Regulations
SEBI asks Moneyworld to immediately stop providing investment advice

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".

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Unrestricted imports from China will affect Indian industries

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.)

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COMMENTS

Dr Anantha K Ramdas

2 years ago

Thanks for the comments. I think the Finance Ministry, in cooperation with the Commerce Ministry must determine the list of those items that are being imported from China on a large scale, which can easily made in the country. In fact, lot of these goods were made in India before but our small scale and medium scale are shutting down because of these cheap imports.

After listing out these, the Ministry must also direct the banks not to open Letters of credit for such banned items, under a notification from the government.

Unless we stop this wholesale import of items that can be made in India and gainfully employ our own countrymen/women we are heading for serious trouble.

China not only wants to sell expensive high speed trains but also cheap toys, marbles and the like! One day somebusybody will wake up and say, let's import "chinese noodles", as these are their signature products! It is very much like saying "idly, dosa and samosa" are very Indian (of course they are), we will be eating chinese noodles, soon, if something is not done!

Madhusudan I. Mistry

2 years ago

Countries like Australia, does an exercise on continuous basis to allow immigrants either temporary or permanent in view of the shortage of certain category or based on the actual requirement basis. Similar way,we need to scrutinise the necessity of our imports judicially to ascertain the actual need. The plethora of chinese toys and other articles enter our country and draining the much sought after foreign exchange. I fee small unnecessary leaks should be mended on war footing basis. Also our imports are far more xceeding our exports to china and one way is to increase our exports to china is called for but at the same time unnecessary exports need to be strictly curbed. Imports need to be checked at different levels and they should be properly vetted to eradicate unnecessary and useless imports. Or here the bribe & corruption are also making the way to justify the unrequired & undesirable imports? This also need to be looked into seriously.

TIHARwale

2 years ago

Should we pay for inefficiency of our industries and industrialists who enjoy public finance and indulge in asset stripping there by unduly enriching themselves at the expense of honest tax payers. Don't we see our people illegally mined huge iron ore deposits and even exported because or check posts, customs etc are highly compromised. More than 30% of food grains are allowed to perish for want of proper storage. So if our resources are not enough we should allow FDI in power, infrastructure etc

Narendra Doshi

2 years ago

Our own people's voice of industrialists should be duly considered before blind Chinese imports only on economic aspects.
Ramdasji, once again a timely perspective from you, only if it gets acted upon by all the concerned stakeholders.

Asset reconstruction business at crossroads

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?


Regulatory hurdle


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.

 


Way forward


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)

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COMMENTS

Suresh Kumar Sinha

2 years ago

An excellent article by a financial services veteran on a very relevant topic of the Day --Suresh Kumar Sinha,Deputy General Manager(Retd.),Indian Bank.

V M DAHAKE

2 years ago

Author has hit the nail on the head by commenting on the impediments in the legal system which have nullified the good intentions in introducing DRTs and SARFAESI and bringing ARC business to near naught. Legal process could be expedited, simplified and made more efficient by creating adequate infrastructure more so when it would be self financing in this case and boost economy.

KAIALSH SINGHAL

2 years ago

d/s
arc companies makeing sale of assets without taking the future responsibility like provident fund , excise duty on machinery which also auctioned, service tax liability , vat/cst liability -- how buyer will get rif off these problems

Sunil Karunakaran

2 years ago

The sequel to the earlier articles on the subject by the writer is once again superbly analytical. Apart from highlighting the challenges confronting the ARC business post the recent regulatory changes, more importantly remedial measures have been suggested to retrieve the situation.

Somdutto Bose

2 years ago

Read your article. Very compact. However, in my opinion, the world we live in does not allow changes easily. The half baked socialist approach of India has resulted in a confused welfare state which is neither here nor there. Our banking is a closed system with a strong government presence. Therefore while change is constant and eventually many things will change, expecting the restrictions cramming your operation to go soon may be unrealistic. And here, it is not only the pseudo socialism but the genuine problem of corruption. Call me cynical but I feel that we really have not evolved or perhaps we evolved much earlier and are now in the degeneration part of the cycle. It can be said not without reason, that considering the level of corruption, that if the restrictions are unilaterally lifted we may misuse the same as has happened too many times in the past.

As for the legal system, now that is one sad case. You see we have simply continued with what the British left for us. Innovation is no longer there. We have made some minor changes here and there, otherwise its just another monolithic government machine, where there is no real checks and balances or performance yardstick which you have also mentioned. But due to our legacy issues, we are coming with some serious baggage. Yes, we desperately need to increase no. of court including DRT. But that would mean finding more Judges and POs. Where do you get them ? Or if you do, what about quality ? The disparity between small towns and big cities are known and is a major drawback here. The small town guys are the once primarily interested but as seen recently with UP, english is a serious issue with them. So, when the higher courts are english based and lower are vernacular, recruitment is an issue.

I think our country is too complex to have any major changes if realistically contemplated. Rather, it would have to be small changes. Yes, it would be slow and woefully inadequate but there is no other option. RDDB and SARFEASI has happened. Not quite what expected but its there. It would be like that only because of our social structure and strong regionalism which magnifies the problem.

Its for this I sometimes feel that there is some merit in the totalitarian form of government where things happen once it is decided upon. Whereas we have a mockery of democracy. I once asked a Chinese how they dealt with the mutli culture issue which must be there, the country being larger than India. He explained that once there was an emperor Qin (from which the word Chin has come). He decided that there would be one written and spoken language and simply wiped out all opposition. While it is debatable whether he was great or a monster in view of the age old argument of end justifying the means, it is better than what we have here, where I cannot understand what my next door neighbor is saying!!!

REPLY

Rajendra M Ganatra

In Reply to Somdutto Bose 2 years ago

While I applaud the incisive comments from a legal luminary like you, I am distressed at the abysmal and yet deteriorating state of affairs. Luckily solutions are available and if not implemented, the country will soon face not only economic, but also administrative crisis. It is time the government took governance seriously.

Rameshwar Singh

2 years ago

Congratulations for a very detailed analysis by Shri Rajendra Ganatra. However what I feel that at the outset why the loans are given where the proper feasibility is not done and what is the security obtained from the promoter. The promoter and sanctioning authority should be held responsible for the wrong projects. The rules should be so stringent that one has to think twice before doing anything wrong for misusing the public money.
The mention of UK bankruptcy act needs to be taken seriously and Govt of India under the leadership of Shri Narendra Modi should bring some changes to protect the public money from being misused.

us poojary

2 years ago

Well thought out article.My observation is that the latest guidelines by RBI may be to dissuade Banks from outright sale of non performing assets to ARCs as has been observed recently.
Your suggestions are apt for amending certain clauses in the SARFAESI act so that the defaulters do not take for granted the loop holes in the law to their advantage. Strict instructions should be given to the DRTs not to grant stay beyond a point and to deliver quick judgements. Otherwise there are cases in DRTs languishing for more than a decade. To accomplish this suitable measures such as increasing thfe presiding officers in good numbers in DRTS and adding more DRTs should be the immediate agenda for the Central Govt.
Once again congrats for a nice article.Please keep it up.

REPLY

Rajendra M Ganatra

In Reply to us poojary 2 years ago

I agree. Number of DRTs has to be thrice the current number. No. of DRATs has to grow manifold. The government can always create a new stream of quality POs through UPSC. There are feasible solutions whose execution will happen only when the government becomes serious about governance.

Rajendra M Ganatra

In Reply to us poojary 2 years ago

I agree. Number of DRTs has to be thrice the current number. No. of DRATs has to grow manifold. The government can always create a new stream of quality POs through UPSC. There are feasible solutions whose execution will happen only when the government becomes serious about governance.

Ramesh Kubde

2 years ago

This is a well researched article, which gives insight into ARC's business. The banks are yet to realize full impact of RBI's new guidelines. Sooner the banks realize this, there would be a meeting point for banks and ARCs. The importance of expediting legal process is well known to everybody and it is expected that the new Govt. will take immediate steps to strengthen the legal system.

REPLY

Rajendra M Ganatra

In Reply to Ramesh Kubde 2 years ago

Yes the government has to take very urgent steps to impart efficiency in the legal system. It is already very late, and soon it will be too late, otherwise.

G Sampath Kumar

2 years ago

A brilliant article by the author elucidating an insight into the ARCs business after the implementation of 15:85 structure. The article exemplifies the capital protection enjoyed by ARCs, how the legal process has to rationalize and throws up the challenges ahead for a lucrative ARC business. Congratulations to the author.

Yerram Raju Behara

2 years ago

We do not have a Bankruptcy Law. The existing laws are either inefficient or hostile to recovery processes. The legal reforms presently under progress hopefully would adequately address this issue. Second, we have an archaic BIFR (Bureau of Industrial Funeral Rights, as I prefer to call) and we have DRTs not so well equipped to handle cases that knock their doors either speedily or efficiently. This DRT structure also needs to be looked into for adequate support systems and number of judges to handle the cases with speed.
ARCs is an extended arm. These ARCs as author suggests should be allowed the leeway to function on viable and efficient lines but with accountability to deliver results. From one window of NPA shifting to another window does not render the economy any good.

REPLY

Rajendra M Ganatra

In Reply to Yerram Raju Behara 2 years ago

I entirely agree. It is indeed a bad idea to shift NPA from one window to another without fixing the malady of PSU bank mismanagement. In my previous articles in Moneylife, I had mentioned that overseas, ARCs/AMCs were set up as special purpose vehicles to fix systemic meltdown. Only in India the ARCs are set up as perpetual entities.

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