IBBI comes up with 'red flags' for IPs to detect avoidance transactions
The Insolvency and Bankruptcy Board of India (IBBI) has come up with a document which lists 'red flags' to detect avoidance transactions by corporate debtors.
 
The document provides guidelines to insolvency professionals (IPs) for understanding certain warnings, or red flags, in this regard.
 
It noted that the IPs should gain a thorough understanding of the nature of business of the concerned entity or the corporate debtor. Certain categories of enterprises operating in domains such as trading infrastructure, construction, EPC contracts, real estate, power, steel among others may be more prone to avoidance transactions than others, it said.
 
"Any material changes to the business operations such as acquisition of a new division, sale of a division or a part of the undertaking, new investments in other entities, divestments, transfers of intangible assets of the CD (corporate debtor) such as brands, sale of large part of fixed assets or certain categories of fixed assets etc need to be specifically understood as these may be potential red flags," the IBBI document said.
 
The segment reporting in the annual financial statements of an entity would provide some insights on various business segments of the corporate debtor, it said.
 
Further, it said that entities marked by complex or unusual transaction structures such as sole selling arrangements, sole buying arrangements, pre-buy decisions, single sourcing strategies without competitive sourcing, high level of import-export and other related forex transactions etc may also be considered as an entity level red flag.
 
High level of trading transactions in case of non-trading entities is also a potential red flag, it said.
 
The document prepared for aiding IPs also said that IPs should review if the affairs of the company, financial as well as operations-related matters were handled by a competent team in place.
 
If such teams were inadequate or absent, the same may be a red flag with possibility of avoidance transactions having occurred due to lack of relevant checks and balances.
 
"The Directors being disqualified under Sec 164(2) of the Companies Act, 2013 for non-filing of Annual Financial Statements pertaining to the CD is a red flag," it said among other suggestions.
 
The Insolvency and Bankruptcy Code mandates the resolution professional and the liquidator to determine if the corporate debtor has been subject to avoidance transactions such as preferential transactions, fraudulent transactions, undervalued transactions, and extortionate transactions in the past.
 
In case there have been instances of avoidance transactions, the IBC casts an obligation on the insolvency professional to file an application to the adjudicating authority for appropriate directions.
 
The code enables the IP or liquidator to facilitate the claw-back or disgorgement of value, if any, lost through avoidance transactions and is aligned with the objective of maximisation of value of the assets of the corporate debtor for the relevant stakeholders.
 
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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    Bank of Baroda Follows SBI, Writes Off Rs21,474 Crore in Bad Loans; Recovers only Rs1,057 Crore in Past 8 Years
    Bank of Baroda (BoB) is the second public sector bank to write off bad loans of several thousand crores of rupees, following the foot steps of State Bank of India (SBI), which wrote off Rs1.23 lakh crore and recovered just over 7% in the past eight financial years. Information about BoB’s write-offs, like that of SBI, was obtained by the Bank’s shareholder and Right to Information (RTI) activist Vivek Velankar. 
     
    A document procured by Mr Velankar shows that from 2012 to 2020, BoB technically wrote off 97 accounts with bad debts of Rs100 crore and more. These add up to Rs21,476.89 crore over eight years, while recovery in that same period is just 4.91% or Rs1,056.53 crore. Mr Velankar says, “There were lot of heated arguments in the country few months ago on written off loans of big accounts. That time it was clarified by the union finance that technical write off does not mean waiving off loans and efforts are on for recovery of these written off loans. Since banks, especially public sector banks (PSBs), are not revealing any information about written off loans and recovery, I am asking these questions as a shareholder to bring it in public domain." 
     
    Mr Velankar, who is also president of Sajag Nagrik Manch of Pune says, "As a shareholder, I had asked BoB about loan accounts worth Rs100 and above that were written off during past eight years. I wanted to ask the question during the bank's annual general meeting (AGM) on 31 July 2020. However, did not provide any information. When I asked the question during the AGM, they could not give proper reply. However, I managed to get an assurance from BoB chairman that they will send me this information in writing. After sending two reminders, finally I received information about loans written off by BoB and the pathetic recovery, which just 5%."
     
    However, Mr Velankar says, in this case, Bank of Baroda did not share names of these account-holders citing 'confidentiality'. 
     
    The letter providing information on written off loans and recovery is sent by PK Agarwal, company secretary of BoB. It states, "As the information requested relates to borrower. account specific details, we regret our inability to share the same with you in terms of our responsibility as a banker to maintain data confidentiality of our borrowers." 
     
    "If this indeed is matter of confidentiality, then how SBI gave me entire list with names and why BoB cannot do the same? When common borrower defaults, the same banks publish his name and all details through advertisement in newspapers, why they want to keep names of defaulters hidden. Why the 'confidentiality' clause does not come while publicising names of common borrowers," Mr Velankar asks.
     
    According him, despite the strict laws brought in by the Central government, Bank of Baroda is not willing to follow it or there may be some vested interests, due to which the Bank is not sharing names of the big defaulters.
     
    Bank of Baroda's reply to Mr Velankar shows that during the eight years from FY12-13 to FY19-20, it has 'fresh technically written off’ a massive sum of Rs21,476.89 crore from its books, but manged to recover only 5% or Rs1,056.53 crore during this period. This entire process makes a mockery of the aggressive claims by a string of high-profile government spokesperson and economic advisers that a ‘technical’ write-off does not stop the recovery process. 
     
     
    Technically speaking, when debts are written off, they are removed as assets from the balance sheet because the bank does not expect to recover payment. This practice is frowned upon by experts but is routinely done by banks as part of their tax management clean-up process. The beneficiaries are invariably some of our biggest industrialist defaulters. 
     
    In contrast, when a bad debt is written down, some of the bad debt value remains as an asset because the bank expects to recover it. However, as SBI and then BoB have shown, most of the times, there is no recovery or negligible recovery for the amounts written off. 
     
    During 2019-20, BoB has written off a massive Rs10,457.69 crore while recovering just Rs607.86 crore. A year earlier, it wrote off Rs6,443.8 crore, while recovering a paltry Rs316.58. However, when it comes to recovering written off debt, BoB's record is simply awesome. During FY15-16, the bank recovered just Rs4 lakh while writing off bad debts worth Rs781.81 crore!
     
    As per the data provided by SBI to Mr Velankar, Bhushan Power & Steel Ltd, IRVCL Ltd and Videocon Industries Ltd are its biggest defaulters, and had not repaid a single penny. Alok Industries Ltd is the biggest borrower in this list with a written off loan of Rs8,098.05 crore but has repaid Rs1,703.57 crore to SBI. (Read: SBI Writes Off Rs1.23 Lakh Crore of Bad Debt, Recovers Paltry Rs8,969 Crore in 8 Years!)
     
    Earlier in April, the Reserve Bank of India (RBI) had said that Indian banks have technically written off a staggering amount of Rs68,607 crore due from --top wilful defaulters, including absconding diamantaire Mehul Choksi. RBI had revealed this information in reply to an RTI filed by Saket Gokhale.
     
    RBI said that this amount (Rs68,607 crore) comprises outstanding and the amounts technically or prudentially written off till 30 September 2019.
     
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    COMMENTS

    Umesh Shah

    3 months ago

    Why should any one buy stock of PSU banks when loans are being written off so brazenly ? It is quite obvious that bank officials are hand in glove with defaulters to the detriment of everyone else’s interest. This has been happening at a growing pace year after year and all successive governments have done nothing about it. Imagine what those thousands of crore written off can do for poors of the country !

    Sanjiv.shanbhag

    3 months ago

    Next in line are numerous start ups and stand ups. ...........

    Sanjiv.shanbhag

    3 months ago

    RBI ---- Please announce, for at least last twenty years, total amount written off from loans granted by entire banking sector in India - all banks in public, private, cooperative and others.. ... . ....public money gone down the drains.

    With robust backup support of properly evaluated asset base at reinstatement / replacement valuations, mortgages, hypothecations, liens, sureties and the like, at least 60 to 70 percent of loan amounts could have been recovered, even under depressing circumstances.

    Why no public figures and citizen representatives shout aloud on this !!!

    kalyanam86

    3 months ago

    What a shocking fact! You kindly try to collect such information from pat sector banks like KARUR Vyshali bank, Lakshmi Vila’s bank, ICICI bank etc and publish. All india bank employees association has already released defaulters names.

    REPLY

    sundarbtw

    In Reply to kalyanam86 3 months ago

    Can be collected. But they don't gobble tax payer money as capital year on year...

    Newme

    3 months ago

    Wonder who are the lucky son of a gun Corporates who escaped with 20k crores.

    rajoluramam

    3 months ago

    Finally all the public sector banks write off bad loans. They cannot collect any bad loans as these loans were taken by politically influential people. The most funniest thing is the banks cannot find the addresses of the bad loan people companies. They just disappeared in thin air. They might have started new businesses in other states with all bogus documents. Peculiarity is these banks are turned into profits from losses in the past, while writting off thoudands of crores bad loans. Some body said" my son is failing SSLC always, what to do. His friend suggusted start again from A B C D......... .

    REPLY

    upadhyepr

    In Reply to rajoluramam 3 months ago

    Heading is very misleading lt signifies that 21000 crore is written off in one year whereas recovery is during 8 years it seems just for popularity

    Covid Relief: RBI Extends Scheme for MSME Debt Restructuring
    The Reserve Bank of India (RBI) on Thursday extended a scheme whereby stressed MSME borrowers will become eligible for restructuring their debt, provided their accounts with lenders were classified as 'standard' as on 1 March 2020.
     
    Accordingly, the existing loans to MSMEs classified as 'standard' will be re-structured without a downgrade in the asset classification.
     
    "A restructuring framework for MSMEs that were in default but 'standard' as on 1 January  2020 is already in place," Shaktikanta Das, governor RBI said while delivering the decision of the MPC on monetary policy.
     
    "The scheme has provided relief to a large number of MSMEs. With COVID-19 continuing to disrupt normal functioning and cash flows, the stress in the MSME sector has got accentuated, warranting further support."
     
    According to the RBI governor, this restructuring will have to be implemented by 31 March 2021.
     
    RBI placed eligibility conditions such as the limit of aggregate exposure, including non-fund based facilities, of banks and NBFCs to the borrower should not exceed Rs25 crore as on 1 March 2020.
     
    Besides, the borrowing entity is GST (goods and services tax) registered on the date of implementation of the restructuring. However, this condition will not apply to MSMEs that are exempt from GST registration.
     
    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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    COMMENTS

    yerramr

    3 months ago

    RBI has not made any mention of Atma Nirbhar Bharat Abhiyan package for MSMEs and pared its forbearance with the scheme. its current extension of Restructuring for standard assets between March1, 2020-March 2021 and continuance of asset categorization is a great welcome departure. Hopefully, Kamat Committee will examine the Revival and Restructuring guidelines of RBI issued in March 2016 and bring out appropriate modifications.

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