SEBI said Moneyworld Research was offering trading tips to investors without obtaining requisite registration to act as an investment adviser
Market regulator Securities and Exchange Board of India (SEBI) has directed Moneyworld Research and Advisory Pvt Ltd to immediately stop providing investment advisory services with regard to the securities market and withdraw all the related advertisements.
SEBI said it prima facie found that Moneyworld Research was offering trading tips to investors without obtaining requisite registration to act as an investment adviser.
Accordingly, through an interim order dated 2nd December, the market regulator has asked Moneyworld Research and its two directors to "cease and desist from acting as investment advisers and cease to solicit or undertake such activities or any other unregistered activity in the securities market, directly or indirectly, in any manner whatsoever".
They are also required "to immediately withdraw and remove all advertisements, representations, literatures, brochures, materials, publications, documents, websites etc in relation to their investment advisory or any unregistered activity in the securities market".
SEBI had closed the application of registration of Moneyworld Research in March 2014, after it found several lapses on part of the entity.
However, it was noted that Moneyworld Research "solicited and induced" investors to deal in securities on the basis of their investment advices as well as guaranteeing returns even after the receipt of communication regarding the closure of their application for registration by SEBI on 27 March 2014.
The order observed that "subjecting the investment advisers to the statutory requirement of registration with SEBI is imperative for the protection of interests of investors and to safeguard the integrity of securities market".
Protection of domestic industry is vital to India’s survival; and this is possible, when strong steps are taken to eliminate avoidable imports from China, in particular
According to the press reports available, the Indian Met Coke Manufacturers Association (IMCOM), the industry is facing a serious threat to its very existence due to the increased and continuing imports of met coke from China.
At present, met coke from China is subject to an import duty of only 2.5%, which is nominal. In the past, suppliers from China had to pay 40% export duty, till December 2012, when it was withdrawn completely, making it attractive for importers to buy from China. Even after paying the 2.5% import duty, imported met coke from China works out to be about $40 (Rs2,400) cheaper than the domestic supply.
The Indian steel industry needs about 35 million tonnes of coke per year, out of which about 20 to 25 million tonnes are met from captive capacities leaving a balance of 10 mt.
The installed capacity of merchant met coke is said to be 10 mtpa but the actual plant utilisation is said to be only 30%-35%, due mostly to cheaper imports from China.
This information was made available, when Gujarat NRE Coke Ltd held a two-day event, called "Global Steel 2014" with the theme "Steeling Recovery". Arun Kumar Jagatramka, Secretary of IMCOM as well as CMD of Gujarat NRE Coke Ltd, while attending the meet, made a pointed reference to the plight and precarious financial implication of the under-utilisation of installed Indian capacity due to this unrestricted imports. He further, pointed out that this is likely to cause tremendous financial strain and is a potential threat to the domestic coke industry, as it has large bank exposure to the tune of over Rs15,000 crore. In fact, he claimed, that many units are in the process of debt restructuring as a result.
Should the government accede to this request, they may also seek IMCOM's assistance that domestic met coke manufacturers should also be persuaded to reduce their margins to be in the market and actively resist the Chinese supplies, provided there are no quality issues.
We may continue to look at the state of affairs of the steel industry, due to this Chinese aggressive selling. In a publicity campaign carried, recently, by the All-India Steel Rerollers Association, they have given detailed methodology used by the Chinese manufacturers in "wrongly classifying the imported reinforcement bars in the Alloy Steel Category to gain benefit of the subsidy and thereby marketing at a discounted price in India". It may be noted that Government of China offers a 13% subsidy on export of Alloy Steel Bars and levies an export tax of 15% on reinforcement bars exported by Chinese manufacturers. This collusion of efforts by vested interest parties is detrimental to steel manufacturing industry in India.
This has been done by circumventing the standards and current imports do not conform to Bureau of Indian Standards (BIS) thereby having an adverse impact on the Indian industry. It is not, therefore, in our interest to continue the import of reinforcement bars from China.
In the case of power equipment, for instance, the Heavy Industry Ministry has taken up the issue with the Finance Ministry and are mostly likely to raise the subject again in the Inter-ministerial meeting on the Budget and request that import duty on power generation equipment should be raised to 10% from current 5% and that the countervailing duty be brought to nil. Such a move, if approved by the government, would directly benefit domestic manufacturers like BHEL, Larsen & Toubro and Bharat Forge. They may go even one step further that those who wish to import power generating equipment need to obtain a "no objection" certificate from domestic manufacturers.
The only good news, at the moment, comes from NMDC, a state owned successfully operating mining enterprise, that it is planning to open new iron ore mines both in Chhattisgarh and Karnataka, next year, and these will enable it to increase the production to 50 million tonnes, from the current level of 30 mt, in the next 5 years.
The other development concerns the acquiring of coking coal assets in Mozambique, according to Narendra Kothari, CMD of NMDC.
Protection of domestic industry is vital to our survival; and this is possible, when strong steps are taken to eliminate avoidable imports from anywhere, particularly from China, where our balance of trade is against us in billions of dollars!
(AK Ramdas has worked with the Engineering Export Promotion Council of the ministry of commerce. He was also associated with various committees of the Council. His international career took him to places like Beirut, Kuwait and Dubai at a time when these were small trading outposts; and later to the US.)
ARCs will come of age only when the legal process turns highly efficient
The 15:85 structure introduced by Reserve Bank of India (RBI) in August, raising asset reconstruction companies’ (ARC) minimum security receipts (SR) subscription to 15%, for acquisition of non-performing assets (NPAs) from banks, restored parity between NPA acquisition cost and the estimated recovery (see here). As expected, barring few tactical acquisitions by the ARCs for consolidation, the NPA acquisition by ARCs has come to a standstill. Why? The erstwhile 5:95 structure provided capital protection often exceeding 100% to the ARCs from the management fee. Hence, the ARCs could bid aggressively for asset acquisition and realise fair returns with back-ended recovery even when the total recovery fell substantially short of the acquisition cost. Though the resultant losses on SRs impacted the banks, the transactions suited them since those resulted in back-ended provisioning by the banks. Under 15:85 structure, the capital protection to ARCs is limited, and hence ARCs have to seek NPAs at a significant discount to the anticipated recovery, entailing upfront provisioning by the banks.
Overall recoveries from NPAs average around 25% of the secured loans outstanding.
Hence, for 20% return over a 5-year horizon under 15:85 structure, the ARCs tend to quote an average of less than 20% of outstanding loans for NPA acquisition. Based on RBI provisioning norms, such deals require provisioning in excess of normal if the asset has been non-performing for up to two years. This tends to deter the banks from selling early NPAs, and limits the transactions only to the loss assets. But is this happening?
According to RBI guidelines, the banks are required to sell the NPAs at a (reserve) price, which should not be generally lower than net asset value (NPV) of estimated net realisation from the account. This is not workable since this does not leave any margin for the ARC, barring exceptions. No wonder the banks have not been able to offer even loss assets at reasonable price to the ARCs under 15:85 structure.
Based on identical acquisition cost and 5-year back-ended recovery profile with 15:85 structure, reasonable returns to ARCs require high recovery ratios i.e. ratio of overall recovery to the acquisition cost. For 20% pre-tax internal rate of return (IRR), with management fee (1.5% pa) linked to SR value, the recovery ratio is 148% (see “A” in the figure). With management fee (1.5% pa) linked to recovery, the recovery ratio is 153% (see “B”). For all-cash acquisition, the recovery ratio is 182% (see “C”). It is evident that the 15:85 structure has resulted in fairly-efficient NPA price discovery, though the price discovery in all-cash acquisition is the most efficient. However, the acquisitions are not materializing owing to the regulatory constraint.
In the SR structure, the maximum recovery and hence the distribution is limited to the outstanding dues. Hence, if the stressed account turns around, a limited upside flows to the SR holders if in the portfolio, the recoveries leave surplus after paying for the expenses, management fee, SR redemption and yield if any. The ARCs are allowed to convert a part or whole of debt into, up to 26% of total equity. Such conversion can potentially provide significant upside to the ARC in case of all-cash acquisition. However, such upside tends to be nullified since the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 requires restoration of the management back to the defaulter after turnaround by the ARC.
Efficient legal process - A must for maximizing value
Owing to legislative loopholes, judicial pronouncements, and very tardy legal process, the DRTs, which adjudicate the Recovery of Debts Due to Banks & Financial Institutions (RDDBFI) Act 1993 and SARFAESI matters, take years to dispose of the cases. The recovery by ARCs, therefore, continues to be highly back-ended to which scenarios A to C relate. However, if the recovery is front-ended, ARCs’ returns increase substantially, and for 20% return, recovery ratio is just 122% (see “D”). Thus, banks can expect significantly higher valuations only with front-ended recovery. This, however, requires highly efficient legal process.
RBI should withdraw the current NPA pricing methodology, which does not leave margin for the ARCs. The banks should sell the NPAs mandatorily to the highest bidder without reckoning the imprecise reserve price. Loss on sale to the ARCs should be allowed to be written off in three years, for the next five years. This will also catalyze all-cash transactions. ARCs should also be allowed 100% equity through conversion and exercise of pledge of shares if any.
ARCs will come of age only when the legal process turns highly efficient. Hence, for speedy clearance of the backlog of about 45,000 cases in DRTs with defaults exceeding 1.45 lakh crore, the government of India should urgently increase the number of current 33 DRTs and appellate tribunals adequately, and introduce e-governance in all the DRTs and tribunals / courts. The system should be backed by adequate judicial manpower and amendments to RDDBFI and SARFAESI acts, including section 15 of SARFAESI act, to allow permanent management change. The recovery suits must be disposed of within the statutory timelines, and any laxity should invite strict penalty. Adjournments sought by the parties should attract prohibitively high fee so that the defaulters’ cannot adopt delay as a strategy.
The UK bankruptcy code is creditor-friendly, where over 50% of the distressed companies are sold as going concerns and over 40% of the companies are liquidated piecemeal. The liquidation process gets concluded in less than 1½ years and delivers to the lenders, recovery of about 75% with recovery cost of just 15% of the asset value. Overall, 75% of the distressed assets undergo bankruptcy and the balance is restructured, reflecting the lenders’ preference for restructuring viable businesses. Speedy resolutions under UK’s bankruptcy code show that the speed of judgments induces discipline among the borrowers. The government of India needs to appreciate merits of speedy adjudication and take immediate corrective action before it is too late.
(Rajendra M Ganatra is Managing Director & CEO of India SME Asset Reconstruction Co Ltd-ISARC. He had over 25 years of experience in project finance, asset reconstruction and financial restructuring. The views expressed in above article are personal)