[aaykarbhavan] Business standard news updates 7-9-2013

Corporate debt restructuring cases to come under scanner

ABHIJIT LELE Mumbai, 6 September The government is set to carry out a performance review of companies that have opted for corporate debt restructuring (CDR). This follows various steps taken to curtail the virtually unchecked flow of CDR cases. There has been concern on the growing number of companies opting for a debt recast. The Reserve Bank of India ( RBI) had implemented strict norms to ensure only genuine units took this route. However, the performances and operations of companies in the CDR cell are often overlooked. Many of these have been under CDR protection for years, without any incentive to move out. Rajiv Takru, secretary, Department of Financial Services, said the first step would be to block the flow of the huge number to companies to the CDR platform. A detailed review of existing cases would be next. " There is a thought to scrutinise each case ( and the respective company's performance) which is under the CDR package," Takru told Business Standard. The details of the timeframe and the mode of review are yet to be worked out. Takru's message comes just two days after Reserve Bank of India Governor Raghuram Rajan sent a strong message to company promoters in his first media conference. Rajan said promoters did not have a divine right to stay in charge regardless of how badly they mismanage an enterprise, nor do they have the right to use the banking system to recapitalise their failed ventures. He has also asked Deputy Governor K C Chakrabarty to take a close look at the restructuring and recovery process and said next steps would be taken shortly. Debt restructuring is a tool to offer aid to borrowers in distress, owing to circumstances beyond the borrower's control such as a general downturn in the economy or a sector. It might also be warranted by legal or other issues that cause delays, particularly in cases of project implementation. As of June, lenders had approved CDR packages for 415 companies, with aggregate debt of ₹ 2,50,279 crore. The iron and steel sector accounted for the most — ₹ 53,543 crore. A year earlier, 309 cases, with aggregate debt of ₹ 1,68,472 crore, were on the CDR platform. Admitting to the lack of a detailed performance check, senior public sector bank executive said hit by the economic slowdown and adverse industry- specific developments, many units were in need of help. But some had remained in this platform for long and continued to enjoy " protection", without making any move to step out. The extraordinary rise in cases referred to and reworked under CDR led to questions whether the trend was due to the general downturn or a gross misuse of the facility by banks and companies. An IDBI bank official said the government's move to carry out an analysis was constructive. " It has to bring lenders on board for the review. This will also send a signal that CDR support is not available for perpetuity." According to an RBI analysis carried out before the strict recast norms were announced, the rise in references to CDR could be partly due to excessive leveraging by a few borrowers during the economic boom. There were deficiencies in project appraisals conducted for cash- flow analyses and determination of the date of completion of projects. When commercial operations were delayed, a host of factors, including uncertainties surrounding aproject, were cited as reasons. Turn to Page 14 > GROWING CDR PILE Approved cases and aggregate debt (in ₹ crore) promoters to improve performance * April to June 2013; Source: CDR Cell data March 2009 184 cases 86,536 March 2010 215 cases March 2011 242 cases 1,10,914 March 2012 292 cases 1,50,515 March 2013 401 cases 2,29,013 June 2013* 415 cases 2,50,279 1,04,299 Takru says will block flow of huge number of firms for CDR, conduct detailed review of cases Click: Article continued from… cases to come under scanner Corporate debt restructuring cases to... But in the case of uncertainties, these had to be accounted for during the appraisal of the project and a proper cushion had to be built to take care of these uncertainties, RBI said. An investment banker said there was room to improve the system to monitor entities after restructuring. Those involved in advising recast ( such as State Bank of India Capital Markets and IDBI Capital) had to be held accountable for the fate of companies, the banker added. The move seems to be aimed at appraising projects, keeping in mind aggressive repayment schedules. RBI had earlier said this led to a short- term focus by borrowers, banks and financial analysts and created the need for successive restructuring. >FROM PAGE 1

 

RBI relaxes norms for non- resident investors

BS REPORTER Mumbai, 6 September In yet another step to attract foreign money, the Reserve Bank of India ( RBI) on Friday allowed non- resident investors to acquire shares of listed Indian companies through stock exchanges under the foreign direct investment ( FDI) scheme. The central bank has said such investment will be allowed only if the non- resident investor has already "acquired and continues to hold control" according to the Securities and Exchange Board of India ( Substantial Acquisition of Shares and Takeover) Regulations. At present, foreign institutional investors ( FIIs), qualified foreign institutions and non- resident Indians ( NRIs) are eligible to acquire shares on stock exchanges in compliance with FEMA regulations, but they are not permitted to acquire shares on bourses under the FDI scheme. According to experts, the new regulation will pave the way for foreigners to be treated on a par with FIIs, as they can buy shares in the company they control ( in line with the Sebi takeover code regulations) through onmarket deals. Earlier, they were allowed to do so only through off- market deals. "This is a very important step and will have a farreaching impact," said Lalit Kumar, Partner at J Sagar Associates. "This will also have tax implications, as stock market transactions don't attract capital gains. Also, the move to allow such acquisitions to be funded through dividend paid to NRIs is significant. The move will help attract capital flows into the Indian market," said Lalit Kumar, Partner at J Sagar Associates. Such transaction should happen through a registered broker, RBI said in a notification. Earlier, a non- resident wasn't permitted to acquire shares on stock exchange. Some experts were of the view that the move was a step towards fuller convertibility of the rupee. " This is a step towards full convertibility of the rupee. Right now, we allow repatriation of capital to a select class of investor and in select assets. Now, this window has been opened to even foreign individuals and NRIs. This makes India a more attractive investment destination," said Sivarama Krishnan, executive director, risk advisory services of consultant firm PwC. The central bank has also laid out certain conditions for the sources of funds for purchase of shares. The amount should be paid by way of inward remittance through normal banking channels, the RBI said. It further said the amount can be paid by way of debit to the NRE/ FCNR account of the person concerned or paid by debit to a non- interestbearing escrow account (in rupees) maintained in India. Turn to Page 14 > LURING FOREIGN FUNDS |NRIs qualify only if they have " acquired and continue to hold control" under Sebi norms |Foreigners could be treated on a par with FIIs as they get on- market- deal window |Deals can only happen broker |Some experts say step a precursor to fuller convertibility of paid by inward remittance through banking channels |Amount can be paid via debit to NRE/ FCNR accounts or via debit to non- interest bearing escrow account Allows them to take FDI route, buy shares directly on stock exchanges Click: Article continued from…RBI relaxes norms RBI relaxes rules for non- resident investors Further, the consideration amount can be paid out of the dividend paid by Indian investee company, in which the said non- resident holds control. Such dividends, however, should have been credited to specially designated non- interest bearing rupee account for acquisition of shares on the floor of stock exchange. RBI has also said that the original and resultant investments have to be in line with the extant FDI policy and FEMA regulations in respect of sectoral cap, entry route, reporting requirement, and documentation. AVAILABLE ON MONDAY

 

Currency- swap deal cap raised to $ 50 bn VRISHTI BENIWAL St Petersburg, 6 September With the rupee around 65 a dollar in recent times, New Delhi on Friday enlarged its agreement with Tokyo to swap the Indian currency with dollars from $ 15 billion to $ 50 billion till December 2015. Japan, too, can exchange the yen for dollars, according to the arrangement. The currency- swap deal, which works in an emergency to tackle the balance of payments ( BoP) problem, was announced by the two countries after bilateral talks, on the sidelines of the Group of 20 Leadership Summit here. The deal is basically aimed at lifting sentiments and allaying any fears that India has insufficient cushion to finance its current account deficit ( CAD) if the situation worsens drastically. "The two governments decided to expand the current bilateral currencyswap arrangement from $ 15 billion to $ 50 billion," a statement from India said here. The arrangement means the Bank of Japan will accept rupees and give dollars to the Reserve Bank of India ( RBI) and, similarly, India's central bank will take yen and send dollars to the Bank of Japan to stabilise the two nations' currencies, in acontingency. The arrangement can be put into operation if foreign exchange reserves deplete or speculators hammer the currencies. "This arrangement is aimed at addressing possible short- term liquidity mismatches and supplementing existing international financial arrangements," RBI said in Mumbai. CRISIL Chief Economist D K Joshi explained the arrangement was like a top- up to one's forex reserves. " This is akind of insurance. It only comes in handy when there is a problem. In case of a worst- case scenario, this will help us tremendously. In today's volatile age, one never knows what is required and when. Yes, these deals cannot insulate us from the global crisis but will surely help in mitigating the problems." Turn to Page 14 > *Change over previous close Sources: BSE, Bloomberg INDIA GETS A JAPANESE HEDGE AGAINST ₹ FALL TRIGGER OF HOPE Markets, rupee stay on recovery pat   lick: Article continued from…Currency- swap deal cap raised to $ 50 bn Currency- swap deal cap raised... Economic Affairs Secretary Arvind Mayaram said he did not think that India would need the dollars from Japan under this agreement. " The problem today is not of reality but of perception. Arrangement of this nature shores up sentiments. Japanese investors also feel greater comfort." India and Japan had inked a bilateral swap agreement for $ 15 billion on December 4, 2012, for three years. This was done after the previous currency- swap deal with a corpus of $ 3 billion between the two nations, signed in 2008, expired. The 2008 agreement was never used despite the last quarter of 2008- 09 making the situation tough due to the global financial crisis. It was for just $ 3 billion. The about- three- time increase in the swap deal means India wants to cushion itself, given the way the rupee has been depreciating in the recent past after talks of tapering the US quantitative easing programme began on May 22. The Indian currency had depreciated 20.21 per cent to 65.25 against a dollar this financial year till September 6. Much of the depreciation, 17.73 per cent, was after May 22. The deal would send a signal to markets that India had a cushion to finance its current account deficit ( CAD), which is targeted to come down to 3.7 per cent of gross domestic product ( GDP) in 2013- 14 from the record 4.8 per cent in the previous year, Joshi said. "This is a kind of on- tap swap window between BOJ and RBI where RBI takes the US dollar into its reserves in exchange for rupees, which BOJ is expected to deploy in gilts. The take- away is the improved sentiment that now RBI has much stronger dollar reserves position to defend rupee," said J Moses Harding, executive director and chief business officer at Lakshmi Vilas Bank. The 2012 deal had a provision that the swap agreement could be activated when an International Monetary Fund ( IMF)- support programme existed or was expected to be established in the near future. Nevertheless, up to 20 per cent of the maximum amount of drawing could be disbursed without an IMFsupport programme. It would be interesting to see if this clause will be present in the new enlarged deal. "The Government of India and the Reserve Bank of India will discuss and finalise the terms of this enhancement with their Japanese counterparts," RBI said in the statement. There were speculations of India going to the IMF for aloan, though policymakers have denied these. RBI Governor Raghuram Rajan and Planning Commission Deputy Chairman Montek Singh Ahluwalia had ruled it out, saying India had enough forex reserves.     Another hit for Voda as HC turns down transfer pricing petition BS REPORTER Mumbai, 6 September British telecom major Vodafone Plc's writ petition challenging the income tax ( I- T) department's jurisdiction over transfer pricing has been dismissed by the high court here. The department had sent a notice to Vodafone's outsourcing unit, based in Pune, in 2008- 09. The notice asked Vodafone to add ₹ 8,500 crore to its taxable income. The department claimed Vodafone India Services, the outsourcing unit, issued shares to a Mauritius- based group company in 200708 at lower prices. The tax authorities wanted an extra ₹ 8,500 crore to be added to the taxable income. After adding interest, the total liability on Vodafone could work out to ₹ 4,200 crore. Transfer pricing is an accounting practice used to conduct transactions between related parties, at an arm's length basis. Vodafone had earlier said the transaction was a share subscription and not a share sale. It also said share subscriptions were not covered by transfer pricing rules, in India and abroad. Hence the department's claim has no basis in law. The high court on Friday rejected the petition on the ground that alternative remedy was available for such issues, such as the tax tribunal or the dispute resolution panel, under income tax laws. This order by the court, Vodafone said, was focused solely on procedure. " The high court's decision today focused solely on procedure and not on the merits of Vodafone's case. The court ruled that the matter should be looked at by the tax tribunal in the first instance, rather than passing directly to the it. The court also extended the stay, on the final assessment order already granted by the court and the company now has almost 12 weeks to review its options," Vodafone Plc said. H P Ranina, senior Supreme Court lawyer, said transfer pricing was a technical issue. " Under Article 226 of the Constitution, one does not go for a writ petition unless there is prima facie error in law. The normal process is to go to the appellate body provided under the statute," he said. Vodafone can challenge the decision in the Supreme Court, asking it to entertain the petition. It can also go to the Income Tax Appellate Tribunal. Vodafone is not the only company to have come under the tax department's net over disagreements on what is the arm's length pricing between two subsidiaries. Another British company in that category is Royal Dutch Shell. The tax authorities claimed Shell India's share sale to its parent was undervalued by the company. Shell claimed this was an incorrect interpretation of the rules, as income tax cannot be levied on capital receipt. For Vodafone, too, the latest case was an additional burden, as it was already mired in ahigh- profile tax controversy relating to retrospective changes in tax laws. The I- T department had claimed as much as ₹ 11,218 crore in capital gains tax for a 2007 deal, where Vodafone bought a 67 per cent stake in Hutch Essar for $ 11.2 billion. The Supreme Court had given a verdict in the company's favour. The government later changed the laws to bring the issue back under its net. The firm is negotiating with the government over this. I- T dept had added ₹ 8,500 cr to telecom major's income from outsourcing unit Companies under transfer pricing tax lens Shell India, HSBC Securities, Havells India, Essar Telecom Infrastructure & Essar Constructions, Standard Chartered Securities TIMELINE Vodafone' s transfer pricing issue >2007- 08: Vodafone India Services issues shares to Mauritius- based group company >2008- 09: I- T department sends a notice on the transfer pricing issue >December 2011: I- T department issues draft transfer pricing order to Vodafone >February 2012: Vodafone challenges the jurisdiction of transfer pricing order in Bombay HC >February 2013: I- T department sends assessment order >February 2013: Vodafone says order has no basis in law as it relates to share subscription and not sale >September 2013: Bombay HC dismisses Vodafone's petition The court rejected the petition on the ground that alternative remedy was available   RBI issues norms to use dollar- rupee swap window BS REPORTER Mumbai, 6 September The Reserve Bank of India (RBI) on Friday said the most banks could swap for fresh foreign currency non- resident bank, or FCNR- B, deposits in aweek would be equal to the deposits raised in equivalent dollar terms in the preceding week. The swap facility is available for fresh FCNR ( B) deposits raised in any permitted currency. However, the swap would be available in dollars alone. The dollarrupee swap facility for fresh FCNR- B deposits would be operated on a daily basis. However, a bank can use this facility only once a week. The swap window would be operational from September 10 to November 30. A bank can sell dollars in multiples of a million to RBI. At the end of the swap period, the bank would have to buy the same amount of dollars. The tenure of the swap would be three years or in line with the tenure of the underlying FCNR- B deposits. The swap would be carried out at a fixed rate of 3.5 per cent a year. In the first leg of the deal, a bank would sell dollars to RBI at the central bank's reference rate or any other rate, as mutually agreed. The settlement of the first leg would take place on a spot basis from the date of the transaction. In the reverse leg, banks have to return rupee funds to RBI, along with the swap premium, to get back the dollars. Underlying deposits would have a lock- in period of at least a year. However, premature withdrawal of these deposits would be permitted after a year. Therefore, swaps with RBI cannot be cancelled before a year. For pre- termination of a swap, the swap cost would be re- fixed at 400 basis points above the contracted rate ( 3.5 per cent) and the prevailing dollar/ rupee swap rate in the market for the residual tenure of the original swap. In the first leg of the deal, a bank would sell dollars to RBI at the central bank's reference rate or any other rate, as may be mutually agreed upon The swap window would be operational from September 10 to November 30   Parliament passes pension Bill BS REPORTER New Delhi, 6 September Despite arch- rivals Left and Trinamool Congress coming together to oppose the long due Pension Fund Regulatory and Development Authority (PFRDA) Bill, 2011, it was cleared by the Rajya Sabha on Friday. The Bill that allows 26 per cent foreign direct investment ( FDI) in the pension sector has been cleared by both the Houses of Parliament and now needs only the Presidential assent. It was passed with 115 members of Parliament ( MPs) voting in favour and 25 against. Introducing the Bill, Finance Minister P Chidambaram said it had been sent to two standing committees and most of their views had been adopted. In a reply, he said since the Bill had originally been mooted by the National Democratic Alliance ( NDA) regime in 2003, he hoped the Bharatiya Janata Party ( BJP) would be proud to take credit for the scheme.

 

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