MUMBAI: Corporates whose managements have “diverted” funds or are perceived as “incompetent” will have a hard time persuading banks to rejig debt and throw in a lifeline. Even in cases where banks agree on a haircut, lenders will think twice before converting sticky loans into low-yielding securities.
In a letter to the corporate debt restructuring (CDR) cell – a forum where corporates and banks come together to restructure bad loans – late last month, the finance ministry has specifically warned banks against taking on their books quasi-securities like convertible preference shares that have a long tenure, low returns and high provisioning.
While these securities are converted into equity in due course and give corporates breathing space, they are a strain on banks’ books.
The ministry has also suggested that banks may use the security enforcement law to change the management that has siphoned off money from the company. While the law empowers lenders to do this, banks have rarely taken such extreme steps.
The ministry communique comes at a time corporates, battling huge debt and shrinking cash flow, are knocking on bank doors to restructure their debt and avert the defaulter tag. But the government, which has to organise funds every year to recapitalise banks, is concerned by the nature of many debt restructuring deals that are being struck.
Bankers admit that lending institutions have suffered losses in the past one year for agreeing to convert distressed loans into cumulative convertible preference shares (CCPS) or other quasi-equity securities.
Recently, 25% of 16,200-crore loans to telecom tower operator GTL were converted into low-yielding compulsorily convertible debentures (CCD) while 20% of 2,000-crore loans to 3i Infotech were converted into CCPS. On account of this conversion, banks had to make substantial provisioning (or setting aside funds out of profits to cushion the loss of income).
What has alarmed the ministry is the surge in the number of such cases. In 2011-12, distress loans amounting to 6,697 crore were converted into quasi-equity as against 562 crore in the previous year, according to data compiled by the ministry.
“Maybe, there is an impression that some of the restructuring terms are too liberal towards corporates. This could be an attempt to tighten the terms,” said Canara Bank Chairman S Raman.
“It has been observed that while restructuring a debt, frequent recourse to long-term cumulative convertible preference shares is taken, which is like a grant to the promoter shareholder. No dividend accrues on CCPS until the company becomes profitable,” said the finance ministry’s letter to the CDR cell.
Banks told not to bail out firms with incompetent management
The ministry has also advised banks that loans should not be restructured to bail out companies with incompetent management. “CDR should only be taken where the slippages have been for reasons beyond the control of the management of the company,” said the ministry letter.
“In case CDR is done in cases that have been spoilt due to the incompetence of the management or where diversion or misuse of funds has taken place, change of management must be the first option,” it added.
Since the inception of the CDR cell in 2001, close to Rs 1.50 lakh crore involving 292 companies have been restructured.
“Banks are taking the easy way out by engaging into long-dated restructuring, the tenure of which often extends longer than the terms of CEOs and directors of banks restructuring the loan,. Far too many restructuring is going on,” said Hemindra Hazari, head of research, institutional equities, at brokerage Nirmal Bang Equities. “Banks should put their effort in recovering loans,” he said. Chiefs of banks will meet on Monday to discuss the ministry directive.
WEAKENING CURRENCY BANE FOR RBI RATE CUT
MUMBAI: The sharp decline of the rupee in the last one month may complicate things further for the central bank, in terms of lowering interest rates, as concern of imported inflation is set to weigh on Reserve Bank of India (RBI)’s decision making. With the country importing more than 80 per cent of its crude oil requirement, a weakening rupee will push up oil prices which will affect inflation. The domestic currency, which is the worst performing in Asiasince March, has lost 3.3 per cent beginning May. Since March, the rupee has lost seven per cent against the dollar. On Thursday, rupee hit fresh intra-day low of 54.59 per dollar despite the intervention by the RBI. According to dealers, public sector banks sold $200-300 million on behalf of the central bank, which pulled rupee from the day’s lows to close at 54.49, a paisa up against the previous day’s close. On Wednesday, rupee had posted a new historic low of 54.50 against the greenback. (For details log on to : http://www.business-standard.com/india/news/weakening-currency-bane-for-rbi-rate-cut/474661/)
HALF OF CORPORATE INDIA’S FOREX EXPOSURE UNHEDGED, SAYS RBI
NEW DELHI: The Reserve Bank of India’s (RBI) central board is expected to discuss next week the elevated levels of unhedged foreign currency exposure at private and state-owned companies, which has made them increasingly vulnerable to the sharp depreciation of the rupee. According to data submitted by the Reserve Bank of India (RBI) to the finance ministry, approximately 60% of companies’ non-trade related exposure is unhedged, while the proportion of uncovered exposure for trade loans is lower at 40%. This was the situation at the end of March and since then, the rupee has slipped by more than 11%. On Thursday, the rupee closed at 54.47 to the dollar, a tad stronger than Wednesday’s close of 54.49, but not before dipping to a new low of 54.58 during the day. Corporates have been reluctant to protect themselves against currency fluctuations despite RBI attempts, sources said. (For details log on to : http://www.financialexpress.com/news/half-of-corporate-indias-forex-exposure-unhedged-says-rbi/950896/)
FALLING RUPEE A TICKING BOMB FOR COMPANIES
MUMBAI: The slide of the rupee to record lows could tear up balance sheets of many corporates that have borrowed overseas in the last few years, nullifying the cost advantage they enjoyed earlier. The cost of repayment of overseas loans and bonds, estimated at more than $100 billion in the next few years, may climb substantially, with the rupee depreciating nearly 12% since its peak this year. A fall in the rupee’s value forces the borrower to part with more of the Indian currency to pay up the same amount of US dollars. While the number of companies accessing overseas loans has fallen since January, even if corporates want to raise funds abroad, they may have to settle for higher yields. “If the rupee does not stabilise soon, corporates would be affected,” said Ajay Marwaha, head of trading at HDFC Bank. “We need to find sources of inflows. The RBI has done everything. Now, the government needs to make some structural changes.” (For details log onto : http://economictimes.indiatimes.com/markets/forex/falling-rupee-a-ticking-bomb-for-companies-repayment-of-foreign-borrowings-to-cost-more/articleshow/13230871.cms)
BANKS CAN SET UP BIZ CORRESPONDENT OUTLETS IN RURAL AREAS
MUMBAI: The Reserve Bank of India (RBI) on Thursday allowed banks to establish outlets for business correspondents (BC) in rural centres to drive the government’s financial inclusion programme. “It is advised that for further financial inclusion, banks may establish outlets in rural centres from which BCs may operate. These BC outlets may be in the form of low cost simple brick and mortar structures,” the RBI said in a statement. Currently, every BC is attached to and is under the oversight of a base branch of a bank. The base branch will now supervise the BC outlets, including periodic visits by officers of the base branch to these outlets. RBI also said that BCs can operate from ultra-small branches of banks as their association with the branch will increase the “legitimacy and credibility” in the area and give people confidence to use their services. Banks, however, should ensure that such arrangements must not lead to BCs servicing customers at these branches only. (For details log on to : http://www.business-standard.com/india/news/banks-can-setbiz-correspondent-outlets-in-rural-areas/474664/)
RBI MULLS SELLING DOLLARS DIRECTLY TO REFINERS
MUMBAI: The Reserve Bank of Indiawas considering selling dollars directly to oil importers to reduce exchange-rate volatility after the rupee fell to a record low yesterday, a central bank official said. The recent widening of swings in the local currency might last only for a short period and would ease once global markets stabilised, the official said, asking not to be identified, citing central bank policy. Indiabuys abroad 80 per cent of the oil it uses and crude shipments accounted for 32 per cent of the country’s $489-billion import bill in the year through March. The rupee slid 1.3 per cent in Mumbai yesterday and touched a record low of 54.5 per dollar, according to data compiled by Bloomberg. A 0.4 per cent advance on Thursday pared its loss this quarter to 6.3 per cent, still Asia’s worst currency performance. The central bank may offer dollars to oil companies at its daily reference rate for the local currency, according to B Mukherjee, director of finance at Hindustan Petroleum Corp, India’s third-largest state-run oil refiner. (For details log on to : http://www.business-standard.com/india/news/rbi-mulls-selling-dollars-directly-to-refiners/474666/)
FINMIN SEEKS HIGHER RATING FROM FITCH
NEW DELHI: After failing to convince Standard & Poor’s (S&P) on India’s rating outlook, the finance ministry on Thursday pitched for higher ratings from global rating agency Fitch, citing the good inflow of foreign funds, high returns from markets and steps being taken by the government for fiscal consolidation. “We pitched for a rating upgrade. We told them (Fitch officials) to look at the FDI (foreign direct investment) inflow at the returns in the market. We said we are committed to capping subsidy at 1.9 per cent of GDP (gross domestic product) this financial year,” said a finance ministry official after a meeting with Fitch representatives here. Fitch had last rated Indiain 2010, assigning it a sovereign rating of BBB-, the lowest investment grade, with a stable outlook. Last year, the agency had affirmed the ‘BBB-’ rating for India, indicating a moderate degree of safety in the timely servicing of financial obligations. (For details log on to : http://www.business-standard.com/india/news/finmin-seeks-higher-ratingfitch/474670/)
EPFO MOOTS HIGHER ELIGIBILITY AGE TO COVER NEW PENSIONERS
NEW DELHI: If private sector employees get pension at the age of 60, instead of the current 58, the Employees Provident Fund Organisation (EPFO) suggests it would be possible to provide a monthly pension of Rs 1,000 to workers who don’t get any. The proposal in question is currently the subject of a battle between employee and employer representatives in the EPFO’s Central Board of Trustees (CBT). Repeated meetings have ended without an agreement on who would finance the scheme. It was estimated to require a 0.63 per cent increase in the present provident fund contribution to pay a minimum pension of Rs 1,000 to the 1.5 million workers proposed to be covered. The scheme is expected to cost around Rs 637 crore annually. So far, representatives of employers, employees and the labour ministry have been unable to decide who should bear the additional burden. The increase in contribution would have been in addition to the 8.33 per cent the employers already contribute and the 1.16 per cent that comes from the central government. (For details log on to : http://www.business-standard.com/india/news/epfo-moots-higher-eligibility-age-to-cover-new-pensioners/474671/)
GAAR PROVISIONS TO BE PART OF DTC, TO COME INTO EFFECT IN APRIL 2013
NEW DELHI: The General Anti-Avoidance Rule (GAAR), approved under the Finance Act, will be part of the Direct Taxes Code (DTC) Bill to be tabled in the monsoon session of Parliament. The finance ministry plans to implement both GAAR and DTC from April 1, 2013. However, if the implementation of DTC is again deferred, the government will introduce GAAR under the Income Tax Act next year. The Finance Act, introducing GAAR provisions to check cases of tax avoidance, has already been cleared by Parliament. However, DTC, which is set to replace the 50-year-old Income Tax Act, is yet to be tabled in Parliament. This would be done after incorporating the suggestions of the standing committee on finance. “The GAAR provisions approved by Parliament will be made part of DTC. The approval of the legislature will be sought for other provisions of the DTC,” said a finance ministry official, adding GAAR would be introduced from April 2013, any delay in the roll-out of the DTC notwithstanding. (For details log on to : http://www.business-standard.com/india/news/gaar-provisions-to-be-partdtc-to-come-into-effect-in-april-2013/474672/)
PLANCOM SEEKS RISE IN BUDGETARY SUPPORT
NEW DELHI: Even as the finance ministry sets about going on an austerity drive to cut government expenditure, the Planning Commission has sought a hefty 132 per cent rise (at current prices) in the gross budgetary support (GBS) for the 12th Five-Year Plan, estimated at about Rs 37 lakh crore, over the commission’s estimated GBS for the 11th Plan. This, the commission said, was to accelerate inclusive growth. The document for the 12th Plan, which started on April 1, is in the final stages of preparation. It is expected to be sent for approval by the inter-planning commission meeting around July. However, given the strained financial resources, the finance ministry is believed to have not agreed entirely with the suggested rise. To arrive at middle ground, the finance ministry has suggested shifting some of the non-Plan expenditure to Plan expenditure in the 12th Plan. It has suggested that some traditional non-Plan expenditure heads like bank recapitalisation and bailout of Air Indiabe included in Plan expenditure. (For details log on to : http://www.business-standard.com/india/news/plancom-seeks-rise-in-budgetary-support/474669/)
UCBs CAN OFFER HIGHER RATES ON FCNR DEPOSITS
MUMBAI: In order to attract more dollars into the country, the Reserve Bank of India on Thursday increased the interest rates on foreign currency deposits of non-resident Indians (FCNR-B) held in Urban Co-operative Banks (UCB). In the first week of May, the central bank had revised interest rates on such deposits held by scheduled commercial banks (SCB). The ceiling on one to three year foreign currency deposit rates in UCBs has been upped to 200 basis points above the London Interbank Offered Rate (Libor) from 125 basis points earlier. On deposits of three to five years, UCBs can offer rates of up to 300 basis points above Libor instead of only 125 basis points earlier. (For details log on to : http://www.financialexpress.com/news/ucbs-can-offer-higher-rates-on-fcnr-deposits/950681/)
IT DEPT DEMANDS 4-FOLD INCREASE IN 12TH PLAN OUTLAY
NEW DELHI: With the government planning to achieve $400 billion of revenue in the electronics and hardware sector by 2020, the department of electronics and information technology (DeitY) has sought an allocation of R81,378 crore in the 12th Plan, which is four times the amount allocated in the previous Plan to boost electronics systems design and manufacturing. The target is part of the draft National Policy of Electronics 2011which calls for Indiato invest $100 billion in the sector and create 28 million jobs by 2020. The move is important as Indian electronics hardware production constitutes only around 1.31% of the global production and the country’s imports are expected to rise from 50% to 75%. The policy also proposes to set up over 200 electronic manufacturing clusters in various states and create a 10-year stable tax regime for the electronics systems and design manufacturing industry (ESDM). (For details log on to : http://www.financialexpress.com/news/it-dept-demands-4fold-increase-in-12th-plan-outlay/950871/)
INDIAN BANK REJIGS MUMBAI METRO LOAN ACCOUNT
MUMBAI: Indian Bank has restructured the Mumbai Metro loan account worth R108 crore in the March 2012 quarter. Indian Bank chairman and MD TM Bhasin told FE that this was on account of delays in handing over land to a depot, the construction of a bridge over the Andheri station as also in the right of way and other clearances. The Mumbai Metro project was awarded by Mumbai Metropolitan Region Development Authority (MMRDA) through a global competitive bidding process on PPP framework to a Reliance Infrastructure-led consortium in 2007. It entails designing, financing, constructing along with the operating and maintaining about 12 kms of elevated metro with 12 stations enroute. The project borrowed loans from a group of lenders, of which Indian Bank’s share is around 4-5%, said Indian Bank ED Rajeev Rishi. However, he added that only Indian Bank has restructured the money lent to Mumbai Metro as directed by the RBI. The other lenders have not done so as yet. (For details log on to: http://www.financialexpress.com/news/indian-bank-rejigs-mumbai-metro-loan-account/950689/)
SBI’S Q4 RESULTS UNLIKELY TO THROW UP NEGATIVE SURPRISES
KOLKATA: State Bank of India’s fourth-quarter results are unlikely to throw up any negative surprises like last year when chairman Pratip Chaudhuri presents them on Friday afternoon. Analysts expect the country’s largest lender to report a net profit of Rs 3,400 crore to Rs 3,550 crore and net interest margin (NIM) of about 4%, but concerns over asset quality are likely to remain. Last year, the bank was forced to make some exceptionally high provisioning to cover rising bad loans and create a counter-cyclical buffer that pulled down net profit to a mere Rs 21 crore. “Fresh slippages will continue but SBI is expected to be back on the normal profitability path as exceptional provision burden like last year will not be there this time,” Vaibhav Agrawal, vice-president for banking research with Angel Broking told ET. (For details log on to : http://economictimes.indiatimes.com/news/news-by-industry/banking/finance/banking/sbis-q4-results-unlikely-to-throw-up-negative-surprises/articleshow/13240249.cms)
HSBC TURNAROUND PLAN ON TARGET, CUTS $2 BILLION IN COSTS
HONG KONG: HSBC, Europe’s biggest bank, said it cut costs by $2 billion (£1 billion) after one year of a three-year turnaround plan, and is on target to meet its return on equity and other financial targets. The bank is close to already achieving the bottom end of a $2.5-$3.5 billion range of annualised savings by next year, as set out by CEO Stuart Gulliver, who is steering HSBC back to its roots as a financier of global trade. HSBC has sold 28 businesses, taking some 15,000 staff off its payroll, and releasing about $55 billion in risk-weighted assets, the bank said in a statement in Hong Kongon Thursday. Having focused on shrinking the bank, analysts and investors expect Gulliver may soon point to where HSBC is expanding. “We will continue to simplify HSBC, enabling us to integrate systems and operate to high global standards internationally,” Gulliver said in the statement. “We will continue to run off our legacy assets, including the USconsumer and mortgage lending book.” (For details log on to : http://www.business-standard.com/india/news/hsbc-turnaround-plantarget-cuts-2-bn-in-costs/474662/)
RBC, CREDIT SUISSE BID FOR WEALTH UNITS OF BANK OF AMERICA
SINGAPORE/HONG KONG: Royal Bank of Canadaand Credit Suisse are among suitors who have put in initial bids to buy the non-US wealth management business of Bank of America in a deal that could be worth about $2 billion, sources said. Swiss bank Julius Baer was also keen to bid for some of BofA’s units in Europe, the Middle East, Latin America and Asia excluding Japan, the sources, who had knowledge of the matter, told Reuters. It was not clear whether Switzerland’s third-biggest bank had submitted an initial bid. The deal would be biggest in the wealth management industry since ING Group sold its private banking assets in Europe and Asia in 2010 to Julius Baer and Singapore’s Oversea-Chinese Banking Corp, respectively, for a total of about $1.9 billion. (For details log on to: http://www.financialexpress.com/news/rbc-credit-suisse-bid-for-wealth-units-of-bofa/950819/)
IRDA TO CAP RISK PASSED ON TO REINSURANCE FIRMS
MUMBAI: Soon, insurance companies in Indiawill not be able to pass on a majority of their risk to reinsurers. The Insurance Regulatory and Development Authority (Irda) is set to specify the retention limit in this regard for insurance companies. In a communication to the CEOs of insurers, Irda said companies operational for more than 10 years would not be able to cede more than 30 per cent of their premiums to reinsurance companies. Those operating for less than 10 years would have to retain half the risk in their books. There were no such caps till now. According to sources in the sector, most insurers retain nearly half of risk and move out the rest. Companies, generally, pass on or cede a part of their risk to reinsurance companies against a ceding commission. Under these agreements, reinsurers would bear the claims arising out of these risks. According to Irda, with most of the risk passed on to the reinsurers, an insurer is eventually acting as “service provider” rather than “risk bearing insurer”. “If an insurer has low retention limit, then such insurers only act as an insurance service provider than as a risk bearing insurer. This amounts to fronting. Fronting insurers only rely on ceding commission without developing national retention capacity and underwriting expertise necessary for development of a viable domestic insurance industry,” it has said in a recent letter to the insurers. (For details log on to : http://www.business-standard.com/india/news/irda-to-cap-risk-passedto-reinsurance-firms/474665/)
AVIVA MAY SELL UNDERPERFORMING UNITS HUNT FOR CEO ON
LONDON: Aviva Plc, the UK’s second-biggest insurer by market value, said it might sell underperforming units while it took the rest of this year to find a replacement for ousted chief executive officer Andrew Moss. “As far as you’re concerned, I’m the CEO,” Executive Deputy Chairman McFarlane said in response to a reporter’s question about whether the review would pre-empt changes made by a new CEO. “If you’re suggesting, which I would regard as naïve, that the thing to do is not do anything just in case if we get a CEO down the road. That’s clearly ludicrous.” Aviva is looking internally and externally to replace CEO Moss, who stepped down this month after an investor rebellion over the company’s pay. The insurer’s stock dropped 60 per cent in the five years of his leadership after attempting a European growth strategy in 2009 and subsequently having its capital reserves eroded by the region’s sovereign debt crisis. (For details log on to : http://www.business-standard.com/india/news/aviva-may-sell-underperforming-units-hunt-for-ceo-on/474668/)
SKS MICROFINANCE HOPES NEW LAW TO REVIVE GROWTH BY EASING LOAN RECOVERY
MUMBAI: SKS Microfinance, India’s largest publicly-traded lender to the poor, says proposed legislation will spur a revival by easing loan recovery just as mounting losses force it to curtail operations. The draft law would let microcredit companies improve debt collection and may also help raise funds, chief financial officer S Dilli Raj said in an interview. The Hyderabad-based lender’s loss last quarter widened almost fivefold, prompting it to cut jobs and shut branches. The stock is down 94% from a September 2010 peak. SKS, backed by Sequoia Capital, forecasts relief from a bill approved by Prime Minister Manmohan Singh’s Cabinet last week that would enable the Reserve Bank of India to regulate the industry. SKS has reported five consecutive quarters of losses after the southern state of Andhra Pradesh curtailed debt recovery, capped interest rates and waived loans to arrest a spate of suicides by farmers unable to make payments. (For details log on to : http://economictimes.indiatimes.com/news/news-by-industry/banking/finance/finance/sks-microfinance-hopes-new-law-to-revive-growth-by-easing-loan-recovery/articleshow/13232009.cms)
ANGEL INVESTORS LAUNCH FIRST ONLINE PLATFORM FOR START-UPS
NEW DELHI: Here’s some good news for start-ups. With a goal to connect entrepreneurs with investors, a group of angel investors, including Google India Managing Director Rajan Anandan, has come together to launch an online platform — VentureFund.com — with an initial corpus of $100 million. The founding team members include Lord Alli, co-founder and chairman of www.asos.com, Ashok Kurien, director in the boards of Zee TV, Sun TV and Playwin, and Paul Shoker, a serial investor who has interests in Indian ventures such as thePrivateSales.com and Koovs.com. Shoker would lead the fund as its vice-chairman. Anandan, also a member of the Indian Angel Network, is part of the venture in his personal capacity. VentureFund.com, a brainchild of Shoker, aims to connect entrepreneurs of early stage companies with qualified investors from around the world. The site will go live later this week. Shoker, who claims this is the first online platform for entrepreneurs and angel investors, started working on this concept six months back when his younger son wanted to invest in start-ups. “There was no authentic platform from where you could get details about start-ups,” Shoker said. He was quick to spot this problem and wrapped an online solution around it, in the form of the VentureFund platform. (For details log on to : http://www.business-standard.com/india/news/angel-investors-launch-first-online-platform-for-start-ups/474688/)
MARKET INTERMEDIARIES TO GET NEW NORMS
MUMBAI: The Securities and Exchange Board of India (Sebi) is likely to come out with new periodic reporting norms for market intermediaries like depository participants, merchant bankers and credit rating agencies. The capital market regulator’s move is aimed at enhancing the monitoring and inspection structure for market players after their renewal process was done away with last year. Sebi introduced the concept of ‘permanent registration’ for all intermediaries in July 2011. Earlier, intermediaries, with a few exceptions like brokers, had to renew their application every three years. The purpose of renewal was to check whether the intermediaries were following requirements, such as networth criteria, infrastructure and “fit and proper” compliance. While some intermediaries, like brokers and sub-brokers, were given permanent registration, intermediaries like merchant bankers, credit rating agencies, registrars and debenture trustees had to renew their licence application every three years. (For details log on to : http://www.business-standard.com/india/news/market-intermediaries-to-get-new-norms/474644/)
NFO MOBILISATION SLUMPS 58% TO R914 CRORE IN FY12
MUMBAI: Equity new fund offers (NFOs) launched in FY12 are the lowest in the last ten years as volatile equities and stringent regulatory requirements dissuaded fund houses from launching schemes. The number of NFOs being launched have seen a steady decline every fiscal since FY09, the year the global financial storm hit equity markets across the globe. With just 16 equity NFOs launched in FY12, NFO mobilisation slumped 58% to R914 crore in FY12 from R2,191 crore in the preceding fiscal. NFO mobilisation in FY12 is down a whopping 98% from the peakof R46,171 crore garnered by way of 89 NFOs in FY08. According to market participants, most of the NFOs launched in the past year have been from the newer fund houses that are in an expansion mode. “The industry is gradually moving away from focusing on new fund sales to working on improving the positioning of existing funds,” said Naval Bir Kumar, president & CEO, IDFC Asset Management. “The regulator is now much more insistent on ensuring that the new funds launched by a fund house are significantly differentiated form its existing offerings. (For details log on to : http://www.financialexpress.com/news/nfo-mobilisation-slumps-58-to-r914-crore-in-fy12/950706/)
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