Money & Banking
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

1 year ago

excellent!!!

Freedom 251: FIR certain, defamation case likely against Ringing Bells
New Delhi : Set to file an FIR against Ringing Bells Pvt. Ltd. - the makers of the controversial Rs.251 (less than $4) smartphone - Cyfuture, a Noida-based data centre and BPO, on Friday met a senior police official and is now deliberating on filing a defamation suit too.
 
According to Anuj Bairathi, Cyfuture founder and CEO, they met Vishwajeet Srivastava, Gautam Budh Nagar Superintendent of Police (crime branch), who looked into the matter and assured them a suitable course of action.
 
"After deciding to file an FIR for fraud and non-payment of dues, we are now thinking to file a defamation suit against Ringing Bells as their allegation of non-performance has tarnished our image," Bairathi told IANS.
 
"Just a week before 'Freedom 251' launch this month, we were told that the company is going to do a 'dhamaka' and need 100 people to handle customer calls. But that they are going to launch a dirt cheap smartphone which will attract an unprecedented response was not conveyed to us at all as this exercise would have had needed at least 2,000 people," he added.
 
Bairathi, whose BPO has 10 offices across the country with 1,500 employees, agreed to sign the contract after several rounds of discussion and meetings but is now repenting his decision.
 
"I have 100 kids here who were specifically hired to take customer calls for Ringing Bells. We were assured weekly payment within the contract stating a minimum lock-in period of one year and no termination before a year. What am I going to tell those 100 employees?" he said, talking to IANS. 
 
Ringing Bells, however, refuted these charges.
 
"We completely disagree with the facts shared by Cyfuture BPO. Ringing bells were receiving thousands of complaints directly from the consumers that lot of people were not able to get through the helpline number. We had outsourced this job to Cyfuture BPO," said Ringing Bells president Ashok Chaddha.
 
"Telecom companies confirmed that the helpline was receiving a volume of approx 12 lakh calls per hour. It came to our knowledge that the BPO company were not able to handle the traffic. We are looking into the situation to serve our customers better," he added in a statement. 
 
Bairathi, however, said that they have been in the BPO business for more than a decade and are able to handle any customer calls requirement.
 
"Our satisfied client list includes Fortune 500 companies like Indian Oil Corporation Limited (IOCL), Bharat Petroleum Corporation Limited (BPCL) and Hindustan Petroleum Corporation Limited (HPCL), among others. We have the expertise and knowledge to successfully manage any BPO project," he pointed out. 
 
According to him, from the very first day of the launch of the call centre operations, they have been requesting Ringing Bells to increase the number of seats considering the massive call flow that the call centre started receiving from the public. 
 
"We explained to them that not increasing the number of seats would lead to severe call drops but they were not willing to increase the number of seats as it involved additional costs," Bairathi said in a statement. 
 
According to him, Ringing Bells was to provide a 30-day notice-period and make all pending payments.
 
Taking the world by surprise, Ringing Bells launched "Freedom 251" smartphone that, it said, has been developed "with immense support" from the government.
 
As the makers of the smartphone went gaga over being part of Prime Minister Narendra Modi's “Make in India” and “Digital India” initiatives in last few days, a top government official clarified on Thursday that the government has nothing to do with “Freedom 251” smartphone.
 
“This is not a government project. 'Make in India' team has nothing to do with this," wrote Amitabh Kant, secretary of department of industrial policy and promotion (DIPP), in a Twitter post.
 
The tweet comes on the heel of the fact that the government is already keeping a close watch on “Freedom 251” and its maker.
 
Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.

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Economic Survey sees no pick-up in growth, pushes reforms
New Delhi : India's Economic Survey sees the growth rate for the coming fiscal to remain at 7-7.75 percent due to domestic factors and warns that the upcoming budget will have to contend with an unusually challenging and weak external environment.
 
The survey, tabled in parliament by Finance Minister Arun Jaitley here on Friday, also expresses concern over pan-India GST being elusive, the divestment programme falling short of target and recast of the distortive subsidy regime, especially for fertilisers, being a work-in-progress.
 
This apart, the survey says, balance sheets of Indian banks remain stressed, becoming a roadblock to the revival of private investments, adding to the anxiety that the country's growth potential of 8-10 percent in the long term.
 
"This year's survey comes against the backdrop of an unusually volatile external environment with significant risks of weaker global activity and non-trivial risks of extreme events," says the survey, authored by Chief Economic Advisor Arvind Subramanian.
 
"Fortifying the Indian economy against possible spill-over is consequently one obvious necessity. Another necessity is recalibration of expectations," it says, and warns that if the world lurches into a crisis or slides further into weakness, India's growth, too, will be severely affected.
 
On the positive side, though, the survey says India will remain the fastest-growing large economy and a refuge of stability with an outpost of opportunity, even as steps taken toward a stable tax tax system, ease of doing business and foreign participation have gone down well globally.
 
It also projects the retail inflation to ease further to 4.5-5 percent in 2016-17.
 
Coming as it does on the eve of the national budget for the next fiscal, and given its import in providing the direction the country's economic policy should take in the coming year, the survey also spells out its policy prescriptions, both broad and specific.
 
Among them, it wants as good an exit policy for industry, notably start-ups, as entry norms as it will remove impediments to investments, job creation and growth. It also wants focus ro return towards agriculture and human needs like health and education to reap the demographic dividend.
 
"While dynamic sectors such as services such as services and manufacturing tend to grab public attention, India cannot afford to neglect its agriculture. After all, nearly 42 percent of Indian households derive bulk of their income from farming."
 
On fiscal deficit, it says the target of 3.9 percent of GDP, which Jaitley set for this fiscal, was achievable. But it also says the coming year will be a challenging one, calling for improving tax compliance, tapping new revenue sources, re-look expenditure and recast subsidies.
 
It wants the income tax net to widen from 5.5 percent of earning individuals to 20 percent.
 
Notwithstanding the volatality and turmoil, the survey says the Indian equity markets have been relatively resiliant compared to peers in other major emerging market economies, and potentially sees the country as the leading investment destination due to its robust economic fundamentals.
 
The survey also feels there is lot to be done so that policy-making is quick with public servants being able to decide without fear or favour. As of now, it says, the legal provisions are seen as draconian, and anti-corruption laws scaring the honest without deterring the corrupt. 
 
"There is a widely held perception both within the civil service and among outsiders who interact with government, that civil servants have in recent times become increasingly reluctant to decide issues quickly and firmly. This has consequences for the economy."
 
On social aspects, the survey makes some worrisome observations and calls for corrective action. It says India still has the second highest number of undernourished people, warranting immediate action. Over 42 percent of its pregnant women are underweight.
 
"Despite recent progress, India generally under-performs on maternal and child-health indicators, it says, adding: "India is already half-way through its demographic dividend and taking the full advantage requires a healthy and educated population."
 
Subramanian also outlines what has been the theme and focus of this year's survey, given that the Indian economy is "richly complicated". He says the focus is to outline policies that will enable Indians to lead a better, richer and healthier life. On the whole, he remains an optimist.
 
"In sum, for now, but not indefinitely, the sweet spot for India is still beckoningly there."
 
Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.

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