Taxation
CA Nikhil Vadia simplifies income tax laws
Moneylife Foundation organised an interactive session on deductions allowed under different sub-sections of Section 80 for salaried and self-employed
 
Many salaried people and self-employed professionals end up incorrect taxes as they are unaware of various deductions and exemptions. Some of them put money in tax saving instruments, which exceeds the exemption limit, or make investments which are not eligible. CA Nikhil Vadia, a Voluntary Expert with Moneylife Foundation’s Tax Helpline (www.moneylife.in/taxhelp) , took the audience through an interactive session on deductions allowed under different sub-sections of Section 80 for salaried/employed. With over 19 years of experience in direct and indirect taxation, he simplified the complex provisions of the Income Tax Act. 
 
“Since a deduction is available, I will invest in a particular instrument” is the common wrong approach to investing – and it is wrong. He said that you must make investments on the basis of your needs and not merely because a deduction is available. First, you need to list down your deductions which are in the form of expenses such as tuition fees, home loan repayments etc. After accounting for this, you can work out the investments needed, if required. He said that documentary proof was essential for claiming deductions. Explaining the difference between exemptions and deductions, he went on to explain one of the most important sections for claiming deductions – Section 80C. Section 80C contains many clauses, but 6-7 are the most important. Listing down the different investments that could be made for claiming deductions under this Section, he explained the detailed provisions for each investment head. Understanding income tax is not complete unless you highlight different exceptions to the rules. For instance, coming to Sukanka Samridhi Account for girl child, many people are under the wrong impression that the money will be available when the daughter reaches the age of 21 years. He highlighted that this money is only available after 21 years of investment.
 
He moved on to the other important sections of Section 80. Explaining deduction in respect of contribution to certain pension funds, he explained issues with respect to withdrawal from National Pension System (NPS). He also highlighted the different conditions under which deduction will be available for medical insurance premium under Section 80D.
 
'Tax laws create more criminals than any other law' is the popular saying. Deduction for house rent allowance (HRA) is a fit case for this saying, he said. “A large number of queries on Tax Helpline relate to house property”, he remarked, which makes this deduction extremely critical. Vadia explained the conditions under which this deduction along with deduction on interest is available. He highlighted that deduction also allowed for any expenditure incurred towards stamp duty/registration charges for transfer of house. He explained the conditions under which repayment of loans does not qualify as deduction. 
 
Capital gains arise on sale of capital assets. There are methods to reduce your capital gains liability. Section 54  is one such section.  If capital gains from sale of residential property are invested in purchase or construction of residential house property, the long term capital gains are exempt under certain conditions. Highlighting different aspects and complexity of Section 54 and Sec 54F, he remarked, “There might probably be a case law for each word in Section 54.” The event ended with an lively Q&A session.

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News SDR rules: Alchemy of turning bad loans into good
RBI’s just tweaked its rules on SDR assets will permit banks to achieve the alchemy of transforming a non-performing asset into a standard, performing asset
 
The Reserve Bank of India (RBI) on Thursday did a substantial tweaking of its guidelines for strategic debt restructuring (SDR), obviously with the intent to allow banks to move more of their stressed assets to the SDR category.
 
The multiple changes in the SDR mechanism indicate that the RBI was keeping a keeping a note on the how the SDR framework unfolds. It is quite evident that the apex bank is viewing this to be as an effective tool for arresting stress in the economy in times to come and the increase in the number of failed cases under the corporate debt restructuring (CDR) mechanism may be one of the important reasons behind this. 
 
The changes also indicate the RBI is trying to be extra careful to ensure that this power in the hands of the bankers, which can actually turn out to be nightmares for the borrowers, is not exploited by them.
 
With just about a month to go for the end of the financial year, it seems that the relaxed guidelines will permit several banks to put more of their non-performing assets (NPAs) into SDR category, and for those that have already been put into SDR, to effect a change in management, and thereby achieve alchemy by transforming a non-performing asset into a standard, performing asset.
 

Background:

 
SDR is a process initiated by the RBI vide notification of 8 June 2015. The substance of the SDR process is that the lenders cause a forced change of management of the borrower’s business, on the underlying economic argument that the cause of non-performance lies in managerial factors. Analogically, it is like saying – the car is not running because the driver is bad; so if we change the driver, it is still a good car. Therefore, bankers constituting a special majority (at least 75% in value and 60% in number) decide to convert their loans into equity, and thereby acquiring at least 51% of shares in the borrower company. Obviously, the idea of the bankers is not to continue to run the company – therefore, the bankers look for a new management to run the company, and thus, force a change in management. If change in management is effected by the banks, the account will be upgraded into a performing or standard account.
 
Obvious enough, the SDR scheme was taken with great vigor by the wary banks, hoping this will reduce their NPAs. There have been nearly 24 cases of SDRs already. A report, written in January 2016 suggests that there may be about 40 cases of SDRs by end of March 2016, involving loans worth about Rs1.50 lakh crore
 
One of the biggest problems in the SDR guidelines of June 2015 was the need for banks to acquire the shares of the defaulting companies, by converting their loans into equity. As per company law rules, these shares could not be acquired by banks at less than the par value, even though, very evidently, the borrower companies would have lost a large part of their net worth already. Therefore, another guideline was issued by the RBI in September 2015 [notification of 24 September 2015] for change of management, without having to go for conversion of loans into equity. This is primarily using the powers of the banks contained in loan agreements, or powers agreed with borrowers at the time of formation of Joint Lenders’ Forum (JLF). Here also, on succeeding in causing a change in management, the status of the account changes from non-performing to performing.
 
Changes in the Guidelines of 25 February 2016:
 
Change in management, without full divestment:
 
Among the important changes introduced in the notification of 25 February 2016, the condition of the bank causing change in management by divesting the whole of shares the bank acquired by way of conversion of the loans, has been relaxed. The revised scenario is as follows:
  1. The banks will still have to acquire at least 51% of the shares of the borrower by conversion of loans.
  2. However, the banks may sell only minimum 26% out of the 51%, and retain the remaining holding, with an intent to cause a sale of the remaining holding later. However, the banks have to be still successful in causing  a change of management with the 26% divestment. 
  3. As regards the remaining stake, banks may, upon the unit turning around, either sell the stake to the incoming management (with whom the banks will have a right of first refusal), or to any new acquirer.
 
This relaxation will increase the feasibility of the intended change of management substantially. First of all, the incoming management has to acquire only 26% of the shares, and yet, get to take over the management, thereby limiting their immediate investment requirement, as well as the possible downside if the acquisition did not work out well. For the banks too, the ability to cause a faster sell-down increases the chances to reduce the NPA burden, particularly before the end of the financial year.
 
Further the bankers may not be pro in the running a business, hence, the Guidelines has also discussed about formation of a separate panel of management firms/ individuals who would assume the responsibility to run the defaulting company on behalf of the bankers until the change in management takes place.
 

Stand-still on provisioning for 210 days:

 
There is a provision, in para 8 of part A of the 25th Feb notification, which seems to suggest that the status of the borrower’s account, as standard or sub-standard, will be put under a “stand-still” from the reference date, that is, date of examination by the JLF as to whether any critical conditions under the corrective action plan have been achieved or not. This stand-still may go for a maximum of 210 days. If the stand-still is applicable from the date of very decision of JLF to convert their loans into equity, it is quite likely that most bankers will make the most of this new dispensation, and put their loans under the so-called equity conversion option, at least to get a major reprieve on asset classification as 31st March 2016. This will be particularly true for those accounts which are on the verge of turning into NPAs.

 

Graded provision for loss on account of fair value of equity shares:

 
Realising that the conversion of loans into equity, with equity being valued at least at par, may expose banks to losses when equity gets fair valued, the RBI has allowed spreading of the losses over a period of 4 calendar quarters. This, also, comes a relief for the banks, already burdened with stress on their P/L accounts
 

Making JLF decisions more practical:

 
Among other changes, the RBI has also made the decision-making at the JLFs more practical, by reducing the super-majority [75% in value, 60% in number] to a simple majority.

 

Restructuring within and outside the CDR mechanism

 
The RBI has also made changes to increase the scope of the assets eligible for restructuring. Earlier, the cases involving fraud/ malfeasance were not eligible for restructuring, but now it has been decided to allow such cases for restructuring also, provided the existing promoters are replaced by a new set of promoters and such new promoters are not at all linked with the former promoters/ management.
 
The aforesaid assets shall also be eligible to the benefits of refinancing after change in ownership, subject to the fact that the change in ownership has taken place based in accordance with the provisions of the prudential Norms issued for change in ownership of the borrowers outside the SDR mechanism. This is applicable to both, the cases within or outside the CDR mechanism.
 
Further, the RBI has also decided to give a relook at the cases which have been admitted for being willful defaulters and may consider the account to proceed for restructuring provided the banks are satisfied that the manner of classification of willful defaulter was not transparent and such borrower is ready to rectify the willful default. Further, it also stipulates that the restructuring of such asset should be approved only by the Core Group of the CDR Cell.
Apart from the above, there are several changes that have been made to the existing framework for restructuring of loans and advances:
 
  1. The special regulatory treatment, which was earlier eligible in cases of restructuring package implemented within a specified timeframe stands withdrawn.
  2. In order to speed up the process, the RBI has laid down timelines for implementation of restructuring packages, following are the time frames –
    Restructuring packages under CDR/ JLF/ Consortium/ MBA arrangements – 90 days from the date of approval;
    Restructuring packages apart from the above – 120 days from the date of receipt of application by the bank.
  3. Additional funding of 20% of the bank’s sacrifice or 2% of the total restructured debt, whichever is higher, has to be brought in by the promoters upfront, which may be in the nature of cash or may be in form of conversion of unsecured loan into equity.
  4. Banks should determine a reasonable time period during which the account is likely to become viable, based on the cash flow and the Techno Economic Viability (TEV) study;
  5. Banks should be satisfied that the post restructuring repayment period is reasonable, and commensurate with the estimated cash flows and required DSCR in the account as per their own Board approved policy.
  6. The banks should clearly document its own due diligence done in assessing the TEV and the viability of the assumptions underlying the restructured repayment terms.
  7. To conclude, this approach of RBI to shape up the recovery procedures of the country surely deserves a thumbs-up.

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COMMENTS

Ramesh Poapt

9 months ago

excellent !

RBI's SDR norms tightening is too little, too late
The write-off required to make SDR cases viable is 60-80% of the loan and therefore a mere 10% increase in provisions is not enough, says Religare Capital in a report
 
The Reserve Bank of India (RBI) has issued new directions to banks that are going in for strategic debt restructuring (SDR) scheme to make sufficient provisions to the tune of 15% of the loans value, to tide over possible loss in the value of the equity they acquire in lieu of debt and residual loans. However, this tightening is too little and too late, says a research report.
 
Religare Capital Markets Ltd, in the note says, "...the write-off required to make SDR cases viable is 60-80% of the loan and therefore a mere 10% increase in provisions is not enough. We remain negative on the sector and maintain sell on Axis Bank, ICICI Bank and State Bank of India (SBI)".
 
 
According to the report, there are two loopholes, conversion price and open offer that the RBI needs to plug. The RBI has not changed norms for calculating conversion price for debt into equity. Conversion takes place at face value or fair value whichever is higher. This results in huge mark to market (MTM) losses at the time of conversion itself, for example Electrosteel’s conversion price was Rs10 as against its market price of Rs3," Religare said.
 
On open offer, Religare says it strongly believe that new promoters should be exempt from making an open offer post acquisition of shares from banks. It said, "This is mainly because potential buyers may have limited appetite to invest in the current weak market conditions. In addition, potential buyers may end up investing 100% in a listed SDR entity owing to the open offer triggered under the Securities and Exchange Board of India (SEBI) norms." 
 
Here are the key revisions in the SDR norms...
 
  1. SDR cannot be used for all defaults: SDR should be evoked only in cases where a change in ownership is likely to “improve economic value & enhance the prospect of recovery” and not for all defaults.
  2. 100% provision against equity MTM losses: Banks convert a part of their loan into equity under SDR and are currently exempt from creating MTM provisions. To avoid the cliff-effect of provisioning in case SDR fails, banks are now required to build up 100% provisions against equity MTM losses equally over four quarters.
  3. 15% provisions on balance debt vs. 5% now: On the balance portion of loans, banks should create 15% provisions (vs. 5% now) within the 18-month window available for finding a new buyer.
  4. No release of personal guarantees; instead increase the charge on promoter shares: Banks should NOT release the personal guarantees or commitments of old promoters till new owners are in place. Banks should also try and pledge existing promoter shares in favour of lenders. This will ensure that existing promoters do not divert funds out of the company. 
  5. Partial stake sale to new promoter allowed: Banks are allowed to transfer 26% stake rather than the full holding to new promoters, which will help lenders to also benefit from the turnaround. In our view, this is a positive move as banks can potentially recover the write-off taken on existing debt in future through equity gains.
  6. Conversion of debt into equity in 210 days from 180 earlier: Apart from this extension, the timeline for individual activities (such as calling a board meeting, JLF meeting) up to the conversation of debt into equity (210 days) has been scrapped.

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COMMENTS

Ramesh Poapt

9 months ago

excellent!!!

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