NEW BANKRUPTCY RULES TO HIT BANK.
The amendments to the Insolvency and Bankruptcy Code (IBC) barring defaulting promoters from bidding for their own company's asset is expected to increase losses for banks as it would lower competition during the bidding process thereby impacting the valuation. According to market participants, there are promoters who want to regain control over the company by offering the most competitive bids during the resolution process. 'Mandatory settlement of overdue before submitting the plan will make it difficult for promoters to bid. Optimism in bids will also dip, thereby leading to a risk of resolution now happening at a lower-than-anticipated valuation. Promoters, in a bid to retain control of existing assets, would have potentially made a higher bid, thereby setting a benchmark for other bidders', said Edelweiss Financial Services.
The government through an ordinance made amendments to the IBC Code, which prohibits promoters having Non Performing Assets (NPAs) accounts - that are more than a year old and with unpaid dues - from bidding for their own assets during the insolvency process. The move also barred the guarantors of the NPA from bidding for it. While some experts have welcomed the ban as it sends a strong signal against crony capitalism, where promoters try to milk the banks, the market participants believe that the move will push banks into further losses.
"The absence of promoter bids could potentially increase losses for banks during the recovery process as competition would lessen:, said analysts at Kotak Securities. "Our initial reading and recent meetings with various stakeholders suggests that the promoters in at least most of the large steel companies were quiet intent to regain control and did appear to offer the most competitive bid during the resolution process. The probability of a higher bid during the resolution process now needs to be tempered", said the analysts, adding that loss given default on loans would rise against which banks would need to set aside higher provisions.
Experts also believe that the resolution process could be delayed as fresh bids would have to be called for and there are also possibilities of promoters initiating litigation against the law.
Limited Liability:
- THE CONCEPT of limited liability caps the liability of a shareholder only to the extent of his investment in the shares of a company. Even if the company goes bankrupt, it would not entail personal liability of shareholders.
- BUSINESS ENTITIES like private limited company, public limited company and firms formed as limited liability partnerships follow the concept of limited liability. While all those who transgress the bounds of law should be legitimately punished under the law of the land, violating the principle of limited liability can have negative consequences for entrepreneurship in India.
The Supreme Court recently directed 13 directors of embattled realty firm Jaiprakash Associates not to alienate their personal properties and asked the company to pay up Rs. 275 crore by December end "like a good kid". The court's direction that the directors shall not alienate their or their family members' personal properties in any manner implies freezing of their assets. This implies that while a shareholder can participate wholly in the growth of a company, his or her liability is restricted to the amount of investment made in the company, even if it subsequently goes bankrupt and has remaining debt obligations.
- Banks, the world over, get into problems, when the loans advanced by them are not repaid on time, by the borrowers. When the economy is in a slow-down, many of these borrowers go belly up and become NPAs.
- Normal banking prudence suggests that the banks should auction the assets given by the borrower as security, at the time of taking loans. Generally banks insist on 150% security of the loan amount. For example, if a borrower wants Rs. 100/- as loan, he has to provide security worth Rs. 150/- before availing the loan.
- However, for big borrowers, every norm is flouted and when they become NPAs like that of Anil Ambani in Telecom, you are talking of outstanding dues worth Rs. 45,000 crore. Now the question is, who will replace the funds, that were loaned to him.
- Today the NPAs of Indian Banks, amount to over Rs. 10 lakh crores. Jaitley or Urjit Patel do not give the actual figures. To rescue these banks, the Government has two options. They are called 'bail-out', which means the Government uses the taxpayers' money to fund the bank. This is very wrong but it has now been happening, quiet regularly in India.
- The other monstrous option is called 'bail-in'. This is the term that forms the very pivot of this article and has never been resorted to, in our country earlier. Now what is 'bail-in'. The dictionary meaning of 'bail-in' is - "rescuing a financial institution on the brink of failure 'by making its creditors and depositors' take a loss on their holdings". A bail-in is an internal process and is the opposite of a bail-out, which is external and handled by Government with budgetary allocation.
- You just deposit your money in a bank as a 'Savings Deposit' to use it whenever you want. You have no clue as to how well the bank is managed. Now Modi and Jaitley have got a bill approved by the Cabinet called "The Financial Resolution and Deposit Insurance (FRDI) Bill, 2017" and this has now been referred to a Joint Parliamentary Committee before getting it passed in the Parliament.
- This Bill covers 'Bankruptcy of businesses such as banks and insurance'. Financial Resolution includes solutions for banks facing 'imminent' risk to their viability and their very existence, depending on their capital, asset worth and quantum of NPAs.
- Now comes the wily Jaitley into the picture. This Bill also introduces the provision for a 'bail-in', whose purpose is to provide capital to absorb the losses of a bank and ensure its survival does not mean safety of depositors' money, but restoration of capital of the bank. The bail-in empowers the bank to cancel a liability owed by the bank or change the form of an existing liability to another security.
- In simple words, it means that your savings account balance of Rs. 15 lakhs, can be reduced to Rs. 1 lakh, which is mandatory by law. Or they can convert your savings account balance of Rs. 15 lakhs to a Fixed Deposit, repayable after five years, giving you a 5% annual interest. And you can do nothing about it. If you had kept that money for your daughters's marriage, it is bad luck and you cannot access your money for the next five years.
- A question may arise in your mind, if such things happen abroad. Certainly yes and in a big way. Cyprus was the first country to face 'bail-in' in 2013. The depositors lost 47.5% of their savings in Phase-I. They also had a Phase-II.
- After this, the G-20 Nations, comprised of Nations that include US, UK, Japan, Germany, France, China, Australia, Canada and others have officially approved this process. Incidentally, India is also a part of G-20.
- When the banks make hefty profit , you don't get anything but when they are into losses, "suppliers and depositors have to lose their money. And the heartless duo of Modi and Jaitley have come up with another brutal aspect. Just unbelievable.
- To recover the money from the defaulters, there is no attempt so far by the Reserve Bank of India to blacklist these entities from getting further loans or prevent their managements from retaining a majority equity stake, as penalty for the huge haircuts (writing off loans) being taken by banks. Ambanis and Essars can go away scott free and we depositors have to clean the toilet.
- In a nut-shell they are now trying to shift the responsibility of rescuing the 'sinking banks' from the Government to the Suppliers and Depositors of the bank. The borrowers can go on a fishing trip. Trust in Banking Industry would be decimated. People would gradually close all their bank accounts and keep their cash under the bed. Bloody Madness.
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