will take the Banking sector report and understand the strength of our banks.

Business growth

The deposit of all SCBs on a year on year basis has decreased from 11.1% to 7.8 % between March and September 2017. The reason may be the demonization factor which helps the Bank with the flood of deposit in the month of Nov and Dec 2016. 

The credit growth on the same period increased from 4.4% to 6.2 % and the public sector banks recorded growth of 0.7% to 2.2 % reversing the declining trend of past years.

It may be noted that the Foreign Banks has registered a negative growth during the period ending Sept 2017 both in deposit and loan portfolio.

Soundness – Capital adequacy and leverage ratio

Capital to risk-weighted asset ratio (CRAR) of SCBs increased from 13.6 percent to 13.9 percent between March and September 2017 largely due to an improvement for private sector banks (PVBs). The CRAR is almost stagnant at 12.2% due to the laxity of the Government to induct additional capital and now only the finance ministry has proposed to infuse additional capital for the Banks. All the Banks should achieve a minimum CRAR of 11.5% by Mar 2019 as per Basel III. However, the banks which fall under the category of too big to fail must have an additional capital requirement of 2.5%.

Asset quality  

The asset quality of a bank plays the very important role as it is the main factor which affects its health, profitability, and efficiency of the bank. The main factors in the asset quality are classified into Gross Non-Performing Asset (GNPA), Restructured Standard Advance (RSA) and Stressed Advances (SA) and Net Non Performing Assets as all these are interconnected.

For the Indian banks, the GNPA ratio of SCBs increased from 9.6 percent to 10.2 percent between March and September 2017, whereas, their RSA ratio declined from 2.5 percent to 2.0 percent. The SA ratio rose marginally from 12.1 percent to 12.2 percent during the same period. GNPA ratio of PSBs increased from 12.5 percent to 13.5 percent between March and September 2017. Stressed advances ratio of PSBs rose from 15.6 percent to 16.2 percent during the period

The GNPAs of all SCBs has increased by 18.5 percent on a y-o-y basis in September 2017. PVBs registered a higher increase in GNPAs (40.8 percent) as compared to their public sector counterparts (17.0percent)

Net non-performing Assets

The net non-performing advances (NNPA) as a percentage of total net advances increased from 5.5 percent to 5.7 percent between March and September 2017. PSBs recorded distinctly higher NNPA ratio of 7.9 percent

 NNPAs of all SCBs increased by 11.1 percent on a y-o-y basis in September 2017

Sector-wise asset quality.

The asset quality of SCBs deteriorated across broad sectors between March and September 2017 with the industrial sector leading this cohort, among the major industry sub-sectors, mining and quarrying, food processing, engineering, construction, and infrastructure registered an increase in their stressed advances ratios between March and September 2017. The asset quality of sub-sectors such as textiles, rubber, cement, basic metals, and vehicles, however, improved during the same period. It is evident that most of the NPA come from basic metal and infrastructure sector.

Credit quality of large borrowers

The share of large borrowers both in total SCBs’ loans as well as GNPAs declined between March and September 2017.  The total stressed advances of large borrowers increased by 2.4 percent between March and September 2017. Advances to large borrowers classified as special mention accounts also increased sharply by 56.5 percent during the same period.  

The GNPA ratio of large borrowers increased from 14.6 percent to 15.5 percent between March and September 2017. The GNPA ratios went up for both PSBs and PVBs, whereas, the same came down for foreign banks (FBs). The share of standard advances (excluding restructured standard advances) in the total funded amount outstanding of large borrowers declined from 80.9 percent to 80.6 percent between March and September 2017. The top 100 large borrowers (in terms of outstanding funded amounts) accounted for 15.5 percent of credit and 25.0 percent of GNPAs of SCBs

Stress Testing -- NPA

The stress test indicated that under the baseline scenario, the GNPA ratio of all SCBs may increase from 10.2 percent in September 2017 to 10.8 percent by March 2018 and further to 11.1 percent by September 2018. However, if the macroeconomic conditions deteriorate, the GNPA ratio may increase further under such consequential stress scenarios.

Under the assumed baseline macro scenario, six banks have CRAR below the minimum regulatory level of 9 percent by September 2018. However, if the macro conditions deteriorate, CRAR of more banks in the stress test goes below the minimum regulatory requirements. Under the severe stress scenario, the system level CRAR declines from 13.5 percent in September 2017 to 11.5 percent by September 2018. The recent capitalization plan announced by the GoI for PSBs is expected to significantly augment capital buffers of affected banks as also the credit growth

Stress test – Interest rate Risk

For investments under available for sale (AFS) and held for trading (HFT) categories (direct impact), a parallel upward shift of 2.5 percentage points in the yield curve will lower CRAR by about 123 basis points at the system level. At the disaggregated level, four banks accounting for 5.3 percent of the total assets were impacted adversely and their CRAR fell below 9 percent. The total loss of capital at the system level is estimated to be about 10.3 percent. The assumed shock of a 2.5 percentage points parallel upward shift of the yield curve on the held to maturity (HTM) portfolios of banks, if marked-to-market, reduces the CRAR by about 280 basis points resulting in 19 banks’ CRAR falling below 9 percent.

Liquidity risk

Scenarios, there will be increased withdrawals of uninsured deposits Simultaneously, there will also be increased demand for credit resulting in an attempt to withdraw unutilized portions of sanctioned working capital limits as well as utilization of credit commitments and guarantees extended by banks to their customers.  Using their HQLAs required for meeting day-to-day liquidity requirements, most banks (49 out of the 54 banks in the sample) remain resilient in a scenario of assumed sudden and unexpected withdrawals of around 12 percent of deposits along with the utilization of 75 percent of their committed credit lines

Credit concentration risk

Credit risk arising from exposure to the infrastructure sector (specifically power, transport, and telecommunications) was examined through a sectoral credit stress test where the GNPA ratio of the sector was assumed to increase by a fixed percentage point impacting the overall GNPA ratio of the banking system. The results show that shocks to the infrastructure segment will considerably impact the profitability of banks, with the most severe shocks (15 percent of restructured standard advances and 10 percent of standard advances becoming NPAs and moving to the sub-standard category) wiping out about 87 percent of the profits. The most significant effect of the single factor shock appears to be in the power sector

Conclusion:

The credit growth has improved during the 6 month period ended Sept 2017 but the growth does not commensurate with the economic growth of 5+% of the country. Either the banks deliberately keep the credit growth under control to maintain the quality of the credit portfolio or divert their resources to reduce the NPAs.

The NPAs are on the rise due to the policies of the government and inefficiency of the Bank to take advantage of the legal system. Despite the creation of DRT, Sarfaesi act etc, the recovery percentage of NPA is poor. Therefore, we need to look into the process and take corrective action. It is also observed there is the sudden rise in NPA during the last year and also current half year in private sector/ public sector banks is due to suppression of NPAs and provisioning to present a better balance sheet and lack of supervision of the regulator over the banks and the financials. Lack of knowledge in managing the credit portfolio is also evident.

The banking system is managing the interest rate risk well although a shock of 2.5 % upward shift will reduce around 280 basis points CRAR and 19 banks CRAR will fall below 9 % mark.

The liquidity risk is under control.

The need of the Hour

Let is wait for the Government program to augment capital of the Public sector banks which will improve the risk perception of the bank. The need of the hour is to control the NPAs and speedy recovery of the same. Although there is accountability at the lower level, it is high time to consider accountability at the top management level also as the major chunk of the NPAs are from the large borrowers.

Under universal banking, it is necessary to provide all products including insurance, credit cards, and mutual funds to the customer under one umbrella. At the same time, the core business of banking viz. accepting deposit and quality lending should not be pushed to back seat. 

This is based on the RBI report on Financial Stability report for sept 2017  all graphical representation are from the same report.(www.RBI.ORG.IN)