Regulations
SEBI to soon formulate new code on corporate governance: Sinha
According to the SEBI chief out of the listed companies, more than 1,100 are non-compliant of Clause 40A of the Listing Agreement and over 900 entities do not adhere to Clause 49
 
Market regulator Securities and Exchange Board of India (SEBI) will soon come out with a new code on corporate governance based on consultative paper, says a top official.
 
UK Sinha, chairman of SEBI said, new set of corporate governance guidelines for listed companies are being finalised and are expected to be announced shortly.  
 
“For listed companies, I will like to tell you, we are going to do something over and above what is specially mentioned in the Companies Act, in the interest of corporate governance of large corporates,” he said.
 
Formulation of new set of rules for listed companies will be done in consultation with all stakeholders, Sinha said at a corporate governance summit organised by industry body CII.
 
“We have already placed our document for consultation. Our consultation is almost over. So, we are now going to promulgate our rules very soon.”
 
Sinha said out of the listed companies, more than 1,100 are non-compliant of Clause 40A of the Listing Agreement and over 900 entities do not adhere to Clause 49. Enforcement action against such companies is justified, he added.
 
Clause 40A of the agreement deals with minimum level of public shareholding, while Clause 49 deals with corporate governance, with a focus on the constitution of the board and top management.
 
“My request to all of you (corporates) is to help SEBI to ensure that we reach a level that is much higher and which is in keeping with the best in the world,” he said.
 
The SEBI chief assured that the regulator will not veer off from the spirit of Companies Act in formulating the norms.
 
Sinha said there is a need to align ‘our’ rules with the best in the world as there are many corporates already working outside India in a multi-national environment or have aspirations to do so.
 
“Now, we don’t only have the problems of foreign guidelines and standards, also we have to deal with extra-territoriality of foreign laws, we have to cope with them.”
 
Sinha asked companies to show real commitment towards corporate social responsibility (CSR). “The commitment to CSR has to be built as a culture in the organisation.”
 
A joint CII- Deloitte publication titled 'Global Trends in Corporate Governance - since the financial crisis' was released by Sinha at the summit. The paper gives an overview not only of the national trends but also global trends in corporate governance.
 

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RBI proposal reveals the magnitude of bulging NPAs

The forthcoming regime of corporate debt restructuring –CDR may be more lethal, and borrowers may only shudder at the prospects of their account having to be restructured

The RBI’s just-released discussion paper on  Early Recognition of Financial Distress, Prompt Steps for Resolution and Fair Recovery for Lenders: Framework for Revitalising Distressed Assets in the Economy is, right perceived, a frank admission of the mammoth problem that Indian banking industry is currently sitting on – the spectre of lots of actual and potential non-performing assets (NPAs). Actual NPAs may still be manageable, but the potential NPAs may be a huge problem.

 

The discussion paper was described as a carrot and stick, but on balance, it is more of a stick against the borrower, rather than any carrot. The forthcoming regime of restructuring of corporate debt may be more lethal, and borrowers may only shudder at the prospects of their account having to be restructured.

 

The following are main proposals of the RBI:

 

Special Mention Accounts

The Discussion Paper proposes that in addition to non-performing or substandard accounts, banks will identify a new category of Special Mention Accounts, called SMA. SMA itself is further classed into 3 classes – SMA-NF, SMA-1 and SMA-2. While classification into SMA-NF is based on non-financial information such as sales/operating profits dropping by 40% or more, return of three or more cheques over a period of 30 days, and so on, SMA-1 is based on principal/interest overdues of 31-60 days, and SMA-2 based on principal/interest overdues of 61-90 days.

 

The RBI will set up a Central Repository of Information on Large Credits (CRILC) – an entity to keep track of “large credits”. The RBI’s definition of “large credits” is not really large, as accounts with a fund and non-fund exposure of Rs5 crore, and current accounts with an outstanding balance of Rs1 crore will be covered by the CRILC system. Where an account reaches SMA-2 status, banks and larger NBFCs (systematically important NBFCs) will report the account to CRILC.


Joint Lender’s Forum

The reporting of an account to CRILC by more than one bank/NBFC will also trigger the formation of a Joint Lenders’ Forum, if the total fund-based and non-fund based exposure is of a size of Rs100 crore or above. Banks/NBFC do have the option of forming a JLF even for exposures of less than Rs100 crore. The JLF will work under a JLF agreement, either under the leadership of the consortium leader, or the lender having maximum exposure, and will try to work around ways to ensure that the borrower comes out of the stress.

 

Corrective action plan

The JLF will frame the corrective action plan (CAP). The CAP may include case-specific solution to the problem – rectification, recovery or restructuring. Rectification is the corrective action taken by the borrower, without either a restructuring or recovery action. If the JLF comes to a view that additional equity investment may have to be brought in to keep the account performing, the JLF may prevail upon the borrower to do so.

 

The next alternative is restructuring. This seems to be the replica of the existing CDR mechanism, and one of the downsides of the Discussion Paper is that duplicates the CDR mechanism with the JLF mechanism. Restructuring under the JLF works exactly on the same basis as in case of CDR – with an inter-creditor agreement, debtor-creditor agreement, recovery of sacrifice, non-disposal of assets by the promoters, and a stand-still clause whereby the lenders agree not to take any coercive recovery action during a certain period. Presumably, all lenders will anyway be a part of the JLF – hence, subjecting the restructuring to a decision by the CDR Cell seems to be further burdening the already-burdened CDR framework.

 

Not only has the Discussion Paper retained the overlapping roles of the JLF and the CDR cell, it has mandated an independent evaluation committee, called IEC, to assess the techno-economic viability of CDR proposals involving debts of Rs500 crore and above.

 

If restructuring fails, recovery follows. The JLF may decide upon the best and most effective recovery action. The recovery action is to be decided by a vote of creditors forming 75% in value, or 60% in number.

 

The JLF has a time-bound brief.  It has a maximum time frame of 60 days for finalising and signing off on the corrective action plan.

 

Sting attached to corporate debt restructuring

Corporate debt restructuring may, henceforth, not just be a breather to the company – it may come with coercive covenants such as transfer of promoters’ equity to the lenders, lenders causing issue of shares to themselves to the extent of their sacrifice, and so on. In essence, we may be back to the era of “convertibility clause” where lenders could cause their loans to be converted into equity and thus dilute the stakes of the promoters. The RBI sites the principle of skin-in-the-game to justify the forced sale or dilution of promoters’ equity – how would conversion of a loan or loan sacrifice into equity ensure any skin-in-the-game on the part of the promoter is not coming clear at all. On the contrary, when a loan is converted into equity, the very obligation to repay the loans gets erased.

 

Hang the auditor

The current regulatory mood of hanging the auditor, when things go wrong with a borrower, seems to prevail upon the RBI in the Discussion paper as well. The discussion paper says that banks must strictly adhere to RBI instructions about filing complaints against auditors where auditors seem to have engaged in falsification of accounts, stock statement or end-use statement etc. However, it does not seem to trust the disciplinary mechanism of the ICAI. It says, even while the disciplinary proceedings before ICAI are pending, the names of the CA firms against whom many complaints have been received from different banks may be flagged for information of all banks. Banks should consider this aspect before assigning any work to them. The names may also be shared with other regulators/MCA/CAG for information. In essence, the auditor is penalised by the banking system merely based on complaint, and not based on actual establishment of a case of breach of discipline by the auditor.

 

Strengthening the ARCs and the DRTs

The two of the legal institutions currently available to banks for coercive recovery action are – sale of NPAs to asset reconstruction companies (ARCs), or recovery action through debt recovery tribunals (DRTs). The discussion paper proposes several reforms of the current regulatory framework applicable to ARCs as well as DRTs.

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COMMENTS

nagesh kini

4 years ago

I entirely agree with Mr.Gopalakrishnan.
The RBI remedy is a shade worse than the ailment - it seeks to cut the head to cure a head ache!
The menace of NPAs is essentially man-made - all the wilfull defaulters are big ticket politically powerfull who are granted large limits based on fudged accounts and unattainable projections - they dio not contemplate repaying from day one. The branches know this for certain and it simply goes on and on. The CDR is another massive fraud to provide them with an extension by not classifing them bad by calling the exercise 'evergreening' the first step at back dooor write off.
The only solution is a massive shot gun treatment! Nothing short of it! Or less God help Indian Banking!

REPLY

Peter Armand Menon

In Reply to nagesh kini 4 years ago

Dear Mr. Nagesh Kini & Mr. Gopalakrishnan TV,

Pardon the trite idiom, but "it takes two hands to clap". In this case, the NPA is the result of
A. A Bank Officer who demonstrates (1) Carelessness (2) Due Diligence and
B. A Borrower who (1) Has dishonest intentions at the outset (2) Who is honest and diligent but the victim of difficult or impossible circumstances.

This leads to a vast variety of NPA Contexts and unless an Independent Agency examines the NPA genesis, no correct action can be taken.

The core issue is that when and if necessary, both the careless Bank Officer and the Dishonest Borrower must face some form of legal/punitive action.

Gopalakrishnan T V

In Reply to Peter Armand Menon 4 years ago

I request MR Menon to go through the book on Management of Non Performing Advances published by Indian Institute of bankers in the year 2004. The book based on a well appreciated thesis on a study of NPAs in public Sector banks carries a foreword by Dr Rangarajan,the presnt Chairman, PMEAC. The book carries a statistical model by way of a solution to discipline the banks and borrowers simultaneously without giving any scope for manipulation by the usual ttrade off between the Banks Board and Auditors.The solution if implemented will help the prevention of formation of NPAs through proper sanction, regulation , monitoring and supervision. Mr Menon can have a copy of the book from Indian Institute of Bankers, Mumbai.

Peter Armand Menon

In Reply to Gopalakrishnan T V 4 years ago

Mr. Gopalakrishnan,

My observations are not relating to the loan application and the process that leads to granting of the loan. What you advise will reduce the incidence of NPA's.

My observations relate to after the NPS has been created. What does the system do then ?

Dayananda Kamath k

In Reply to Gopalakrishnan T V 4 years ago

i would like to narrate a small episode of recovery at rural branch in kanataka during 1980s. the branch had a advances in irdp dir schemes the govt sponsored schemes.the manager used to give a small lecture to the borrower before the loan proceeds is disbursed to the borrowers. this a loan and not charity this has to be repaid. it is given out of the deposits from fellow villagers and if it is properly utilised and paid back everybody will benefit and he too can get higher loans. we used to keep track of borrowers through personal contacts as well as their friends. so if one instalment or interest is delayed every staff who evr meets him or his friends will remind him about repayment due. and we had a good recovery in these schemes also. when the due is small you persuade him to pay whatever he he can they will pay. but if you do not follow up and when the amount has become huge he will not be able to pay at one go. and he thinks already so many months they have not bothered and they may not bother for another two three months even if i dont pay. and bank as borrower will be the looser in this process. this personal touch is missing now. that is why npa andgovt too have contributed through its policies.

nagesh kini

In Reply to Peter Armand Menon 4 years ago

Mr. Menon you seem to have overlooked the chronic wilfull defaulters who use the top managements to pressurize the lower echelons to disburse the loan.

Peter Armand Menon

In Reply to nagesh kini 4 years ago

Agreed. That means there is one more possible culprit class to add to the culprit list. Thanks for pointing this out.

Gopalakrishnan T V

4 years ago

The present proposal of RBI to contain the menace of NPAs is expensive, cumbersome, time consuming and will prove to be a remedy worse than the disease. In fact the willful defaulters will welcome this as they will get more time to dodge and enjoy. Further, this remedy does not intend to discipline the banks in any way.NPAs are basically the creation of banks and they entertain such borrowers who have no creditworthiness, competence, character and the required credentials to run some business is a well known fact. Some of the NPAs are
ab -initio NPAs,approved by the Banks Board and they are eventually written off after some lapse of a reasonable period.The RBI should ensure that both the Banks and borrowers adhere to some discipline to have a healthy Credit portfolio and in case they violate and banks' economy's get affected by the poor performance of the borrowers, they deserve to be penalised. A self correcting mechanism under the supervision of RBI without expecting other stake holders of banks and economy is what is required and it should be possible by introducing a levy from banks and borrowers for their lapses in building up a very healthy credit portfolio. The present system of cross subsidisation of bad borrowers by depositors, good borrowers and tax payers should come to an end.Bad borrowers cannot be allowed to have banks money for their luxury and comforts.

REPLY

Dayananda Kamath k

In Reply to Gopalakrishnan T V 4 years ago

restructuring can be done on their own by the banks when they observe tends of npa.a bank entereda consortium at the request of the customer. other bank agreed because they thought their npa will be reduced. but the borrower used the money of both the banks. and he was in real trouble because of riots during indira gandhi murder and he is aumotive spare parts manufacturing company and most of his customers were sikh. when as an auditor when we visited his factory we discussed with the situation and his plans for repayment/ regularisation of the account.he said if his usance bills are allowed to be discounted which are drawn on his other firm which is acutally marketing his products and his entire production is sold through them. he can reduce the iablity gradually. his benefit is he will save on overdue interest of 2% on the loan. and 1% lesser interest on bill discount limit. even if the bill was not to be honoured on due date bank will not loose anything as the overdue bill will be debited back to loan account. but it is honoured you have recovered the amount he offered rs.2lks every month when proposal was put to higher authorities is it violates rbi norms of related concerns. but we emphsiised that since goods are sold diretly to the firm as since beginning it is a genuine transaction. and now our concern is reovery and we will allow it on trial basis. and they approved it. and you may not believe for six months the arrangment went well and rs. 12 lakhs recovered and the regional manager as wll as branch manager changed/transfered and new incubents discontinued it quoting rbi regulations of copanies of same groupe. and repayment stopped and finally bank wrote of a huge amount after 4 years. if you have the will you can recover.

Peter Armand Menon

4 years ago

Let us say that there has been a "System Failure" and all due processes have created a situation where there is an NPA. What then? What about the people who took the money and created an NPA?? Do they go scott free?? because that is what happens today. Might it be worth penalising borrowers who created NPA's with serious financial/criminal stringent punishments? How do we make the borrowers more responsible? After all, the banks are lending on "The borrower's demonstration of confidence in the productive use of the funds".

REPLY

Dayananda Kamath k

In Reply to Peter Armand Menon 4 years ago

today the maphsis is given in lending than recovering because lending will increase your balanse sheet size. and govt through various schemes of debt relief has made the borrowers recalstrient hoping they will get the relief.because in these schemes who pays promptly will be the looser. banks also grant reclessly to such schemes. only when regulator, govt is serious about these issues and book the guilty the system will improve.

Yerram Raju Behara

4 years ago

The suggestion of mr K. Venkataraman, an experienced banker himself deserves immediate consideration by the RBI and the Ministry of Finance who shed tears over the bleeding NPAs in the banking system. Second, there are various types of audits prevalent now: internal audit by the department officials within each institution, vigilance audit; concurrent audit; statutory audit and regular inspections and management audits among the larger banks. Why the CAs who annually audit alone should take the blame when the whole system of audits perpetrate it? How these NPAs originated deserves to be looked at for making corrections instead of making a wild goose chase. In fact banks' due diligence process took a beating with the arm chair and system based lending initiation. Banks would be well advised to go back to the basics to correct the malady instead of aping the western models of credit risk management.

REPLY

Dayananda Kamath k

In Reply to Yerram Raju Behara 4 years ago

when auditors are hounded and punished with active connivance of cvc, rbi, ministry of finance, primeministers office,presidents office who actually holds the equity in nationalied banks in trust on behalf of people of india for bringing out irregularities, and the karnatka high court uphelds and allows the bank to terminate the service for being stickler for rules.what you can expect in this country.

nagesh kini

In Reply to Yerram Raju Behara 4 years ago

Agreed Mr. Behara, the auditors after all conduct a post mortem pure and simple. The rot is more deep rooted - beginning to stink the moment the loan is processed under top level - incl.MOF pressures - without due dligigence on fudged accounts and projections and the same pressures preventing the banks to initiate action on defaults.

SuchindranathAiyerS

4 years ago

Six decades of Social and Capital Engineering has left its inevitable mark on this as every other field of Indian "endeavour". The rentiers of India's Neta-Babu, Quota-Corruption Raj continue to triumph over India's serfs as they loot, plunder and rape with remarkable persistence and consistency! India's inexorable and grotesque Constitution and laws that slice and dice "justice" by community, religion, caste, tribe, gender, station in life, distance from power and station in life may keep it so for all time. I resigned from State Bank of India in 1983 as Officer on Special Duty (Long Range Planning) when the depredations of the UPSC trade Union represented by the Pillai Committee and quotas for recruitment and promotions turned SBI into another Sarkar ki Sampathi PSU Latifundia and the piracy of the Khangress Party fomented by Indira Gandhi with storm troopers led by Janardhan Pujari began to destroy the vitals of the Banking in India.

REPLY

nagesh kini

In Reply to SuchindranathAiyerS 4 years ago

Read "Barons of Indian Banking" how SBI decline started withSanjay Gandhi interference.

venkataraman k

4 years ago

NPAs are the talks of the day. the institutions are carried away by the press reports who indirectly induce the lenders to part with the money. if you analyse the financials of these SPVs of large projects, the stake of the promoters are minimum. for example take telecom sector, look at the revenue generated by these companies. 40 crores mobiles users and just one call/mobile/day. 40x30x12? for the past 10 years.14400 crores, but these companies default. Just like TDS mechanisam if 10 paise is recovered per call there will not be any default. so in the HIGh WAY PROJECTS, the recovery for every toll collection along with service tax, there would not have mbeen any default. so with the powerm generation. consumers are not defaulters and it is only the service provider defaults. if the recovery mechanism is linked to the source of revenue, i think there will not default. As a banker i tried this with the loans given to small vendors and the recovery is made daily, recovery was to the extent of 90%. the default percentage is less than 1%. if the recovery is linked to the source of revenue which has the element of profit with which the repayments are made, then where will,be the default. as most of the business is cash and carry the procedure can be very well implemented. will the authorities have the guts to implement?
venkataraman k

nagesh kini

4 years ago

It is not just merely 'hang the auditor'. It is a fact that NPAs primarily arise out of fudged financial statements and feasibility studies or projections intentionally attested by the auditor, is a party to the fraudand ought to be issued a show cause along with the promoters. ICAI mechanism are long winded.

Peter Armand Menon

4 years ago

NOTE: There is absolutely no action defined with respect to the Directors or the Decision Makers who were responsible for creating the NPA. This is plain bad management. If the chap creating the problem does not get a serious rap across the knuckles or his sweet batooties - there is no question of reforming or remediating his/her actions. This sounds clearly like a Banking Bureaucrats notion of "Taking Action" :))))

Peter Armand Menon

4 years ago

NOTE: There is absolutely no action defined with respect to the Directors or the Decision Makers who were responsible for creating the NPA. This is plain bad management. If the chap creating the problem does not get a serious rap across the knuckles or his sweet batooties - there is no question of reforming or remediating his/her actions. This sounds clearly like a Banking Bureaucrats notion of "Taking Action" :))))

Dayananda Kamath k

4 years ago

it is measure to drive out genuine borowers from bank finance.when dhabol project zoom builders, diamond merchants accounts are managed npa by rbi itself by changing norms.what these additional measures will do except may be giving new products to be developed by it companies.when audit reports are ignored and brought to their notice if rbi is not acting then what is the use of such actions. it is only playing to the galery and nothing else.i have a complaint registered with disciplinaery authority of indian institute of chartered accounts and all the auditors who audit banks for their dreilection in duty. pending since last 8 years.

RBI restricts foreign investment in HDFC Bank

RBI said HDFC Bank has crossed the FDI limit of 49% and foreign investors cannot invest any further in the Bank 

The Reserve Bank of India (RBI) has restricted foreign investors from to investing further in HDFC Bank Ltd (HDFC bank) as the lender has crossed the 49% foreign direct investment (FDI) limit. As of 13th December, foreign shareholding in HDFC Bank stood at 52.18% as against the limit of 49%. Separately, HDFC Bank has filed an application with the Foreign Investment Promotion Board (FIPB) seeking approval for increasing its foreign shareholding limit.
 

In a release, RBI said “foreign entities would not be allowed further to purchases HDFC Bank shares through stock exchanges in India as it crossed its overall foreign shareholding limit of 49%. These entities include foreign institutional investors (FIIs), non-resident Indian (NRI), persons of Indian origin (PIO), foreign direct investment (FDI), asset development reserve (ADR) and global depository receipt (GDR).”
 

In a regulatory filing, HDFC Bank said, “The foreign shareholding in the Bank as on 13 December 2013 was 52.18% of its paid-up capital. This includes investments through the FDI route in ADRs and GDRs of 17.01% which were raised in accordance with the then applicable guidelines, and other foreign holdings made under the FII route of 35.17%. Necessary approval from the shareholders is in place for FII investments up to 49%.”
 

HDFC bank further mentions that, “Since the total foreign shareholding in the bank (FII and FDI) has crossed limit of 49%, the bank has filed an application with FIPB seeking approval for increasing its foreign shareholding limit, in accordance with the now prevailing guidelines."
 

HDFC Bank closed Thursday, 2.16% down at Rs653 on BSE, while Benchmark Sensex closed 151 points down at 20,708.

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