Government policies and interventions for development in various sectors and issues arising out of their design and implementation.
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One of the important decision of SEBI was to give relaxation when it comes to distressed assets whenever there is change of promoters and change of ownership. The SEBI decision comes against the backdrop of the government and Reserve Bank of India stepping up efforts to tackle the menace of bad loans, amounting to Rs 6 lakh crore.
With so much money locked into these assets, a need was felt to give some kind of relief or relaxations to these rules otherwise the cost of acquisition would be so high that it would be difficult to scout for new investors.
The Indian economy for last few years has been a victim of twin balance sheet crisis.
It means that on one hand there are many banks which have lent resources, given good money to large number of Indian companies for putting up projects. Now those projects have not come good and those companies are not in a position to repay the loans to the banks. The banks have stiff and stringent stressed asset recognition norms which were made even more stringent by latest government norms. 7 lakh crores have been locked up in bank and most of them are PSBs. This is first part of twin balance sheet problem.
The second problem is that the companies that have taken these loans are in no positon to repay the loans. Neither they can go ahead with the expansion of project nor can they run it nor they can repay the loan nor can they undertake new investments.
So this twin balance sheet problem was actually key reason for India’s growth story being adversely impacted. India has been growing for last 7.5% + largely because of consumption boom. But the investment side was almost absent. As a matter of fact, the investment growth has been declining quarterly now.
Next step now
The first decision by government in context of twin balance sheet problem was amending the RBI act under which RBI was empowered specifically invoke the provisions of Insolvency and Bankruptcy Code to force banks to resolve assets under the norms of 180 days of trying to workout the stressed assets and if doesn’t work out, to find the buyers for the stressed assets for the company. For this, the promoters and the banks will take a haircut so it is a tough decision.
Before going for the 180 days of resolution of stressed assets and 90 days of selling of stressed assets, if there is no resolution, government and the market regulators have combined taken a well advised step by which the hurdles to the resolution of the assets through a new buyer of those assets does not face unnecessary hurdles.
Currently, relaxations from preferential issue requirements and from open offer obligations are available for lenders undertaking restructuring of distressed listed companies under Strategic Debt Restructuring (SDR) scheme. There have been representations made to SEBI that lenders who have acquired shares and propose to divest them to new investors faced difficulties as the latter have to make an open offers. Such offers further reduce the funds available for investment in the company concerned.
Right now in the corporate-shareholder democracy, if somebody wants to acquire more than 25% stakes in the company, he has to make an open offer to acquire 26% more stake. If it is a stressed asset, and new buyer comes within 180 days, he comes and decides on acquiring those assets. He has to make an open offer for 26% more before he can acquire company. So the cost of regulation goes up.
Now, the open offer requirement has been waived. The critics would say that the interest of minority shareholders has been killed but there is a new provision in SEBI rules for the minority shareholder where their needs will be taken care of and for that the SEBI will come out with new guidelines.
One of the protection clauses is that the new investor who comes in, will also have a lock in period. The new one who comes is exempted from making an open offer, he is locked in for three years so that he can actually get the right time to invest his resources and ensure the commitment. The minority shareholders are assured that this is not fly by night operator who comes and makes open offer requirements. This was seen in hotel sales where people bought hotels and sold them in less than a year and made good profit.
Will it be possible to complete the deals?
Under the IBC, the National Company Law Tribunal (NCLT) has to clear the cases first and within 90 days new buyer has to be found to complete the deal. Under the present economic and business environment, the good chunk of India is under high leverage. The challenge is to find a suitor within prescribed period of time and if there is infrastructure to complete this kind of deals.
There are concerns of getting number of adequate professionals in this field- the assessors, the evaluators whether that the stake that has to be bought should be at which price, whether the valuation of asset is correct. These are all going to be a matter of extensive discussion and deliberation amongst the insolvency code professionals and body and bankers.
RBI act amendment– banks under the guidance of oversight committee to be set up by the RBI will now be more empowered to take decision and they will not suffer from fear that if they take a decision it will be hounded upon later. The reluctance of market is being taken care of by open offer exemption.
The third stage which has been not specified is to close the company when 180 days of resolution of asset through reorganising and restructuring and 90 days if selling the asset doesn’t work. It is harsh decision but from the point of view of economic revival and economic growth, if the banking sector and Indian companies are allowed to fluster and remain constraint under the load of stressed assets, growth will be difficult to sustain.
For instance, 2.5 lakh crore of stressed assets are in steel sector. There are just 12 companies which have got stressed assets of 2.5 lakh crore. Huge amount of steel is imported by India. There is going to be steel demand for developing country like India. So there is hope that there will be buyers. If the loan is written off, the public impression is that there is loan waiver. This is where moral hazard comes.
When the loan waiver takes place, the promoter is not penalised. So far when it comes to waiving loan for India Inc., the loans have been waived but promoters have not been penalised adequately. So the debate of loan waivers in farmers vs industry is not out of context. There has to be example that ‘x’ promoter has promoted a company, was in bad debt, couldn’t resolve the asset thus he lost control of the company. This shouldn’t be another exit route. People should be penalised. BIFR shouldn’t be repeated where in practice it became a way of prolonging the life of unviable companies for years at taxpayer expense.
Connecting the dots:
Explain the efforts taken by appropriate regulators and authorities to tackle the bad loan menace.
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