AUTHORIZATION FROM CENTRAL GOVT NECESSARY FOR RBI TO DIRECT
INSOLVENCY PROCESS AGAINST STRESSED ASSETS : SC
In the judgment of the
Supreme Court which quashed the general circular of Reserve Bank of India
issued on February 12, 2018 on insolvency process against stressed assets, much
turned on whether the power to issue such circular flew from Section 35A or Section
35AA of the Banking Regulation Act. While Section 35A talks about general
powers of RBI to issue directions to banking companies, Section 35AA gives
power to the Central Government to authorize RBI to direct any bank to initiate
insolvency process in respect of a default. The petitioners, which comprised
association of companies from the sectors of power, sugar, shipping, etc,
argued that the direction in February 12 circular to initiate insolvency
process if bad debts over Rs. 2000 crores are not resolved within 180 days
could not have been issued without the authorization of the central government.
The RBI sought to sustain the circular by tracing its source to the general
powers under Section 35A, instead of Section 35AA, which is inserted as per
2017 amendment. Since no authorization from Central Government is needed to
exercise powers under Section 35A, the circular was valid, argued the RBI. Though
the judgment agreed that Section 35A could be a source of power for the
impugned circular, it said that after the insertion of Section 35AA in 2017
with a specific condition of authorization from central government, recourse
cannot be made to general powers under Section 35A for issuing directions to take
insolvency action in respect of bad debts. The bench of Justices R F Nariman
and Vineet Saran explained the position as follows : Section 35AA makes it
clear that the Central Government may, by order, authorise the RBI to issue
directions to any banking company or banking companies when it comes to
initiating the insolvency resolution process under the provisions of the
Insolvency Code. The first thing to be noted is that without such
authorisation, the RBI would have no such power. The corollary of this is that
prior to the enactment of Section 35AA, it may have been possible to say that
when it comes to the RBI issuing directions to a banking company to initiate
insolvency resolution process under the Insolvency Code, it could have issued
such directions under Sections 21 and 35A. But after Section 35AA, it may do so
only within the four corners of Section 35AA. The Court further applied the
principle that when a statute prescribes a specific manner for doing a thing,
it should be done only in that specified manner. If a statute confers power to
do a particular act and has laid down the method in which that power has to be
exercised, it necessarily prohibits the doing of the act in any manner other
than that which has been prescribed. Following this principle, therefore, it is
clear that the RBI can only direct banking institutions to move under the
Insolvency Code if two conditions precedent are specified namely,
(i) _that there is a
Central Government authorisation to do so_ and
(ii) _that it should be in
respect of specific defaults._
The Section, therefore, by
necessary implication, prohibits this power from being exercised in any manner
other than the manner set out in Section 35AA. The Court also held that Section
35AB which spoke of powers of RBI to issue directions for resolution of
stressed assets, cannot be a source of power for the circular. That Section,
which opened with the words without prejudice to, was held to be a general
provision, which is to be read along with Section 35A. It was held that Section
35AB dealt with directions for debt resolution outside Insolvency and
Bankruptcy Code(IBC). Therefore, the scheme of Sections 35A, 35AA, and 35AB is
as follows
(a) _When it comes to
issuing directions to initiate the insolvency resolution process under the
Insolvency Code, Section 35AA is the only source of power._
(b) When it comes to
issuing directions in respect of stressed assets, which directions are
directions other than resolving this problem under the Insolvency Code, such
power falls within Section 35A read with Section 35AB., explained the judgment
authored by Justice R F Nariman. Section 35AA can be used only in respect of
specific debts The general application of Circular to all debts above Rs. 2000
crores was challenged by petitioners as suffering from non-application of mind,
as it failed to draw a distinction between various forms of stressed assets
from different industrial sectors. They further contended that the circular
failed to distinguish between genuine and wilful defaulters. The Court held
that reference to IBC under Section 35AA can be made only on a case to case
basis, and that there cannot be a blanket direction to that effect. This was
because Section 35AA used the phrase in respect of a default. 'Default' has
been given the same meaning as in Section 3(12) of IBC What is important to
note is that it is a particular default of a particular debtor that is the
subject matter of Section 35AA, observed the Court. The Press Note dated 05.05.2017
along with the 2017 Ordinance (which introduced Section 35AA , 35AB)
specifically referred to resolution of specific stressed assets which will
empower the RBI to intervene in specific cases of resolution of NPAs. The
Statement of Objects and Reasons for introducing Section 35AA also emphasises
that directions are in respect of a default. Thus, it is clear that directions
that can be issued under Section 35AA can only be in respect of specific
defaults by specific debtors. This is also the understanding of the Central
Government when it issued the notification dated 05.05.2017, which authorised
the RBI to issue such directions only in respect of a default under the Code.
Thus, any directions which are in respect of debtors generally, would be ultra vires
Section 35AA, held the Court. The circular was struck down, and all proceedings
under Section 7 of the IBC taken by financial creditors on the basis of it were
declared as non-est. The manifest legal infirmity in the circular forced the
Court to consciously step away from the judicial hand's off approach vis-à-vis
economic regulation and proceed to quash the circular.
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RBI TO DECIDE ON REQUIRED ACTION AFTER SC ORDER: JAITLEY
Within hours of the
Supreme Court voiding the RBI’s timebound debt resolution circular of last
February, a cautious government said on Tuesday that, on the nullifying of this
directive the central bank would have to decide on what is required to be done
for recovery of banks’ bad loans. RBI will now decide with the present
condition of the market as to what’s to be done in the absence of the February
12 circular, Finance Minister Arun Jaitly said. Finance Ministry officials
earlier declined to comment on the order and its implications for the banks and
their non-performing assets (NPAs or bad loans), the alternate loan resolution
mechanisms, and the fate of those cases which have been referred to the
National Company Law Tribunal (NCLT) by banks under directions from the RBI,
but which have not yet been admitted.
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NSE CLARIFICATION REGARDING TRADING RESTRICTION PERIOD
The Schedule B to the SEBI
(Prohibition of Insider Trading) Regulations, 2015 (PIT Regulations) prescribes
the Minimum Standards for Code of Conduct for Listed Companies to Regulate,
Monitor and Report Trading by Designated Persons.
Clause 4 of the Schedule B
inter-alia stipulates the modalities of opening and closure of trading window
to monitor trading by designated persons wherein it is stated that the trading
window shall be closed when the compliance officer determines that a designated
person or class of designated persons can reasonably be expected to have
possession of unpublished price sensitive information Clause 4 of the Schedule
B of PIT Regulations was amended, effective from April 01, 2019 to include the
following: Trading restriction period can be made applicable from the end of
every quarter till 48 hours after the declaration of financial results. As
discussed with SEBI, this amendment has to be read in conjunction with the
existing provision of Clause 4 of the Schedule B (wherein compliance officer
determines that a designated person or class of designated persons can
reasonably be expected to have possession of unpublished price sensitive
information). In any case, the trading restriction period is required to
commence not later than end of every quarter till 48 hours after the
declaration of financial results.
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IBC TAKES 300 DAYS, BIFR TOOK 5-8 YRS-IBBI DENIES NEWS
PUBLISHED BY BUSINESS STANDARD
The Business Standard
recently published a news item stating that according to Chairman IBBI, the entire
process of debt resolution under Corporate Insolvency Resolution Process (CIRP)
takes nearly 300 days compared to 5-8 year time taken under the process
prescribed by Board for Industrial and Financial Reconstruction (BIFR).
However, in a letter addressed to the Editor, Business Standard with respect to
the said news item dated 1st April, 2019, titled IBC takes 300 days, BIFR took
5-8 yrs; IBBI Chief, the IBBI has denied to have submitted any such affidavit
in the NCLAT in the matter of ongoing CIRP of Essar Steel India Limited as
claimed in the article. The IBBI has clarified that since it had not submitted
any affidavit in the matter, hence, the reference of any data or information or
views of the Counsel in the matter is not the correct factual position of the
IBBI The IBBI has cautioned the Business Standard to first verify facts and
figures before publishing, especially while reporting court matters. Also, IBBI
has advised Business Standard to clarify the correct position prominently in
the next edition of the paper.
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RBI UNLIKELY TO CHALLENGE SC ORDER, MAY REVISE CIRCULAR
The Reserve Bank of India
(RBI) could revise its bankruptcy circular to ensure that an amended version of
the directive complies with norms although the regulator cannot dictate a
blanket order for taking all companies above a threshold to insolvency courts,
lawyers said. This order means that the RBI cannot issue a blanket guideline
without the approval of the government. But the majority part of the February
12 circular is still valid, said Sapan Gupta. The RBI can rework the circular
after consultation with the government. The only thing clear is that the RBI
has to come up with specific guidelines for industries and not a general direction.
The central bank is unlikely to challenge the SC order. We do not want to
challenge an order which is already passed now. Our legal team is studying the
order minutely and we may decide on the future course of action depending on
that. The governor will meet the press after the policy announcement on
Thursday where he may address the issue, said a senior RBI official.
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INSOLVENCY LAW: TWO YEARS AND STILL COUNTING
Marking the first time
that the concept of ‘time value of money’ made its way into India’s legal
discourse, the Insolvency and Bankruptcy Code (IBC) and specifically,
provisions relating to the Corporate Insolvency Resolution Process (CIRP), completed
two years of existence last December; long enough to establish its popularity
and effectiveness as a mechanism to deal with the country’s toxic stressed
assets pile-up while also favourably impacting India’s ease-of-doing-business
ranking. Since its enforcement on December 1, 2016, the law has, as per admission
of the various stakeholders involved, contributed significantly both tangibly —
as a means for cash-starved banks to recover capital stuck in stressed assets
with average recovery far exceeding previous recovery mechanisms, and
intangibly — bringing about a fundamental change in borrower behaviour, where
the fear of losing control of their companies has led promoters to be more
proactive about debt repayments. The real gain from IBC is not from resolutions
in the courts but resolutions due to the fear of IBC, say bankers. IBC has been
quite successful in creating a positive change in behaviour of the corporate
borrowers who were earlier incentivised to default as the courts were very slow
in giving judgments. With its time-bound process, creditor-in-control model,
exclusion of promoter under 29A and market-oriented resolution, we are
observing a scenario where defaulting borrowers are coming upfront to settle
their dues rather than face CIRP under the National Company LawTribunal (NCLT),
bankers said. According to the Reserve Bank of India (RBI), under the IBC
average, recovery stood at 46.1% of the amount filed in the first half of the
last financial year against 41.3% in the previous fiscal. In comparison,
recovery stood at 12.4% of amounts filed for the previous fiscal through other
mechanisms such as the Securitisation and Reconstruction of Financial Assets
and Enforcement of Securities Interest (Sarfaesi) Act, Debt Recovery Tribunals
(DRT) and Lok Adalats. Latest available data with the Insolvency and Bankruptcy
Board of India (IBBI), which essentially speaks about the popularity of IBC,
reveals that nearly 1,500 corporate debtors have been admitted into CIRP by the
end of December 2018. However, as resolutions progress, one development that
has bothered observers is the fact that out of the total number of cases
admitted, 302 cases ended in liquidation while 142 were closed on appeal or
review or settled, 79 ended in approval of resolution plans and 63 were
withdrawn. Compared with 13.48% that ended with a resolution plan, a far higher
51.53% of CIRPs closed thus far have ended in liquidation. But it’s important
to note that 75.16% of CIRPs ending in liquidation were earlier with BIFR and
or defunct. As RBI noted in its banking trends 2017-18 report, Though the number
of liquidation cases so far appears to be comparatively large, a closer
examination suggests that these mainly consist of long-pending issues. As the
intrinsic value of these assets had already eroded, liquidation was a more
efficient strategy than resolution. However, analysts have raised concerns that
in some cases, companies are liquidated even in the presence of optimal
resolution, based on the fact that, of the 302 liquidated cases, there were 48
cases where the resolution value was higher than the liquidation value. In
older cases, it is understandable that the value of assets has already
deteriorated and there is no choice but liquidation, as long as it is the best
recourse to get these assets off banks’ books, bankers said. However, in some
cases such as EPC firms, there is no solution in sight while these assets are
in NCLT, they pointed out.Also, so far there is no solution to keep firms
involved in trading in commodities, rice milling, oil extraction, etc, where
stock and receivables vanish soon after they are admitted under bankruptcy
proceedings, and where the company does not have any big assets and relatively
large outstandings. These are destined for liquidation, they said. According to
bankers, in EPC companies’ cases, even if there are interested bidders, they insist
on continuing with guarantees and are only willing to give 10-15% of cash or
even lesser amounts upfront, while continuing the rest of the non-fund based
facilities. In other cases, bidders are willing to pay less than 20% of the
value, they added. According to Ashish Pyasi, Though the RBI report suggests
that there is better recovery, recovery and resolution are two different
things. One is aimed at only regaining through repayment whereas the other is
meant to resolve the financial distress of the corporate debtor, and in that
process, maximisation of value of assets may happen if there is such
possibility. Agreeing that under the IBC regime, the resolution process has
become speedier and effective, Pyasi said in some of the cases liquidation was
a better option than resolution as the value of assets had depleted/eroded due
to various pending issues such as industry-specific issues, economic slowdown,
pending litigations, delay in recovery, etc. In future, there is a good
possibility we will also see more resolution than liquidation. As IBC is
evolving, the paradigm is also evolving towards resolution, he added. The two
years since the law’s implementation have also revealed several teething
issues, undermining the effectiveness of the Code. Infrastructure has proved
inadequate, skilled manpower has since been overwhelmed and litigations have
led to inordinate delays, which could also hypothetically drive up the
liquidation figures. Reflecting rather poorly on the impact of the law, data
available with the IBBI suggest that of the 898 ongoing processes, 275 cases
have breached the 270-day deadline since admission while another 166 have
crossed 180 days. The 12 large stressed accounts where banks initiated CIRP on
directions from RBI in June 2017, with an outstanding claim of 3.45 lakh crore
against liquidation value of 73,220.23 crore, have been widely tracked as proof
of the process. Of these 12, resolution plans for only three corporate debtors
— Electrosteel Steels, Bhushan Steel, Monnet Ispat and Energy have been
approved. Liquidation orders have been passed in case of Lanco Infratech while
the tribunal recently allowed for start of the resolution process afresh in
Amtek Auto after Liberty House failed to honour its payment commitments. However,
delays in resolution of these 12 accounts can’t be seen as teething issues,
according to Suharsh Sinha. For a nascent law, the natural progression would
have been for smaller cases to be organically tested at NCLT before the large
matters were referred to IBC. But the most complex cases with the most
well-connected and influential promoters became test cases. Given this reality,
the current lot of issues can’t be referred to as teething issues, he said. He
added that given that it is overhauling ‘creaking’ restructuring laws of the
past, IBC has functioned relatively well. Anecdotal evidence also suggests that
delays in resolution owing to excessive litigation, among other factors, have
prompted bankers to go for quick cash-based recoveries, sometimes even at a
haircut compared with the expected recovery in event of a successful resolution
under the IBC. Recently, Central Bank of India put on the block stressed assets
worth 3,322 crore, including its exposure to Essar Steel India with an
outstanding balance of 423.61 crore, Bhushan Power & Steel (1,550.07 crore)
and Alok Industries (1,251.10 crore), to be sold on a full-cash basis; all
three stressed accounts are undergoing CIRP. In fact, among stressed accounts
currently being resolved under IBC, Essar Steel has witnessed the highest
number of lenders wanting a quick exit. Only recently, SBI finally shelved its
plans to sell its 1,543-crore exposure to Essar Steel amid poor response
despite several extensions. Since IBC is a new law, litigations were bound to
happen bankers said. According to them, the good part is that the Supreme Court
is coming out with elaborate judgments explaining the real intent of law. The
understanding of law among the stakeholders, including the Adjudicating
Authorities (AA), is gradually improving. Initially, despite the law being very
clear that the committee of creditors’ (CoC) decision on resolution plan must
not be judged from a commercial angle, in many orders, AAs had been referring
back the decisions of CoC or finding faults with such decisions. The SC has now
underscored, in the Swiss Ribbon case, the CoC’s exclusive authority to decide
on the resolution plan. The second reason may be the not-so well-developed
secondary market for these stressed assets. Gradually, we will have more
players who will purchase and sell assets coming out of insolvency or
liquidation and then we expect the real purpose of IBC will be justified, one
of the bankers said. The SC delivered a landmark judgment in Swiss Ribbons vs
Union of India & Others that upheld the constitutional validity of IBC in
its entirety and cemented supremacy of creditor rights in insolvency firms the
experiment conducted in enacting the Code is proving to be largely successful.
The defaulter’s paradise is lost. In its place, the economy’s rightful position
has been regained. The result is that all the petitions will now be disposed of
in terms of this judgment. There will be no order as to costs, the judgment
from January 25 read. Litigations aside some concur that NCLT itself could be
the weakest link in the process, compromising on the time value of money in
process. According to AZB Partners’ Sinha: NCLTs are currently tasked with
hearing matters relating to the Companies Act, Competition Act and IBC. They
are overburdened, leading to backlogs and delays. The government should
consider having dedicated benches for IBC.
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SARFAESI, RDBA, IBC DO NOT PREVAIL OVER PMLA, TO BE ENFORCED
IN HARMONY: DELHI HC
The Delhi High Court has
held that banking legislation and the Insolvency and Bankruptcy Code, 2016
(IBC) do not prevail over the Prevention of Money Laundering Act, 2002 (PMLA)
when it comes to attachment of properties obtained as proceeds of crime. The
Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (RDBA), The
Securitisation and Reconstruction of Financial Assets and Enforcement of
Securities Interest Act, 2002 (SARFAESI Act) and the IBC should instead be
enforced in harmony with the PMLA, the Court held. The said laws (or similar
other laws, some referred to above) must co-exist, each to be construed and
enforced in harmony, without one being in derogation of the other, with regard
to assets respecting which there is material available to show the same to have
been derived or obtained as a result of criminal activity relating to a
scheduled offence rendering the same proceeds of crime, within the mischief of
PMLA. The judgment was pronounced by a Single Judge Bench of Justice RK Gauba
in a batch of appeals preferred by the Enforcement Directorate (ED) against an
order passed by the PMLA Appellate Tribunal. While adjudicating the issue of
third party rights over a property attached by the ED, the Appellate Tribunal
had held that third parties (in the present case, banks) which have
legitimately created rights such as a charge, lien or other encumbrances, have
a superior claim over such properties. The decision of the PMLA Appellate
Tribunal was based on Section 26-E of SARFAESI Act and Section 31-B of RDBA,
which declared the claim of secured creditors to have priority over certain
other claims as specified by the law. The ED argued that if the right of third
parties such as banks were to be upheld, the PMLA would stand defeated. It was
submitted that such an arrangement would be against the power of the sovereign
authority to take away the property of a money-launderer. Furthermore, a
borrower who has indulged in money-laundering would also derive an illegitimate
pecuniary advantage. The banks, on the other hand, argued that the legislative
intent and command was that the RDBA, SARFAESI Acts and the IBC must prevail
over PMLA. Putting the dispute to rest, the Court held that the objective of
PMLA being distinct from the purpose of RDBA, SARFAESI Act and IBC, the latter
three legislations do not prevail over the former. (Hence), an order of
attachment under PMLA is not illegal only because a secured creditor has a
prior secured interest (charge) in the property, within the meaning of the
expressions used in RDBA and SARFAESI Act. Similarly, mere issuance of an order
of attachment under PMLA does not ipso facto render illegal a prior charge or
encumbrance of a secured creditor, the claim of the latter for release (or
restoration) from PMLA attachment being dependent on its bonafides. Nonetheless,
the PMLA, by virtue of Section 71, has an overriding effect over other existing
laws in matters dealing with money-laundering and proceeds of crime, the Court
added. It further held that the PMLA allows the concerned authority to attach
not only property acquired or obtained, directly or indirectly, from proceeds
of criminal activity, but also any other asset or property of an equivalent
value belonging to the offender. The latter is an alternative attachable
property or deemed tainted property on account of its nexus with the offence or
offender of money-laundering, the Court explained. However, if the offender
objects to the attachment on the ground that the property attached was not
acquired or obtained from criminal activity, the burden of proving facts in
support of such claim is to be discharged by him. Meanwhile, if a bonafide
third-party claimant, such as a bank has cogent evidence to show that it had
acquired interest in the alternative attachable property at a time anterior to
the commission of the criminal activity, the property to the extent of such
interest will not be subjected to confiscation so long as the charge or
encumbrance of such third party subsists. The attachment under PMLA will,
however, be valid or operative subject to the satisfaction of the third party
charge or encumbrance and restricted to such part of the value of the property
that is in excess of the claim of the third party. Such bonafide third-party
claimant shall nonetheless be accountable to the enforcement authorities for
the excess value of the property subjected to PMLA attachment, the Court has
clarified. However, if the order confirming the attachment has attained
finality or the order of confiscation has been passed, or the trial of a case
under Section 4 PMLA has commenced, the claim of the bonafide third-party
claimant will be inquired into and adjudicated upon only by the special court. The
Court thus set aside the order passed by the Appellate Authority and sent the
matters back for further consideration.
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FEWER DEFAULT CASES MAY HEAD TO NCLT
The squashing of RBI’s
February 12 circular is likely to see fewer default cases being referred to the
National Company Law Tribunal (NCLT), central bank out with revised prudential norms and banks
getting a major relief in terms of provisioning for bad assets. However, most
experts said they would wait for the detailed judgement and response of RBI
before deducing the impact of the SC’s order on the banks and borrowers. Automatically,
the number of cases going to the NCLT under Insolvency and Bankruptcy Code
(IBC) law will get reduced with this judgement. The RBI governor had said he
will not dilute the circular. Now, he will have to go by the SC ruling, said a
banking analyst with a leading management consultancy, who did not want to be
named as he is working with several banks. A former banker, said the SC had used
the word unconstitutional to establish the constitutional rights of the
borrowers that had been breached by central bank’s directives issued last year.
What are reasons the SC has found for treating the RBI circular as
unconstitutional. Unconstitutional is a strong word It must be saying that it
is going against the established rights of the borrowers, he said. The
ex-banker expects the the position before the RBI circular to be restored
following the SC order. If the SC court order is followed then till the account
become out-of-order after 90 days, no action can be taken for declaring it as
NPA. As there will now be no automatic route to refer the case to NCLT, banks
will have to follow a certain basic rule to refer a case to NCLT, the ex-banker
added.
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SC ORDER ON RBI CIRCULAR DOESN'T TAKE AWAY OUR RIGHT TO GO TO
NCLTS: BANKS
Bankers have opined that
the Supreme Court quashing the February 12 circular on NPA recognition does not
dilute credit discipline and that they will continue the resolution process
under the bankruptcy code which was upheld by the apex court earlier. Rajnish
Kumar, the chairman of the nation's largest lender State Bank of India Rajnish
Kumar told that banks have already put a resolution framework under bank-led
resolution approach which is already functioning. The Supreme Court has upheld
the Constitutional validity of the Insolvency and Bankruptcy Code (IBC) in
their previous judgement. So, the intent to bring discipline into the lending
and borrowing market is not getting diluted in any manner with this judgement,
he said. Kumar said SBI's approach to the resolution of stressed assets is
proactive-recognizing assets early and take corrective action, and there will
be no change in that. The discipline which has come into the market around
repayment. I don't think that is going to be diluted in any manner with this
judegment, Kumar stressed. Echoing similar view, a senior official of a
state-run bank said the apex court striking down the circular does not take
away bankers' right go to NCLT. Banks will continue with their resolution
process and take defaulting companies to NCLTs, he said.Lenders had made a
representation to RBI for relaxation in some of the norms in February 12
circular including one day-default norms but without any success.
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LENDERS STILL HAVE THE POWER TO TAKE CORPORATES TO NCLT
Indian banks would still
have the power to recover loans by using the bankruptcy code but they would
have to demonstrate their seriousness about protecting depositors’ money. There
is nothing preventing the banks from taking corporates to NCLT, said a bank
executive after the apex court struck down the February 12, 2018, circular.
This momentum is set and banks will do everything to protect the depositors’
money. For exposures exceeding Rs 2,000 crore, corporates were given six months
within which they had to either resolve stressed assets or face the Insolvency
and Bankruptcy Code. At the first stage, the RBI referred 12 accounts for
resolution under the Insolvency Code and these constituted around 25% of the
NPAs in the system and the cumulative fund-based and non-fund-based outstanding
amounted to Rs 1,97,769 crore. In terms of impact on asset quality and
profitability for banks, Icra in its earlier reports mentioned that the total
estimated debt affected because of the circular was Rs 3.8 lakh crore across 70
large borrowers. Of this, Rs 2 lakh crore was across 34 borrowers in the power
sector. Further, 92 per cent of this debt was classified as non-performing by
banks as on March 31, 2018. Banks have made provisions of over 25-40 per cent
on these accounts and hence should not impact the reported asset quality of
profitability numbers. However, the resolution process, which was expected to
be expedited, may get delayed, said Anil Gupta.
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SUPREME COURT RULING ON RBI CIRCULAR TO GIVE TYCOONS REPRIEVE
ON $55 BILLION OF BAD DEBT
Indian tycoons whose
companies have fallen behind on loan repayments can breathe a bit easier now. The
nation’s top court on Tuesday struck down a Reserve Bank of India directive
that tightened rules for recasting delinquent accounts and mandated when they
must be moved to bankruptcy tribunals. In doing this, the court restored to
lenders some discretion in deciding how they want to resolve a loan once it’s in
default. Business tycoons in industries from power to aviation and real estate
will now have more room to negotiate loan repayments with lenders even after
payments become overdue. High on the list are power companies, which have
argued that they shouldn’t be penalized since issues such as delayed government
payments have made it hard for them to service debt. The ruling will bring some
relief to the founders of firms including Jet Airways India Ltd. and power
generators GMR Chhattisgarh Energy Ltd. and Jaiprakash Power Ventures Ltd.,
whose companies were at risk of being pulled into bankruptcy proceedings. Some
sectors genuinely have been sick for reasons beyond their control, said Rohit
Wahi. Everything can’t go into bankruptcy court and get easily resolved. As
long as bankers are negotiating and are confident that something can come out,
the flexibility to negotiate further is something positive.
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NCLT CASES LIKELY TO BE RE-LOOKED AT AFTER SC ORDER ON RBI
CIRCULAR
The Supreme Court decision
declaring RBI's February 12 circular ultra vires may push for a relook to some
of the cases referred to the National Company Law Tribunal (NCLT), said a
report on Tuesday. Since the circular has been suppressed, it is likely that
some cases referred to NCLT may be looked at afresh. For the corporate-heavy
PSU and private banks, this seems to be a near-term positive because of the
possibility of delaying incremental stressed asset recognition, the Centrum
report said. Post the RBI circular, banks have referred close to eight power
projects to NCLT. Most of these cases are yet to be admitted under IBC. The
circular imposed a one-day default rule. Banks had to treat a company as a
defaulter even if it missed the repayment schedule by a day. This would not
impact the NPA recognition rule. The impact of this circular was to identify
stressed assets in the banking system immediately rather than wait for an
account to turn NPA over 90 days past default. As soon as there was a default in
the borrowera¿s account with any bank, all banks singly or jointly had to
initiate steps to cure the default. Failing implementation of such a resolution
plan, such accounts were to be directed to the National Company Law Tribunal
(NCLT) for insolvency proceedings within 15 days.
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SC ORDER ON RBI CIRCULAR NEGATIVE FOR BANKS, MAY DEFER DEBT
RESOLUTION
Ratings agencies and
industry analysts have said the Supreme Court striking down the February 12 RBI
circular on loan defaults as credit negative for banks as the debt resolution
process may have to be started afresh. The order, handed out by a bench headed
by justice RF Nariman said, we declare the RBI circular ultra vires. The
details of the order are awaited. International rating agency Moody's in a note
Tuesday said voiding of the circular is credit negative for banks. The circular
had significantly tightened stressed loan recognition and resolution for large
borrowers. But, with the voiding, this may now have to be watered down, it
said. Moody's also said the resolution of stressed loans impacted by the circular
will be further delayed as the process may have to be started afresh. Icra in a
note said the circular removed discretion with banks on resolution on stressed
accounts by requiring them to compulsorily implement a resolution plan in a
time-bound manner or refer the affected borrowers under Bankruptcy Code for
resolution. Despite quashing of the circular, banks will continue to have an
option to refer such defaulting borrower under IBC, in case the resolution
plans fail, Icra said. The agency had estimated total debt impacted due to the
February 12 circular to be around Rs 3.8 trillion across 70 large borrowers of
which Rs 2 trillion across 34 borrowers were in the power sector. It had said
92 percent of this debt have been classified as non-performing by banks as of
March 2018 and also made provisions of over 25-40 percent on these accounts. Hence
the quashing of circular should not impact the reported asset quality of
profitability numbers, however, the resolution process, which was expected to
be expedited, may get delayed, Icra said. Audit firm EY India said the SC
ruling will raise significant questions around the timely reporting and
resolution under IBC --the primary reason behind IBC law. There are a host of
willful defaults and frauds still under the IBC, and more clarity would be
required on how the same would be dealt with by resolution
professionals/committee of creditors, EY said.
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LEGAL FRATERNITY DIVIDED OVER APEX COURT ORDER ON NPA CIRCULAR
Legal experts have given
mixed views on the Supreme Court judgement quashing the Reserve Bank's circular
on bad loan recognition saying while the ruling is a great setback for banks it
also offers relief to the troubled companies. While it is too early to say but
if banks voluntarily still invoke the IBC, practical impact will be minimal,
Cyril Shroff, said. The Supreme Court order holding the circular as unconstitutional
is a great set back in respect of the actions initiated by banks before NCLTs
against the defaulting companies which were covered under the impugned
circular, said Rajesh Narain Gupta. A legal expert who specialises in
bankruptcy laws opined that the RBI circular was considered a bit too stern by
many in the industry, especially the 180 days deadline. The 180 days deadline
and default by a day causing mandatory bankruptcy action irrespective of
business and sector specific issues was probably considered severe, Babu
Sivaprakasam, said. A blanket direction for mandatory initiation of insolvency
proceedings and simultaneous withdrawal of other resolution and restructuring
options has probably left banks with few other options other than bankruptcy
resolution against a defaulting debtor, Sivaprakasam told PTI. Gupta also noted
that large resources and costs have been put in by banks as well as borrowers
in various matters pending before NCLTs and the NCLAT. The time already spent
by the industry including in the courts has been unprecedented. The ruling
shows that how a questionable administrative decision can be immensely
counterproductive. This is certainly a setback to IBC initiatives at least for
the short-term, Gupta added. On the other hand, Ashish Pyasi, opined that it
will be a relief for some companies where the CDR was at a advanced stage but
due to the RBI circular they couldn't take that forward and instead taken to
NCLT. With the RBI circular being struck down, the earlier circulars of RBI
would stand revived which were changed by the impugned circular and now those
companies can request the lenders to reconsider their restructuring plans, he
added.
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CAIT HAILS SC MOVE TO QUASH RBI CIRCULAR ON DEBT RESOLUTION
The Confederation of All
India Traders (CAIT) on Tuesday said they appreciated the Supreme Court’s move
to quash the RBI circular dated February 12 said that it is necessary to
monitor large debts given by banks In a statement, Praveen Khandelwal, said:
Even in trading activity, the owners keep a close watch on big debtors. When hundreds
of small debtors may fail it may not affect the company, but one big debtor can
shake the foundation of the company. There has to be some mechanism to ensure
that big companies pay to their creditors as well as the bankers. We cannot let
them go scot free. We do appreciate the sentiments of the Honourable Supreme
Court, he added. Stating that CAIT will need to study the details of the
judgment, he added that while monitoring of big debts by banks is important,
monitoring of big companies towards repayment of the creditors is equally
important.
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POWER COMPANIES NEED AT LEAST 6-12 MONTHS FOR SECTORAL REFORMS
TO TAKE EFFECT
The power sector that has
been grappling with huge debts scored a victory against the banking regulator
in the country's highest court of law on April 2. While the judgement has
bought them more time to deal with sticky sectoral issues it will take at least
six months to a year for the reforms to kick in and take effect. In a shocking
judgement, the Supreme Court has struck down the central bank's directions on
the resolution of bad loans under the Insolvency and Bankruptcy Code (IBC),
saying it is beyond the banking regulator's authority to issue such a mandate. The
judgement buys time for all power companies because recently the government has
started internationalising the recommendations of the high-level committee. It
gives them time for sectoral reforms to take place without the axe of IBC
hanging over them, said Vishrov Mukerjee, that represented the power companies
in the case. These reforms, Mukerjee said, would take at least six months to a
year to take effect. There are upcoming elections and the code of conduct is in
place. Also, the health of distribution companies is not going to miraculously
revive in the short term. It would take at least six months to a year for these
benefits to slowly start kicking in, he added. The parliamentary committee
analysed 34 stressed power projects with total debt exposure of over Rs 1.74
lakh crore to the Indian banking system. Of this, total non-performing loans
amounted to Rs 34,200 crore. It is common knowledge that huge resources and
costs have been put in by the banks as well as the borrowers in various matters
pending before NCLT and NCLAT. The time already spent by the industry including
the courts has been unprecedented. This is certainly a set back to IBC
initiatives at least for a short term, said Rajesh Narain Gupta. Banks, as
financial creditors, still have the discretion to invoke insolvency under IBC
However, now they will need to decide on a case-to-case basis to initiate
action, without the deadlines set by the RBI.
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SC ORDER ON RBI CIRCULAR SAVES RELIANCE NAVAL, L&T
SHIPBUILDING FROM IBC CLUTCHES
The Supreme Court order striking
down the February 2018 Reserve Bank of India (RBI) circular will help
beleaguered shipbuilders such as the Anil Ambani-led Reliance Naval and
Engineering Ltd and L&T Shipbuilding Ltd to resolve debt without being
dragged to insolvency courts under the country’s bankruptcy law. Such
categorisation of companies by RBI with debts of more or less than ₹2,000
crore is completely arbitrary and without any basis and is a class legislation
as it seeks to create a class amongst a class, the Shipyards Association of
India (SAI), a 20-member lobby group, had argued. The SAI argued that Reliance
Naval and L&T Shipbuilding were under serious financial stress and on the
brink of closure and the RBI circular, rather than aiding the industry is
taking it to an eventual closure. The RBI circular, according to SAI, is also
draconian as it does not require a long-standing debt to be overdue for such
harsh actions to be taken but a single instance of ‘a default even for a day
with any one of the lenders’ is enough. Besides, by mandating approval of 100
per cent of the lenders, the RBI has created a further impediment to the
implementation of resolution plan (outside the scope of IBC) within an already
unrealistic timeline of 180 days. In contrast, a resolution plan under IBC has
to be approved by only 66 per cent of the committee of creditors. With the RBI
circular not providing any limitation on the reasons for refusal that can be
given by a lender, any lender with minimum exposure can derail the entire process
since the consent of all lenders is required under the RBI circular, the
association contended. Hence, the 180-day timeline is impractical devoid of
reality and arbitrary due to multiple layers of decision making along with the
requirement for approval of all lenders to the resolution plan. It is a chance
for stressed shipyards to get revived without going through the requirement of
100 per cent approval of lenders for resolution plans and the possibility of
finding a resolution outside IBC, said Vijay Kumar. Lenders of the respective
companies before this court, according to the association, have not come
forward objecting to and opposing the petition. This itself shows that they are
still attempting to resolve the debt outside IBC. But, the RBI circular has
coerced the lenders to approach NCLT, failing which, appropriate action would
be taken by RBI, it said.
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SC ORDERS EMAAR MGF LAND TO REFUND HOMEBUYER'S MONEY WITHIN
FOUR WEEKS
The Supreme Court (SC) on
March 29 ordered Emaar MGF Land to refund a home buyer's money within a period
of four weeks from March 29 with 10.7% interest The bench of Judge said that
the matter is being disposed, as it is clear that the appellant is an allottee
in the real estate project of Emaar MGF Land. As an allottee, it has either a
right to get possession of the flat or to claim refund. It has been argued
before us that the appellant has been offered possession but has declined. It
is clear that the appellant is entitled to refund of monies that it has paid.
This refund will be made by Emaar, the bench said. Meanwhile, NCLAT had allowed
home buyers to file interlocutory application through their representatives
while adjourned the matter saying that let the Supreme Court first decide the
issue. Now, NCLAT will hear the case on April 4, 2019.
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PSBS CAN FIND RESOLUTION UNDER PROJECT SASHAKT NOW
Public Sector Banks (PSBs)
may now use provisions of Project Sashakt to deal with economically unviable
projects said a senior government official, adding that lenders could still
initiate corporate insolvency proceedings if there is no other mode of
resolution within 180 days. The concern that erring promoters will get off the
hook is unfounded and banks can still find resolution and take necessary
action, he said. Under the aegis of Project Sashakt, 35 banks have signed an
inter-creditor agreement (ICA), which provides the framework to resolve assets
through a bank-led resolution approach (BLRA). Under the agreement, if the lead
bank is unable to implement a resolution plan in 180 days, the assets will then
move to the National Company Law Tribunal (NCLT) process.
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INDIAN FIRMS RAISE RS 6,482 CR THROUGH 14 IPOS IN FIRST
QUARTER OF 2019: EY
Indian companies raised
$940 million (about Rs 6,482.48 crore) through 14 initial public offers in the
first quarter of 2019 and the IPO activity is expected to gather more steam
post elections, an EY report said Tuesday. The report also noted that during
January-March 2019, Indian stock exchanges (BSE and NSE, including SMEs) ranked
fourth globally in terms of number of IPOs. In the latest quarter, the main
markets (BSE and NSE) witnessed five IPOs, while SME market saw nine IPOs
spread across different sectors, such as transportation, infrastructure, IT
consultancy, etc. Investors and other stakeholders are waiting for the outcome
of national elections till then, IPO activities are expected to remain at low
levels, Sandip Khetan, said. Khetan further noted that if a stable government
is formed, IPO activities are likely to gather momentum and there could be
flood of IPOs and fundraising activities in the second half of 2019. Around 70
companies have received clearance from markets regulator Sebi, but are waiting
for election results. About 19 firms are awaiting clearance from the regulator,
which indicates a strong pipeline of IPOs, the report said. Going forward, the
factors that could affect markets and IPO activities in 2019 include RBI's
measures to ease tight liquidity, increased election-related government
spending and consequent rise in corporate earnings for the coming quarters. In
global context, Europe Middle East, India and Africa (EMEIA) region's two
largest IPOs in the quarter came from NSE, accounting for 94 per cent of
India's IPO proceeds and 66 per cent of EMEIA's proceeds for the reported
quarter.
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SEBI SLAPS RS 50 LAKH PENALTY ON THIS BROKER FOR FRAUDULENT
TRADE
Markets regulator SEBI had
slapped a fine on a broker for resorting to fraudulent trade practices. Matri
Mangal Mantri Trading has been fined with a Rs 50 lakh penalty for resorting to
fraudulent trade practices in illiquid stock options on BSE. Investigation
revealed that during the Investigation Period, a total of 2,91,643 trades
comprising 81.38% of all the trades executed in the BSE Stock Options Segment
were trades which involved reversal of buy and sell positions by the clients
and counterparties in a contract. Matri Mangal Trading Private Limited
(hereinafter be referred to as, the Noticee) was one such client whose reversal
trades involved squaring off open positions with a significant difference
without any basis for such change in the contract price, SEBI said. SEBI came
to know about the discrepancies after it noted 81.38 per cent of all the trades
executed in stock options of the exchange were non-genuine. The above mentioned
broker was among the entities that executed manipulative reversal trades,
creating a misleading impression of trading, said an order dated March 29. The
firm violated PFUTP (Prohibition of Fraudulent and Unfair Trade Practices)
regulations, the order said. In a separate order, Sebi imposed a total fine of
Rs 44 lakh on nine entities for manipulating share price of Shree Hanuman Sugar
& Industries by placing orders higher than the last traded price (LTP).
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APPOINTMENT CIRCULAR
In exercise of powers conferred
by Section 4(4) read with Section 4(1) of the Securities and Exchange Board of India
Act, 1992 (15 of 1992), the Central Government hereby nominates Shri K.V.R. Murty,
Joint Secretary, Ministry of Corporate Affairs as Member of the Securities and Exchange
Board of India (SEBI) vice Shri Injeti Srinivas, Secretary, Ministry of
Corporate Affairs with immediate effect and until further orders
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STARTUP FUNDING FALLS 25%, NUMBER OF DEALS ALSO DOWN 17% IN Q1
2019; BINNY BANSAL TOP ANGEL INVESTOR
The first quarter of the
calendar year (CY) 2019 has seen a drop in startup investments vis-a-vis Q4 CY
2018. The January-March 2019 quarter saw total deal value dropping down to $2.4
billion from $3.2 billion in the preceding quarter — a fall of 25 per cent. The
number of deals or rounds has also seen a descend by around 17 per cent from
224 rounds in October-December CY 2018 to 187 rounds in the last quarter,
showed data sourced from startup data platform Tracxn. However, compared to the
same period (January-March 2018) wherein $1.8 billion was invested the deal
volume has increased. The number of deals is low from 298 in Q1 CY 2018. Late-stage
deals show that a handful of companies are getting a larger share of the money
while at early-stage there is not much left even though the number of deals is
high. At mid-stage investors aren’t investing as they see investing for even a
small stake at late stage a sure shot bet that they can sell it at a higher
price ahead rather than taking a risk at the mid-stage, Rohit Chokhani, told. Among
the major rounds that 2019 saw in its first three months include Delhivery’s
$413 million round led by Softbank, Ola’s $300 million from Hyundai and Kia,
$150 million raised by Bigbasket from Mirae Asset and Alibaba, $100 million
raised by OYO from Didi Chuxing, CarDekho’s $110 million from Sequoia, Capital
G etc. The early-stage (seed-series A) funding has reduced from near $547
million invested in 166 rounds in Q4 FY 2018 to $326 million in 134 rounds in
Q1 2019. The arrest has also cascaded to mid-stage (series B and C) environment
where $587 million was invested across 33 deals in Q1 this year versus near
$738 million was poured in 44 deals Q4 last year. Similarly, in late-stage
(series D and beyond) funding that saw maximum capital infusion, the amount of
capital has declined to $1.5 billion in the last quarter from near $2 billion
in Q4 CY 2018. The only positive there was a slight increase in the number of
deals from 14 to 19. However, with respect to $295 million and $806 million
invested in the early and late stages respectively in Q1 CY 2018, the funding
in the last quarter across both stages has increased. But mid-stage continued
to be under stress as funding has been on a downward slope in the last two
quarters compared to $778 million invested in Q1 CY 2018.
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PROMPT CORRECTIVE ACTION-HIT DENA BANK CUSTOMERS TO GET LOANS
POST MERGER
The merger of Dena Bank
with Bank of Baroda will restart fresh loans to former’s clients. About a year
ago, RBI had put Dena Bank under Prompt Corrective Action, meaning that the
banks had to freeze all its lending till it brings its bad loans under control.
This had stopped new disbursement of loans to its clients. However, with the
merger of Dena Bank and Vijaya Bank with Bank of Baroda, overall NPA is under control
and so clients of Dena Bank will now be able to get fresh loans, said KV
Tulshibagwale, GM of Ahmedabad Zone of Bank of Baroda. GCCI president Jaimin
Vasa said that this will improve the confidence of all the stake holders.
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NEW INVESTMENTS IN INDIA REMAIN IN A SLUMP IN JANUARY-MARCH
2019
Economic activity remains
subdued in India, with overall investment in new projects on the decline and
private sector projects stalling, fresh data from the project-tracking database
of the Centre for Monitoring Indian Economy (CMIE) shows. Indian companies,
both public and private sector, announced projects worth ₹1.99
trillion in the quarter ending March 2019, 16% lower than what was announced in
the quarter ending December 2018, and 46% lower than the year-ago period. These
are provisional figures that come with a lag and may even be revised upwards by
CMIE. However, they still paint a gloomy picture of the Indian economy. As in
the December 2018 quarter, the fall in overall capex announcements was driven
by a slump in new project announcements by the private sector. New private
sector projects fell 25% in the just-ended March quarter compared with the
previous quarter, and 34% compared with the same period last year. However, investment
in new public sector projects increased in the March quarter, rising by 5.25%
compared with the December 2018 quarter. This could be a cyclical effect with
governments looking to complete projects by the end of the fiscal year. Over
the last two years, there has been a similar spike in public sector project
investments in the final fiscal quarter. This quarter’s public sector
investment ( ₹738.4 billion) in the March quarter is significantly lower
than last year’s value (a year-on-year decline of 62%), even after the increase
over the December quarter. The decline in construction and real estate
investment is especially stark, falling by nearly 80% compared to the December
quarter and the same period last year. Manufacturing has also fallen by 54%
compared to the December quarter and 46% over the previous year. The only
positives are investments in electricity and services sectors, which have shown
a large increase, almost doubling from the December quarter. The prolonged
effects of non-performing assets (NPAs), power sector distress, and
election-induced policy uncertainty could be curtailing investment activity in
the Indian economy. The CMIE data reveals that private sector projects are
being stalled at near-unprecedented rates in India. Stalling rate is calculated
as a percentage of the total projects under implementation so that the values
are comparable across time. In the March quarter, the stalling rate of the
private sector stood at a record high of 25.4%. The overall stalling rate in
both public and private sector projects is lower at 11.08%, because of a
decreased stalling rate in public sector projects. The services (excluding
financial services) and manufacturing sectors remain the worst affected by
stalling. Services sector projects accounted for 35% of all stalled projects,
while manufacturing accounted for nearly 24% of stalled projects. Lack of funds
has emerged as the biggest reason for stalling in recent quarters, suggesting
that under-financed banks and stressed corporations are finding it increasingly
difficult to finance their projects.
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SEBI ISSUES CIRCULAR ON APPOINTMENT OF ADMINISTRATORS
Sebi on Tuesday issued a
circular regarding empanelment of insolvency professionals to be appointed as
administrators under the regulator's framework. An administrator has to be a
person registered as an insolvency professional with the Insolvency and
Bankruptcy Board of India (IBBI) and empanelled with the board from time to
time. During the pendency of the insolvency assignment, the appointed
administrator shall neither withdraw consent nor surrender registration to the
IBBI Board or membership to the Insolvency Professional Agency (IPA), according
to the circular. In case of such withdrawal or refusal, the matter would be
referred to the IBBI for suitable action. The remuneration payable to
administrator shall be in accordance with IBBI's Liquidation Process norms, the
circular said. Besides, there would be different fee slabs for regular and
forensic audits carried out during the insolvency process by chartered
accountants.
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RBI APPROVES APPOINTMENT OF MADHAVAN MENON AS PART-TIME
CHAIRMAN OF CSB
The RBI on Tuesday approved
the appointment of Madhavan Menon as Part-time Chairman of the Catholic Syrian
Bank (CSB) for a period of one year from the date of appointment
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95% EQUITY F&O TRADERS ARE PROFESSIONAL HNIS: LIMAYE
Our Bureau Clearing the
air on retail participation in equity derivatives trading in India, Vikram
Limaye, said 95 per cent of traders in India’s equity derivatives market are
professional high net worth individuals India’s equity derivatives market is
very different from other global peers as it is 100 per cent exchange-traded
derivative market compared to high over-the-counter market turnover globally. There
is enough transparency and price discovery. Also, 95 per cent of India’s market
traders are professional high net worth players. Concerns have been raised in
the past on how small investors in India were losing money by trading in equity
derivatives. Also, all equity derivative products traded in India are extremely
simple and not hybrid or complex like in other markets. Even margining,
compared to worldover, is real time at the client level. Margins have also been
tweaked from time to time depending on market conditions. So, the risk management
is sound. As far as retail investors are concerned 95 per cent of them can fall
in the accredited investor category. They are not new traders and are
professional traders and have certain risk capital, Limaye said.
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RELIANCE JIO SHIFTS CONTROL OF OPTICAL FIBRE, TOWER UNITS TO
RIIHL TRUSTS
Reliance Jio has transferred
control of its fibre and mobile tower units to two infrastructure investment
trusts set up by Reliance Industrial Investments and Holdings Ltd (RIIHL). The
optical fibre cable infrastructure unit, Jio Digital Fibre Private Ltd (JDFPL)
has allocated shares worth Rs 500 crore to Reliance Jio Infocomm Ltd (RJIL) on
March 31, 2019, according to a regulatory filing. Also, mobile tower unit
Reliance Jio Infratel Private Ltd (RJIPL) has allocated shares worth Rs 200
crore to RJIL, it said. On the same day, Digital Fibre Infrastructure Trust
acquired control of JDFPL by purchasing 51 per cent of the equity share capital
of JDFPL for Rs 262.65 crore. Besides, Tower Infrastructure Trust acquired
control of RJIPL by purchasing 51 per cent of shares of RJIPL for Rs 109.65
crore, the filing said. This will result in significant deleveraging of the
consolidated balance sheet of the company as at March 31 2019, it said. Both
trusts have been set up by RIIHL, a wholly-owned subsidiary of RIL as a
sponsor, and have been granted the certificate of registration as
Infrastructure Investment Trust by market watchdog Sebi.
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ONE-SIDED AGREEMENT SKEWED AGAINST HOME-BUYERS NOT BINDING: SC
In a big relief to lakhs
of home-buyers who are put at a disadvantage while signing agreement containing
stringent clauses against them and lenient provisions against the builders for
violation of the accord, the Supreme Court on Tuesday said such one-sided and
unfair agreement would not be binding A bench of Justices UU Lalit and Indu
Malhotra said a real estate company could not be allowed to bind home-buyers
with one-sided contractual terms which protect the interests of the company at
the cost of the buyers. Terms of a contract will not be final and binding if it
is shown that the flat purchasers had no option but to sign on the dotted line,
on a contract framed by the builder, the bench said while directing a builder
to refund Rs 4.83 crore with 10.7 per cent interest to a home-buyer. A
home-buyer is always put to a disadvantage in flat purchase agreement between
the buyer and the company. The agreement is always skewed against buyers who are
to pay higher rate of interest in case of delay in payment and the builders are
allowed to cancel allotment in case of default of payment. But the punitive
clauses against the builders are lenient with leeway given to them in case of
delay in handing over possession and the interest rate in case of delay is very
less. After examining one such agreement in which it was stipulated that a
home-buyer will have to pay interest at 18 per cent per annum in case of delay
in payment but the builder is liable to pay interest at 9% for delay in
possession, the apex court said the agreement was unreasonable and biased which
could not be binding. The court also said the agreement was one-sided as it
entitled the builder to cancel allotment in case of delay of 30 days by the
buyer to pay instalment but in case of delay in giving possession of flats, the
buyer could terminate contract only after a period of 12 months over the grace
period. The court rejected the plea of Gurugram-based builder, Pioneer Urban
Land & Infrastructure Ltd, that it should not be directed to pay interest
to the buyer at the rate of 10.7 per cent as the agreement provided interest at
6 per cent. The court noted that the buyer was paying interest on home loan at
the rate of 10 per cent and he was entitled to get 10.7 percent. The court
turned down the company’s plea that the buyer should be directed to take
possession of the flat as there was a delay of only three years and held that a
buyer cannot be compelled to take possession of flats at such a late stage. In
this case, the buyer had invested Rs 4.83 crore in 2012 to buy a flat in Sector
62, Golf Course Extension Road, Gurugram and was assured to get possession in
2015 but the company failed to fulfil its promise and the buyer filed a case for
refund in 2017. The contractual terms of the agreement are ex-facie one-sided,
unfair, and unreasonable. The incorporation of such one-sided clauses in an
agreement constitutes an unfair trade practice as per Section 2 (r) of the
Consumer Protection Act, 1986 since it adopts unfair methods or practices for
the purpose of selling the flats by the Builder. In view of the above
discussion, we have no hesitation in holding that the terms of the Apartment
Buyer’s Agreement were wholly one-sided and unfair to the flat purchaser. The
Builder could not seek to bind the Respondent with such one-sided contractual
terms, the court said.
#For Source of Information copy and paste the heading in google.
Thanks & Regards,
CS Meetesh Shiroya
Thanks & Regards,
CS Meetesh Shiroya
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