Commercial Bank Management

News Articles from 14.7.2017-18.7.2017

14.7.2017

NRIs’ foreign bank accounts under

income tax lens
For decades, many Indians have escaped tax and legitimised their money stashed abroad by
staying 182 days out of the country every year and declaring themselves as ‗non-
resident‘. The status of a non-resident Indian, or NRI, allowed them to claim such funds lying
in offshore bank accounts as lawful income earned abroad. From now on, this won‘t be easy.
A few days ago, income-tax authorities have added a new provision in the tax return form
(ITR2) which will require all non-residents to disclose details of their bank accounts outside
India. Most NRIs, even those who have been away for years, file tax return in India to cover
their income from stocks, properties and fixed income instruments like bank deposits and
bonds. Beginning this year, they will have to share with the tax office the account numbers of
their overseas bank accounts, name of the banks, countries where the bank offices are located
as well as the Swift codes and International Bank Account Numbers (IBAN). Swift codes
help in identifying banks and are used for cross-border wire transfer of funds between banks
while IBAN is an extra number – over and above the usual bank account numbers – that
come handy for making or receiving international payments.
―But this could also have some unintended consequences. For instance, many foreigners or
non-residents who are working in India may not be willing to share their bank accounts in
their home countries. The (tax return) form has been amended without any change of rules or
notification. Also, why should Indian tax department seek details of bank accounts whose
interest income it cannot tax?‖ said senior chartered accountant Dilip Lakhani. Till now only
resident Indians were required to disclose overseas bank accounts in tax returns.
While NRI taxpayers can successfully upload online tax return form by holding back
information on foreign bank accounts, they run the risk of being pulled up later if the Indian
tax office stumbles upon any information about such funds. Such a possibility is less remote
now with many tax havens agreeing to share data.
At that stage, non-disclosure of such information could even boil over from the I-T
department to the Enforcement Directorate (ED) which is empowered to invoke far harsher
laws that deal with money-laundering.
The new clause has been incorporated amid a widely-shared perception that many Indians
have moved money from jurisdictions like Switzerland to newly opened bank accounts in
destinations such as Dubai, Singapore and Hong Kong.

―They may have multiple bank accounts. Going by plain reading of ITR2 form, an NRI
would be obliged to provide all the bank accounts, and an assessing officer will have the right
to ask any question therefrom which have a possible and potential tax claim in India.

However, the Income Tax Act clearly places taxability based on residential status of an
assessee. Since NRIs are subjected to tax claim only on income earned in India, some could
take an alternative view on the new provision as it is not backed by a circular. It would mean,
disclosure of bank account in India or outside for operative purpose like tax payments and
processing refund,‖ said Mitil Chokshi, senior partner at Chokshi & Chokshi.

Since black money and secret Swiss accounts have emerged as a political issue in the past
few years, most tax practitioners believe a disclosure rule of this nature may be aimed at
tracing untaxed funds. Indeed, last year, many NRIs were asked by ED to explain their source
of funds. Inability to explain assets and fund movements is a violation of the Foreign
Exchange Management Act and exposes a person to penalty. ―As citizens they are obliged to
provide information though they are not a resident Indian from Tax or FEMA perspective.

An individual has to respond to any question raised by any regulatory authority be it Tax,
FEMA, ROC etc. But while such queries cannot be ignored, they have to be deftly replied,‖
said Chokshi.

IDFC's 'marriage made in heaven' brings

Daimler's Schrempp to memory
IDFC Bank chief executive Rajiv Lall packaged the proposal to merge with Shriram Group as
a `marriage made in heaven'. No doubt it has the blessings of the divine too, at least
informally.

Is it a marriage of equals? How harmonious can the marriage be given the contrasting
cultures?
IDFC Bank itself is a child of failed experiment lending for infrastructure through a non-
banking finance company , IDFC. Shriram's twin retail lending units -Shriram City and
Shriram Transport – though successful , were keen to become a bank, but on their own terms.
It wouldn‘t shed its stripes till founder R Thyagarajan was at the wheel.

How does a three-year old bank gobble up a lender with a four-decade legacy?
IDFC Bank is valued at Rs 21,000 crore, and the combined market value of Shriram City
Union and Shriram Transport that IDFC wants to buy is Rs 38,000 crore. Till last week such
a deal was possible for the KKRs or Mike Milkens elsewhere, not in the Indian banking
sector.

A marriage should ideally benefit both the partners, but not necessarily in equal measure.
IDFC Bank appears to be better placed than Shriram. After three years, IDFC Bank's low-
cost deposits is at 4.06 per cent, branches is at 74.
In contrast, Shriram City Union Finance which would merge with the Bank has nearly 1,000
branches, 26,700 staff, and 36 lakh retail customers. Shriram Transport Finance which would
be parked with IDFC has assets of Rs 80,000 crore, compared with IDFC Bank's Rs 66,500
crore.

"It makes sense to do the used commercial vehicle business and some niche businesses out of
an NBFC rather than a bank," says Macquarie's Suresh Ganapathy. "There are challenges
involved in doing cash intensive businesses and recovery related businesses through the bank
model."
Even for Lall, the strategy appears to be a directional change. Soon after getting the bank
licence some investors expected him to go for a bank to show growth.But he did not.
"There are greater merits to pursue organic growth than acquiring a bank," Lall told ET in an
interview in April 2014. "You are also buying other baggage in the form of legacy -
employees and technology."

What led to a change of heart? Shriram is not even a bank. What IDFC Bank needs is a
liability franchise, and not an asset portfolio. A few years after Kotak Mahindra Finance
became a bank, a senior executive said, "It is easy to give out Rs 2 lakh loan, but tough to get
that fellow deposit Rs 2,000 in your bank." For Lall, this deposit problem doesn't go away
with Shriram.
Beyond raising questions about the compatibility of the two, it would establish a precedent
for others too. The RBI has been insisting on all lending business of a group be brought under
the bank. If it lets Shriram Transport to be under IDFC, theoretically it could pave the way
for another bank to seek permission to own a mono line business like gold loans company
independent of the bank.
Declaring a marriage is always easier than making it work. It is a marriage made in heaven'
said Daimler chairman Jurgen Schrempp in 1998 when he went to bed with Chrysler. In less
than a decade they were in the family court.

HDFC Life may call off merger plan

with Max Life, focus on IPO
NEW DELHI: HDFC Life Insurance may call off its proposed takeover of the Max group‘s
life
insurance business as the two have not been able to arrive at a mutually agreeable alternative
structure for the transaction, which the regulator has rejected in its current form.
Also, HDFC Life‘s shareholders want to push ahead with listing plans and a merger is likely
to delay that by at least a year, several people aware of the development told ET.
The three-way merger involving HDFC Life, Max Financial Services Ltd and Max Life
Insurance that was proposed in June last year was rejected by the Insurance Regulatory and
Development Authority (Irda) in May this year.
This was based on the grounds that an insurance company cannot merge with a non-insurance
company under Section 35 of the IRDA Act. The original plan called for Max Life
amalgamating with parent Max Financial and the resultant entity merging with HDFC Life,
paving the way for an automatic listing. A direct HDFC Life-Max Life merger could have
been possible but this didn‘t appeal to the Max group as the shares of the merged company
would have to be issued to Max Financial, and not the shareholders of Max Financial.
Moreover, Max India founder Analjit Singh wouldn‘t have got the non-compete fee that
would have accrued to him if the original three-way merger had taken place, said people
familiar with the development. The Max group was willing to work out an alternate structure
for the merger to overcome regulatory objections but the exercise would have taken time,
said the people cited above.
―HDFC Life Insurance‘s foreign partner, Standard Life Insurance, which owns a 35% stake,
is not inclined to wait any more as it wants to list the joint venture at the earliest possible and
any alternate merger proposal would have taken another year from now, that too without any
assurance (that the deal would go ahead),‖ said an executive familiar with the matter.
HDFC Life is a joint venture between HDFC Ltd and Standard Life. ―No comment,‖ said
HDFC Ltd chairman Deepak Parekh, when asked about the development. ―We have a board
meeting on July 17 and I cannot comment now.‖ A Max group spokesperson said: ―We will
have to decline to comment due to the confidentiality agreement.‖ HDFC and its British
partner had planned a listing of HDFC Life in 2015 when the Indian entity sold a 9% stake to
Standard Life for about Rs 1,705 crore, valuing the joint venture at about Rs 19,000 crore,
said another top banker familiar with the development. After the sale, HDFC owned a little
over 61% of the venture.
Both partners now want to list HDFC Life to provide an exit route for shareholders. ―It is
about providing an enabling provision of exit window through listing,‖ said another person.
―Any alternate structure for a merger will become a long-haul process.‖ Another person said
enthusiasm for the deal within HDFC had been inconsistent. ―Although Parekh had done the
handshake with Analjit Singh, top-level officials at HDFC Life Insurance and its partner
Standard Life were reluctant from the beginning,‖ he said. ―Their heart was not in the deal.‖
This could not be independently confirmed.

SBI plans to raise up to $750 million loan from offshore

market

State Bank of India is planning to raise up to $750 million (Rs 4,835 crore) of overseas loans
from international lenders to fund growth in lending activity at its offshore branches.

The nation‘s largest bank is expected to raise five-year loans, which could be priced at 100-
125 basis points — known as spread in market parlance — over the six-month London
Interbank Offered Rate (LIBOR), three market sources told ET.

The six-month LIBOR is currently around 1.46%. SBI is seeking a finer pricing through
squeezing of the spread as it aims to raise $500-750 million. In the overseas market, the state-
owned bank is rated investment grade, equal to the country‘s sovereign rating.

About 10 bankers, including SBI Capital Markets, BNP, HSBC, Barclays, Standard
Chartered, Axis Bank and DBS are helping SBI arrange a deal. They could not be contacted
immediately for comment.

―While we would not comment on any market speculation, depending on funding

requirements at its foreign offices, SBI regularly raises foreign currency funds in order to
support the balance sheet growth of its foreign offices,‖ an SBI spokesperson said in an
email, responding to ET‘s request for comment.

In 2016-17, loans at the bank‘s foreign offices (excluding Foreign Currency Non-Resident
Bank credit) grew 12.60% year-on-year to about Rs 2.80 lakh crore. That was faster at home,
where loans excluding food credit expanded 9.45% to about Rs 13.37 lakh crore.

―The bank sees business opportunities in its overseas branches, which is why it is raising
money to expand credit. The deal should be closed soon,‖ said an executive familiar with the
matter. This person is not authorised to talk to the media.

SBI has about 50 foreign offices in 34 countries. The focus of these offices is India-related
business.

Besides the proposed offshore loan, the bank has been tapping the overseas market by selling
dollar bonds as well. In March, it raised $500 million as part of its medium term notes
programme, making it the second fund raising by the bank this year after January when it had
mopped up $500 million in a five-year dollar bond sale.
The bonds sold in March were priced at LIBOR plus 0.95%. The three-year money was
drawn through its London branch. SBI aims to raise $1.5 billion capital in FY18.

RBI wary of first loan default guarantee cover

The Reserve Bank of India is learnt to be wary of peerto-peer lending platforms offering any
FLDG, or first loan default guarantee, cover to institutional lenders for any lending they do
through these technology startups, said sources familiar with the discussions.

FLDG cover is a common way of protecting the interest of lenders who lend money to micro
finance institutions or non-banking finance companies (NBFCs) and the magnitude of cover
depends on banks' risk appetite.
The RBI in its preliminary consultation paper on P2P lending had mentioned, ―The platforms
will be prohibited from giving any assured return either directly or indirectly. The platform
will be allowed to opine on the suitability of the lender and credit worthiness of a borrower―
As peer-to-peer lending platforms look for scope to expand business, they are looking at in
vestment from institutional lenders. While various lending entities are keen on exploring this
space as a cheap source of customers, they often look for a security cover against loans going
bad. Experts say such guarantees or covers might go against the intentions of the central
bank.
―Depending on the risk appetite of the lender, they seek for a FLDG cover from these lending
startups, or might also seek for collaterals,― said a senior banker who manages digital
initiatives of a private sector lender. "Since the regulator has hinted on recognising P2P
lenders as a form of NBFC, hence the normal rules could apply, but we are waiting for the
final guidelines for clarity."

"There are few platforms which are offering FLDG covers to various institutions, we have
already partnered with two NBFCs without any FLDG cover as they are interested in low-
cost sourcing of borrowers through us," said Bhavin Patel, co-founder of Lenden Club, a P2P
platform.

15.7.2017

Government, RBI nudge banks to pursue one-time settlement to

recover non-performing loans

One-time settlement of dues by defaulters may rise in the next few months as banks‘
aggressive move to recover loans and the Reserve Bank of India‘s push to make bankruptcy
courts the central mechanism for recoveries could lead to some promoters losing their
businesses. This would also ensure that banks don‘t clog the bankruptcy courts with cases
where the default amount is not high.

People familiar with the development said banks have begun aggressively negotiating one-
time settlement (OTS) on the insistence of the finance ministry and the central bank, which
want speedy clean-up of bank balance sheets.
―Several cases where defaulters had proposed one-time settlement are being brought back to
the table to improve recovery,‖ said a banker. ―We are also proposing this scheme to
promoters who seem willing to pay up dues.‖

Banks are taking this approach in both large and small value cases, the banker said on the
condition of anonymity. RBI had recently reviewed the top 500 exposures of banks that are
partly or wholly classified as non-performing assets (NPAs) and has given its
recommendations, which include referral of the top 12 NPAs for resolution under the
Insolvency and Bankruptcy Code, 2016 (IBC).

The regulator had recommended that for other large NPAs, banks should figure out a
resolution within six months and if a viable resolution is not reached within six months, the
banks must begin liquidation proceedings.

―RBI has set us a deadline and we are taking all measures to improve recovery rates from
defaulting accounts, including OTS,‖ said another banker.

―In the past OTS decisions would come under suspicion and hence decision making was
slow, but we have been assured by authorities that this has to be pursued aggressively,‖ the
person said.
ET had recently reported that banks were aggressively pursuing OTS to recover dues worth
Rs 6,000 crore from telecom and technology company GTL Ltd. The Manoj Tirodkar
promoted company had made a one-time settlement offer to lenders to repay 60 per cent of
the outstanding debt, which amounts to about Rs 4,000 crore.

A month back Paramount CommunicationsBSE 3.21 % entered into a one-time settlement

with Standard Chartered Bank for settlement of their entire outstanding dues. In April 2016
beleaguered liquor baron Vijay Mallya had offered to make a staggered payment of Rs 6,868
crore as onetime settlement, which was shot down by banks.

―Taking a 40 paise loss on a rupee seems better with a one-time settlement than taking a
subsequent haircut on loan,‖ said the CEO of a leading private bank.

―With a one-time settlement, the banker can be assured that he can recover at least 60 per
cent of the loans rather than taking the risk of a long-term settlement where the chances of
recovery will get narrower,‖ the person said.

―The behaviour and personality of borrowers are unlikely to change. There are sick
companies, not sick promoters. As far as insolvency is concerned, banks will eventually have
to provide for 100 per cent of the bad loans,‖ the CEO said on condition of anonymity.

Bank of India had recently said it would opt for one-time settlements of loans with errant
borrowers as one of the key recovery strategies and this would be implemented in all
borrower segments to avoid lengthy legal processes.
In March this year, State Bank of India had allowed one-time settlements for tractor and farm
equipment loans that made up about Rs 6,000 crore of doubtful and loss cases on its books.

In 2015, SBI had opened a one-time settlement scheme for its retail, wholesale and small and
medium enterprise (SME) borrowers, which led to bad loan recovery worth Rs 800-850 crore
from the segment.
Recently, SBI chairman Arundhati Bhattacharya had said that banks may not rush to resolve
cases or recover dues via the insolvency code as the ecosystem required for the new law had
not been fully created.

In a sudden missive to banks on June 23, RBI demanded a steep increase in provisioning
requirements for loans being referred to bankruptcy courts. The regulator also told banks to
set aside at least 50 per cent of the loan amount as likely losses for all cases referred to the
insolvency process.

Essar Steel expresses liquidation fears after RBI's June

13 order

Essar Steel has told the Gujarat High Court that its lenders did not initiate bankruptcy
proceedings against the steelmaker before the Reserve Bank of India‘s June 13 order because
of concerns that such a measure would ‗jeopardise‘ the company‘s operations.

The company, one of the 12 earmarked by the central bank for initiating loan recoveries,
believes that the use of the Insolvency and Bankruptcy Code (IBC) by lenders may tip the
company toward liquidation, Essar‘s counsel Mihir Thakore said. Essar Steel has defaulted
on more than Rs 40,000 crore of loans, and is contesting the central bank order that it be tried
under the bankruptcy courts.

The company says that its loans recast was almost finalised, but delays by the lenders and the
banking regulator‘s selection of March 2016 as the cut-off date have bracketed it together
with less healthy companies.

The court will hear the case next on Monday. Essar argued Friday that the company had
learnt about the bankruptcy proceedings through newspapers and was not aware of it even
when it met banks on June 22.Hence, it should not be blamed for suppressing facts.

―My debt restructuring proposal under JLF made in November 2016 remained ineffective.
From January to June, none of the banks initiated IBC on even though they knew the fact that
IBC came into force from 16th December 2016‖. Essar‘s counsel said.
But central bank counsel Darius Khambatta countered Thakore‘s argument, saying that the
company‘s actions amounted to suppressing material information.

―The material fact suppressed was the presentation made in the June 22 meeting, where it
acknowledged the NCLT proceedings, but did not inform the court,‖ said Khambatta.

State Bank of India and Standard Chartered Bank, the two lenders, and the central bank have
said that Essar Steel was not revealing the correct picture of the developments that led to the
borrower facing tough recovery measures from the banks.

The central bank has said that it had followed a scientific process to identify 12 defaulters
who should be tried under the bankruptcy law. The list was created by the Internal Advisory
Committee under a metric that included a loan threshold of Rs 5,000 crore with defaults, and
where more than 60 per cent of the outstanding loans have already been classified as bad by
the lenders.

SEBI may seek feedback on Kotak committee report in

Sept-Oct

KOLKATA: Capital market watchdog, Securities and Exchange Board of India today said it
will seek public comments after it receives Kotak committee report on improvement of
corporate governance standards including function of independent directors in September.

"The Kotak committee will submit the report in September and then we will go for
publicconsultation and then it will be placed before the board," SEBI executive director
Ananta Barua said here today on the sidelines of Calcutta Chamber of Commerce. He did not
gave any timeline by when the watchdog will come out with final guidelines on the subject.
"It (corporate governance) is high on our agenda," Barua said.

The watchdog set up a 21-member committee under the chairmanship of veteran banker
Uday Kotak to suggest ways to further improve corporate governance standards of listed
companies.

The panel will make recommendations on ensuring independence in spirit of independent

directors and their active participation in functioning of the company.

"Sebi chairman Ajay Tyagi recently criticised saying "independent directors are not
independent". "There are too many lacunae with respect to the concept of independent
directors with many having no commitment to any cause.
Some independent directors are appointed at the mercy of the promoters‖(with) no prescribed
qualifications or procedures, favouritism, (many are from) closed clubs (such as) only those
people being in all boards, no commitment to any cause," Tyagi had said.
Barua indicated the regulator was keen on having stricter norms for independent directors,
including with respect to their appointment, removal and larger responsibility as part of a
company's board.

He declined to speak on the ongoing investigations on National Stock Exchange.

Axis Bank starts search for new MD to

succeed Shikha Sharma
MUMBAI: The board of India's third largest lender Axis BankBSE -0.42 % has begun the
search for a new MD and CEO to succeed Shikha Sharma who may step down from her
position once her term ends next year, two people aware with the development said. The
board has hired executive search firm Egon Zehnder to find Sharma's successor whose term
ends in June 2018.
In an emailed response Axis Bank denied change at the corner office claiming it was
premature.
"As per RBI approvals, the present term of Mrs. Shikha Sharma is till 30th June 2018.

There is a laid down process which the board undertakes at regular intervals but to conclude
that there is going to be change of leadership is entirely premature and speculative," an Axis
Bank spokesperson said in an email statement.

Sharma who took charge in 2009 is into her third term. When her first term ended the board
did not go through this process.

In an earlier interview to ET, Sharma had said that the decision on her term extension would
be taken by the bank‘s board. ―That‘s a decision the board has to take and my job as the CEO
is to make sure that there is alignment on the long-term goals of the bank and ensure that we
have execution capabilities to deliver that,‖ she had said.

Among major banks, Axis has delivered the second-best returns after HDFC Bank since
2009, the year Sharma moved into the corner office.

The bank has delivered 410% returns, compared with the Nifty Bank index‘s 308% in the
period, according to the ETIG database. For State Bank of India, this stands at 105% and for
ICICI Bank, 206%.

But the bank has been under pressure after reporting poor earnings in consecutive quarters.
Also, some branches of the bank was under income-tax lens for violatuons during
demonetisation.

In the last one year, Sharma has been criticised for the bank‘s deteriorating asset quality and
falling profits.

The bank had reported a 43% decline in net profit at Rs 1225 crore in the March quarter from
a year ago as the private sector lender had raised provisions for bad loans.

Gross non-performing assets had risen 3.98% to Rs21,280.48 crore at the end of the March
quarter from Rs20,466.82 crore in the December quarter. On a year-on-year basis, it more
than tripled from Rs 6,087.51 crore

The banks gross non-performing assets stood at Rs 1,318 crore at the end of March 2010.
Likewise, the bank that had reported profits of nearly Rs 2,515 crore at the end of FY10 saw
it plunge to Rs 579 crore in the quarter ended December after several growth years since
2010.

Central bank liquidity withdrawal: Short-term uncertainty can be

long-term opportunity
Recently, we have seen huge sell-off in the global bond market as nervousness deepened that
central banks are moving toward reducing stimulus efforts that have supported debt markets.

Almost all the central banks be it the US Federal Reserve, European Central Bank, the Bank
of England or the Bank of Canada, each one is preparing the markets for a gradual
withdrawal from accommodative monetary policies.

The global economy is experiencing synchronous growth, labor markets are improving and
consumer spending and business investment have picked up. However inflation is running
below central banks‘ targets. The recent data on inflation shows that there is a pickup in
inflation but it still remains below desired levels in most developed economies.

The minutes of the US Federal Open Market Committee‘s June policy discussions shower a
split over inflation. Minutes from the ECB released indicated that the ECB was worried about
how best to communicate increasing confidence in the eurozone economy without roiling
market. The news of shifting monetary policy trajectories of central banks have led to the
volatility in both stock market and Forex market.

The Bank of Japan and the European Central banks are scheduled to meet on July 20 and Fed
interest rates decision is scheduled on July 26. Though Fed Chair Yellen has said that the US
economy is healthy enough for the Fed to proceed with plans to raise rates and begin winding
down its massive bond portfolio, but it is expected that Fed would slow the pace of rate hikes
down the road and interest rates would remain historically low over the longer term.

Emerging economies including India have undoubtedly been benefited from the environment
of lower interest rates.

Among all major economies, the interest rate regime in India only is on a downward
trajectory.

Meanwhile, recent data pointed to slowing industrial production growth and to a falling retail
price inflation has given room to the Reserve Bank of India (RBI) to resort to accommodative
stance from neutral at the review meeting on August 2.

The markets know that the long period of low rates has to end sometime and a gradual
normalisation of policy rates may not necessarily impact the stock markets. However, a
sudden change in yield expectations may cause volatility in the market. As the fundamentals
of the Indian economy are strong, any inorderly tapering by the major central bankers would
have limited impact on the Indian stock market.

So, it is advised to use any dip into the market as buying opportunity and remain invested for
long term as India is a bright spot among its peer though its valuation looks rich.

17.7.2017

Diageo to Cork Up Mallya

Payments, Mulls Recovery
Will hold back $35 m of $75-m settlement deal; plans to recover dues
from absconding bizman
 Diageo Plc, the world's largest liquor company, will hold back the remaining $35 million
of the $75 million it had agreed to pay Vijay Mallya as part of a settlement, said two
executives aware of the development. It will instead seek to recover dues from the
absconding businessman, they added.

These dues include $135 million that Diageo had given to Standard Chartered Bank as a
conditional guarantee for the liabilities of Watson Ltd, a company affiliated with Mallya. The
British liquor company will also claim Mallya's stake in the Force India Formula One team
that had been pledged as security for Watson.

Diageo, the maker of Johnnie Walker scotch and Smirnoff vodka, paid $40 million of the
settlement that was reached last year after Mallya agreed to walk away from United Spirits
(USL). The rest of the money was to be paid in two equal instalments over the next few
years.

―The remaining $35 million will not be paid now,― said the two persons cited above.
―The decision to not honour the deal signed with Mallya is also on account of charges of
various financial misappropriations from USL and fund diversion by him.― When Diageo
acquired control of USL in 2012, it issued a guarantee to Standard Chartered against
Watson's debt to release USL stock that was to be acquired as part of the deal. Diageo has the
benefit of counter-indemnities from Watson and Mallya in respect of its liabilities under the
guarantee.

Diageo declined to comment. Mallya did not respond to an email on the matter.

The businessman has stayed away from India despite being asked to return for
questioning over alleged diversion of loans that haven't been repaid following the collapse of
Kingfisher Airlines. The Indian unit of Diageo filed multiple complaints against Mallya after
inquiries uncovered ―improper transactions― worth . `1,225.30 crore. USL said Mallya had
diverted the funds to nearly half-a-dozen companies in which he had a direct or indirect
interest, mostly located in tax havens.

The private shareholder agreement between Diageo and Mallya last year was subject to
several clauses and the payout was to be made in three tranches. Diageo has been criticised
for giving Mallya a sweet deal despite the USL board's complaints over initial findings that
he had violated several laws.

USL, the maker of McDowell's No 1 and Royal Challenge, has provided for nearly all
amounts identified in the inquiry in its financial statements through impairments in value or
loss of sale of subsidiaries. Hence, analysts don't expect any impact on financial implications
in terms of recovery .

The move won't have any material impact on USL except that it might reduce some
overheads such as legal costs in the future, said Abneesh Roy, senior vice-president at
Edelweiss Securities. The funds were shown on USL's books already so there won't be any
financial implications in terms of recovery, he said.

For Diageo, India now accounts for almost 40% of sales volume and 9% of net sales.
India is the largest whisky market in the world, selling almost 200 million cases. However,
there is a stark difference between volume and value with the average retail price per 750 ml
in the rest of the world being more than five times that in India.

Hence, Diageo has been driving premiumisation as the prestige and above segment is also
where most of the spirits industry profit pool is -it is expected to contribute 70% of spirits
industry profits by 2021.

Expert Take - 1997 Asian Financial Crisis Still has Five Things to Teach the
World
Twenty years ago, I was working at the International Monetary Fund in Washington that
would scramble -like almost everyone else -to understand and respond to cascading financial
disruptions that would throw Asia into a deep recession.Important lessons were to emerge
from an Asian miracle that was taking an unexpected turn for the worse, with frightening
systemic implications.

Asia painfully learned, and adapted well, and what it taught us remains valid today for
other countries, and not just emerging economies. Indeed, had the advanced nations also been
more open to these lessons, the global economy could well have sidestepped the even bigger
global financial crisis in 2008, whose repercussions are still being felt today.

Here are five of the most important economic and financial lessons whose relevance
extends well beyond Asia:

1. Self-insurance, although expensive, is the best way to secure resilience

Heading into the crisis, the combination of low international reserves, high debt and
currencymaturity mismatches made Asia's particularly vulnerable, not just directly but also
by increasing exposure to domestic capital flight and sudden outflows of foreign funds.Asian
countries had no choice subsequently but to build and rely on a big foreign reserve cushion.
They also embarked on more prudent debt management, reducing the overall stock,
lengthening maturities and lowering foreign-exchange exposure. Despite the passage of time,
it hasn't been easy to wean some Asian economies from this defensive approach. As such,
their international reserves have remained well above what would be warranted by traditional
precautionary metrics. To offset the so-called negative carry that results -that is, earning less
on the foreign reserves than the cost of associated domestic liabilities -a few took the
additional step of segmenting their holdings into two distinct categories: reserves and wealth
management. This helps Asia lessen the cost of maintaining a high level of financial
resilience.

No. 2. Currency floats aren't perfect, but they are better than the alternatives

As Indonesia, Malaysia and Thailand discovered during the crisis, a fixed exchange rate
makes countries even more exposed to the disruptive effects of capital outflows.Yet such
flexible currency arrangements, as important as they are, are no panacea. They need to be
managed well, and accompanied by supportive policies. Otherwise, they can become a
problem in themselves.

With high reserves and better debt management, Asian economies became less exposed
to the collateral damage of fluctuating exchange rates -specifically , the extent to which a
currency depreciation fuels inflation and raises the domestic cost of servicing foreign
denominated debt. As such, the transition to a flexible exchange rate regime became a lot
more effective in helping to navigate both domestic and foreign economic cycles. With that,
the region became less vulnerable to the sudden stops in trade and commerce that are
associated with dramatic adverse changes in international capital markets (such as the 2008
global financial crisis).

No. 3. Liberalise carefully while tweaking economic and financial management

It's critical to take a measured approach to liberalising the capital account of the balance
of payments, something the ―Washington consensus― that prevailed at the time had pressed
hard on emerging nations.Rather than an end in itself, the careful and nuanced pursuit of
capital liberalization became part of the redefinition of the region's approach to managing the
middle-income transition, one of the most difficult stages of the economic de velopment
process.

Asia came to understand well that foreign capital flows -and, especially, short-term
portfolio inflows as opposed to longer-term foreign direct investment -constitute a
doubleedged sword. Yes, they help relieve financial constraints on the balance of payments
and even the budget; and yes, they can be associated with the transfer of human capital. But
they can also turn around suddenly , undermining the financial system and sucking valuable
oxygen out of the economy . All of which speaks to the importance of getting the right mix
and having contingency plans for sudden outflows.

No. 4. Interact with others, but also build regional institutional backups

A shift toward a stronger regional construct became another element of this redefinition.
But it was a change that initially faced enormous external opposition and took considerable
time to overcome.

In the midst of the crisis, several Asian governments felt that the conditional financing
available to them from western-dominated institutions took insufficient account of local
circumstances. But their attempt to compensate by building regional institutions -back then,
centered on a new Asian Monetary Fund -was quashed by western countries. Although Asia
did secure better central bank swap lines, the institutional construct remained heavily western
dominated and oriented. Fast-forward 20 years, and the situation has evolved. The west is
less able and willing to block the Asian regional initiatives spearheaded by a more confident
and assertive China. Witness the creation of the Asian Infrastructure Investment Bank (AIIB)
and the ―one belt, one road― project.

These regional arrangements can help Asia navigate the more fluid global economy . But
there is nothing automatic about this. It requires careful design and implementation,
minimizing political interference and maximizing operational autonomy and technical
competency.

No. 5.Your greatest strength can also become your most glaring weakness

But perhaps the most important lesson of all is not to drink too much of your own Kool-
Aid.

It was easy for Asian nations to believe they were exceptional; that they were immune
from certain laws of finance and economics; and that nothing could derail their impressive
economic development.

But as problems emerged, they were initially either ignored or papered over with
measures that involved their own dangers.

The same closed-mindset phenomenon made many advanced countries dismissive of

what they can learn from others. Remember the notion that Japan's economic stagnation
―couldn't happen here―? Or how western experts ignored the important structural insights
from Asia's experience?

Earnings Preview - NBFCs Could Report Best Q1 Performance in Many

Years
HOUSING FINANCE companies may report net profit of 17%-20% due to
lower cost of borrowing, increase in share of non-housing loans, and higher
disbursements
Non-banking finance companies are set to report 15-30% rise in earnings, boosted by a
strong growth in mortgage lending, and an increase in demand for farm equipment as farmers
have begun their planting.

―Farm-loan waivers and expectations of a normal monsoon have lifted the sentiment in
the rural economy,― said Motilal Oswal in a report. ―Focus on collections has also helped
companies make strong recoveries.―

Although the first quarter of a financial year is tepid, analysts expect it to be better than
most years' driven by high growth in retail housing, strong collections from the farm sector,
tractor business loan growth and better recoveries. They expect a stable quarter for
microfinance businesses, consumer finance and housing finance.
 Housing finance companies may report net profit of 17%-20% due to lower cost of
borrowing, increase in share of non-housing loans, and higher disbursements.

Analysts reckon there will be a continued decline in cost of funds, driven by excess
liquidity in the system, to offset yield pressure due to higher competition, which will keep
their margins stable.

―We expect 10 bps improvement in NIM as spreads will find some support from decline
in bulk borrowing rates, increase in share of LAP and non-housing loans and delay in passing
of decline in interest rate reduction to existing borrowers,― said Kotak Institutional Equities in
its report.

While LIC Housing Finance is likely to tap into the developer and loanagainst-property
(LAP) segment, HDFC is expected to expand into commercial real estate financing, the
report said.

―LIC HFL's profit growth is expected to be 24% as the base year had higher credit cost on
developer book,― said HDFC Securities.

Post demonetisation, analysts see improving trends in growth across p ro d u c t s e g m e

n t s i n N B F C s. Consumer durable from pre-GST buying and strong auto OEM growth
aiding growth.

―We expect most NBFCs to deliver 15-30% ear nings growth,― said Kotak Institutional
Equities in its report.

Bajaj Finance is expected to deliver 36% growth in loans as the company benefits from
pre-GST sales by dealers.

―After three consecutive quarters of 16-20% growth, NBFC's 4QFY17 earnings

plummeted due to provisioning (change in NPA recognition policy) and demonetisation,―
said Motilal Oswal in its report. ―All NBFCs, barring Bharat Financial, are likely to report a
healthy PAT performance.―

For small finance banks, collection in the MFI book, loan book growth and provisioning
requirement could weigh in on the first quarter earnings.―Both Ujjivan and Equitas are
expected to report muted earnings,― HDFC Securities said in its report.―Provisioning will
remain elevated due to ageing of delinquencies and we see further increase in opex due to
rollout of more branches.―

INSOLVENCY PROS Needed in Thousands

NEW RUSH Chartered accountants, cost accountants and company
secretaries rushing to get themselves qualified as insolvency professionals
As banks try and resolve the bad loans that have burdened the industry , insolvency
professionals stand to get a big career boost. Chartered accountants, cost accountants and
company secretaries are said to be rushing to get themselves qualified in hundreds--and this is
just the beginning. If the bankruptcy process unfolds as it's meant to, thousands of insolvency
professionals will be needed to oversee the process and run distressed assets as part of asset-
sale programmes, experts said.

The Institute of Chartered Accountants of India (ICAI) alone has enrolled more than 700
practising chartered accountants (CAs) as insolvency professionals, according to the latest
official data. The institute is estimated to have received thousands of enquiries for enrolment,
according to industry sources.Similar exuberance is brewing among company secretary and
cost accountancy institutes that have enrolled 400500 people. ―There are three insolvency
professional agencies promoted by three statutory regulators of professions, namely , ICAI,
ICSI (Institute of Company Secretaries of India) and ICWAI (Institute of Cost Accountants
of India),― said MS Sahoo, chair man of the Insolvency and Bankruptcy Board of India
(IBBI). ―They are frontline regulators of insolvency professionals and they build their
capacity.―

The process g ained momentum with the gover nment having put the ecosystem in place
with the Insolvency and Bankruptcy Code (IBC), which stipulates the need for insolvency
professionals.They play a crucial role after a company is admitted to the National Company
Law Tribunal (NCLT) as part of the process. A three-fourths majority of a committee of
creditors will entrust insolvency professionals with the job of either drawing up a defaulting
company's revival plan or liquidating it within nine months.

IBBI, tasked with providing the framework for recovery proceedings, conducts exams
that allow the chartered accountants, cost accountants, company secretaries and even
advocates to qualify as insolvency professionals. It changed its syllabus in July .
 ―CAs (chartered accountants) have to play a huge role in the insolvency resolution
domain,― said Arijit Chakraborty , a practising chartered accountant.―However, professional
competence, responsibility towards stakeholders and demonstration of the highest ethical
standards are required to make the exercise a success and meet the objectives of the
legislation.― ―We groom our members before they start practising,― said ICWAI president
Manas Kumar Thakur. ―Cost accountants were earlier neglected with little options to grow in
their career. Insolvency has brought in a bunch of opportunities to these people, who can now
obtain their deserved professional credits. But it is not easy to run a company even if for a
stipulated period.―

RBI Yet to Release Nos on Currency

Central bank skips releasing balance sheet for the week ended June 30
for first time ever
The Reserve Bank of India has for the first time skipped releasing the balance sheet for
the week ended June 30, the day the central bank officially closes its accounting year in its
weekly statistical supplement, thereby making the wait for the final impact of the high-value
note ban of November 2016 longer.

The central bank is still working to make the final estimate of the currency in circulation
a prominent item of liabilities on its balance sheet.
 ―The currency in circulation is a major liability on the central bank's balance sheet. They
are mandated to be put in public do main as these (the central bank's accounts) are part of the
public account,― said an economist with a local bank requesting anonymity. ―The RBI
finalises its accounts by July-end and releases it to the government in August.―

RBI governor Urjit Patel had told a Parliamentary Standing committee on July 12 that the
counting of the notes was still on and information would be provided at the earliest. It cited
the delay in announcing the amount of notes recalled to the government's decision to allow
cooperative banks to return old currency notes to the central bank, and the likelihood of
Nepal returning the banned currency as part of a bilateral deal. The total currency in
circulation comprising notes of all denominations ` . 102,000 amounted to ` . 15.4 lakh crore
which is about 85% of the total value of the currency in circula tion as of November 4, 2016,
the day `. 500 and ` . 1,000 notes were scrapped.

After disclosing the amount of scrapped currency notes two weeks after announcing the
note ban in early November last year, RBI stopped announcing the amount of old notes it had
collected. RBI releases the amount of total currency in circulation every week in its weekly
statistical supplement as part of its balance sheet and reserve money data.But it did not
disclose the June 30 numbers in its latest release. Market analysts make their extrapolations
to estimate the value of the high value notes.

ET By Invite - Will the Guv Make an Out of Turn Rate Cut?

High rates by RBI in an economy recovering from Demo can bring down
inflation
Central banks are traditionally wary about the markets dictating monetary policy .
Raghuram Rajan, former RBI Governor, under pressure to cut rates, invariably chose to do so
at his own terms. In March 2015, he cut policy repo rate by 25 basis points without waiting
for the scheduled monetary policy review meeting, taking markets by surprise. In another
instance, rate cuts were front loaded by 50 bps while markets were expecting 25 bps. These
moves conveyed not so subtle messages to the market that the RBI, and Rajan in particular,
have a distinct mind of their own. As Rajan once remarked, ―everyone and his uncle have an
idea about how to run the RBI―.

The current incumbent Urjit Patel too has a penchant for doing the unexpected. In the
December 2016 monetary policy review, status quo was maintained on rates while market
had taken a 25 bps cut for granted. The next review shocked markets with a change in stance
from accommodative to neutral. Again Patel and the Monetary Policy Committee sprung a
surprise in April by increasing the reverse repo rate. The latest MPC review seems to have
run out of ammunition for springing surprises, with data unsupportive for a hawkish stance. It
tacitly acknowledged market feedback that inflation was running out of steam, and forecast
consumer price inflation of 23.5 % for the first half of 2017-18 and 3.5-4.5 % for the second
half, much lower than the 4.5 % and 5% respectively , projected in the previous meeting. The
actual CPI reading for June at 1.54% has been even lower than the revised forecasts.

The cat and mouse game between the markets and the central banks plays out in the US
with vigour where unwinding of the Fed's balance sheet and interest rate increases are now in
action, rather than rate cuts.Probability forecasts are available on future moves in the federal
funds rate. The forecasts depend on factors including macro-economic, employment figures
and political risks.
 Back home, inflationary trends, and fiscal deficit outlook should inter alia dictate
monetary policy . But relatively high interest rates by a hawkish RBI in an economy still
recovering from the demonetisation shock can have a sobering effect and can further bring
down inflation.

In an ET column a couple of months ago, S Naren, CIO of IC ICI Prudential made a

strong case for investment in fixed income when many pundits were convinced about the start
of a tightening cycle. The contrarian view which has since turned out to be prescient was
based on the premise that the hawkish central bank would lead to a falling inflation scenario,
thus making fixed income investment attractive. The dividing line between cause and effect
appears to be getting blurred! What do the markets portend now on interest rates? A major
change has now commenced in the way indirect taxes are levied by unifying multiple taxes. It
requires all stakeholders across the supply chain to become compliant and be ready to make it
work along with a major dependence on the technology backbone.

Disruptions in the rollout due to lack of readiness or chaos due to technology glitches can
bring commerce to a standstill taking a toll on the economy .This would add fuel to the
growing clamor for rate cuts. The GST rollout has been relatively smooth so far with no head
line catching disruptions, though the final verdict will be known only a few months down the
line. The 14 % reduction in global oil prices in the first half of this year coupled with an
appreciating rupee is deflationary further strengthening the case for a rate cut.

The markets are already penciling in a cut, with 10-year Gsec yields having fallen about
30 bps recently . Counter balancing this is the race among state governments to waive farm
loans with an impact on state fiscal deficits though the Union finance ministry has washed its
hands off a demand for budgetary support from the Centre.The rollout of the central pay
commission awards too is in the offing.

It remains to be seen if Urjit Patel, through the MPC, would emulate his predecessor and
surprise the markets with an out of turn rate cut.

MONEY LAUNDERING - Tribunal Strikes Down Penalties on

15 Banks
A tribunal has struck down penalties imposed on 15 banks by the Financial Intelligence Unit
for allegedly facilitating money laundering, as claimed by digital magazine Cobrapost four
years ago.

The appellate tribunal under the Prevention of Money Laundering Prevention of Money
Laundering Act, in an 88-page order, set aside the penalties, saying the FIU failed to probe
the charges against the banks and relied solely on electronic evidence, which was not
admissible.

―It is evident that the director (FIU), before passing the impugned order, even failed to
investigate beyond the edited tapes and transcripts,― the tribunal said in the order.

―Admittedly, the FIU till date has not received the complete and unedited tapes. Thus, it
is apparent that the respondent has failed to establish its case on electronic evidence. The
transcripts uploaded online are not admissible and authorised under the law.―
 The tribunal held that the transcripts and videos were edited versions and could not be
considered proof of actual conversations.

Cobrapost had recorded some bank executives supposedly offering to convert

unaccounted money. It alleged in March 2013 that banks were systematically and deliberately
violating provisions of various laws, including the Income Tax Act, Prevention of Money
Laundering Act and knowyour-customer norms, driven by their desire to boost deposits and
increase profit.

The FIU found banks guilty for not reporting suspicious transactions and levied fines on
15 banks, including `. 26 lakh on HDFC Bank, . 14 lakh on ICICI Bank, ` ` . 5 lakh on State
Bank of India and ` . 13 lakh on Axis Bank. The banks challenged the penalties in the
appellate tribunal. The tribunal pulled up the banks for not reporting these attempted
suspicious transactions and held that in future, they and their employees should be careful
and report such discussions.

Only 7% rise in transactions through cards post demonetisation

Transactions through debit and credit cards rose by merely seven per cent post
demonetisation, as against a surge of over 23 per cent in overall digital transactions, top
government officials told a parliamentary panel.

Officials from various ministries gave a presentation to the Parliamentary Standing

Committee on Finance on 'Demonetisation and Transformation towards Digital Economy'.

The digital transactions in all modes increased by 23 per cent to 27.5 million in May 2017
from 22.4 million in November 2016, according to the presentation, a copy of which is with
PTI.

The highest jump was witnessed in transactions through UPI, from one million per day in
November 2016 to 30 million in May 2017.
UPI or Unified Payments Interface (UPI) is a system that powers multiple bank accounts into
a single mobile application for seamless fund routing and merchant payments into one hood.

Transactions through IMPS or Immediate Payment Service, which is an electronic fund

transfer service, almost doubled to 2.2 million from 1.2 million during the period under
purview, according to the data shared by government officials.

The least rise in digital transactions was witnessed in the case of plastic cards, as the rise was
only seven per cent -- from 6.8 million in November 2016 to 7.3 million in May this year.
The Narendra Modi government had on November 8, 2016 announced the demonetisation of
Rs 500 and Rs 1,000 bank notes in a bid to curtail black money.
Following the move, the government pushed for digital transactions.
RBI set to dump its soft approach, will now play
hardball over Rs 8 lakh crore bad loans

Emboldened by the Banking Regulation (Amendment) Ordinance, the RBI is

expected to push for resolution of bad loans worth around Rs 8 lakh crore by March 2019,
a move that could bring down the NPAs and improve the financial health of banks, a study
by Assocham said.

"So, it should be safe to assume that the non-performing assets (NPAs) mess would largely
be resolved by the first quarter of financial year 2019-20," Assocham study titled 'NPAs
Resolution: Light at the end of tunnel by March 2019' said.

This would be helped by a combination of several factors - turnaround in the economic cycle
and some resolute steps by the government and the Reserve Bank of India to fix the issue, it
said.

Although entire NPAs could be put on the altar of Insolvency and Bankruptcy Code (IBC)
resolution mechanism, it has to be seen how much and how fast they actually go out from the
balance sheets of banks which at this point of time seem very stressed, it said.

It is no secret that NPAs are a big drain on the financial health of banks, especially public
sector banks (PSBs).

For example, 27 PSBs collectively made an operating profit of Rs 1.5 lakh crore in 2016-17,
but after allowing for the provisioning for bad loans, among others, net operating profit
slipped to a paltry Rs 574 crore.

If balance sheet numbers are anything to go by, it simply brings home the fact that banks
have no capacity to do fresh corporate lending that is necessary for pushing subdued private
sector investment, the study said.

Releasing the report, Assocham Secretary General D S Rawat said it is to be noted that 16-
month Asset Quality Review (AQR) exercise that ended in March 2017 pulled out NPAs
from the closet and after this deep surgery strong medicine was required to quickly heal the
system.

"So, somewhat bitter medicine came in the form of the Ordinance promulgated by the
President in May. The government gave wideranging legislative powers to the Reserve Bank
of India (RBI) to issue directions to lenders to initiate insolvency proceedings for the
recovery of bad loans that have reached unacceptably high levels," he said.

Banks were reluctant to resolve NPAs through settlement schemes or sell bad loans with hair
cut to asset reconstruction companies for fear of 3Cs -- CBI, CAG and CVC. With the
institution of OC, the top bankers should get some cushion against the 3Cs, since the key
decisions which involve taking losses by the banks, would be taken by an institutional
mechanism and not one or few individuals.
Within hours of the notification of the ordinance amending the Banking Resolution Act 1949,
the RBI, eased the decision making process in the Joint Lenders' Forum (JLF) and Corrective
Action Plan (CAP) under the 'Framework for Revitalising Distressed Assets in the Economy'.

To begin with, the RBI empowered by the ordinance initiated the process of resolution and
identified 12 accounts each having more than Rs 5,000 crore of outstanding loans and which
accounting for 25 per cent or nearly Rs 2 lakh crore of total NPAs of banks for immediate
referral for reaching a conclusion under the IBC.

Second in terms of card acceptance, says Axis

Bank
Axis Bank today claimed that it stood at second position in the card acceptance industry, with
a point of sale (POS) installation base of over 4,33,000 in the country.

The bank, in 2016-17, acquired more merchants (2,18,000) than in the previous four fiscal
years, underscoring its commitment to electronic payments, Sangram Singh, Head-Cards and
Payment business, Axis Bank, said today.

The bank is actively involved in helping spreading digital payments solutions, post
demonetisation.

The bank will open 25 branches in Rajasthan in the current fiscal. It has a network of 121
branches and 412 ATMs in the state.

Bank of India banks on Project Connect to tackle

bad loans
Bank of India‘s new chief has launched Project Connect, an initiative to revive the bank that
has suffered huge losses for two consecutive years due to a sharp rise in bad loans.

―It is called Project Connect because the Connect between internal staff and clients is not
as strong as it was in olden days. So, many accounts are poached by other
banks,‖Dinabandhu Mohapatra, CEO of the state-owned bank, told ET. He said the new
initiatives are aimed at reducing bad loans, improving the share of low-cost deposits and
retail credit.

In an unprecedented move in May this year, the government ordered two executive directors
— D Mohapatra and Sunil Mehta — to join bigger banks such as Bank of India and Punjab
National Bank while demoting existing chiefs to smaller banks. Originally, Mohapatra
and Mehta were slated to join smaller banks — Syndicate Bank and Allahabad Bank,
respectively.

Banking analysts said both chiefs are under pressure to repay the confidence that the
government has reposed in them. Bank of India has posted huge losses for two consecutive
years and has run up total bad loans of close to 13% in FY17 before making provisions, but
the chief of the bank is confident that the Reserve Bank of India will not impose any
restrictions on it even though these are good enough triggers.

So far, RBI has initiated prompt corrective action (PCA) on six banks — IDBI Bank, Bank of
Maharashtra, United Bank of India, Central Bank of India, Dena Bank and Indian Overseas
Bank — by putting restrictions on their banking activity. ―Triggers are there as per the
guidelines, but they have only brought banks under PCA which are having net NPA of over
10%. They have not initiated it on banks up to 9% — we are much below 10%,‖ said
Mohapatra.

Bank of India‘s net NPA is 6.9% as on March 2016-17. ―RBI is not targeting gross NPA,‖
Mohapatra explained. On Project Connect, he said the bank will have 115 area managers who
would be stationed close to 30-35 branches and would be responsible for these branches; they
would be on field and not have a formal office and would monitor and support the zonal
offices. Further, the bank has opened a new vertical ‗Premium Client Care‘ which will cater
to the needs of the 1,000 top customers identified from the top five centres of the country.
―With this initiative, poaching can be stopped because now most PSU banks are focussing on
recovery, and in the process, they are losing good customers. We should not concentrate only
on firefighting, we should be proactive for the future,‖ he said.

Gujarat HC turns down Essar Steel's bad loan plea

in big win for banks
The Gujarat High Court dismissed Essar Steel‘s plea against the Reserve Bank of India
directive asking lenders to initiate bankruptcy proceedings against the debtladen company,
observing that the regulator and banks are empowered to do so, giving a boost to the
government‘s efforts to clean up the country‘s bad-loan mess.

But the court cautioned RBI against encroaching upon the judiciary‘s territory as a press
release it issued previously appeared to be in form of a directive to National Company Law
Tribunal (NCLT). RBI has since removed the reference in the reissued press release.

The court dismissed arguments that restructuring under the Insolvency and Bankruptcy Code
(IBC) would lead to disruptions in the company‘s operations that could threaten the
employment of thousands of workers.
The law "certainly makes it clear that, now, RBI has such powers to issue certain directions
to certain banks and banking companies so as to see that there is proper recovery of public
money or for any other such purpose," Justice SG Shah said in his order.

"When it is undisputed fact that the petitioner company has not paid its debt to the tune of
more than Rs 32,000 crore at the end of 31.3.2017 and when total debt is more than Rs
45,000 crore, it is clear and obvious that RBI is authorised to direct any banking
company to initiate insolvency resolution process."

An Essar spokesperson said the group respects the verdict but pointed out that the high court
verdict has given the company another opportunity to present its case before the NCLT.
According to Essar, the court, while highlighting the fact that the RBI has powers to issue
certain instructions to banks to ensure proper recovery of public money, also observed that
the NCLT should not allow the petition for insolvency to pass without offering an
opportunity to the company to explain its position. It further stressed on the need for the
company law tribunal to decide on its own based on facts on the validity of the insolvency
petition.

"It is undisputed fact that filing of such application cannot be questioned or that action cannot
be quashed, but it goes without saying that such filing would not amount to admitting or
allowing the petition for insolvency without offering reasonable opportunity to the Company,
which is requested to be taken into insolvency by any such person. Therefore, the
adjudicating authority being NCLT herein, which is constituted in place of the Company
Court, needs to decide on its own based upon factual details that whether the insolvency
petition is required to be entertained as such or not," an Essar statement, quoting the court
verdict, said.

The court further instructed the tribunal to consider the ongoing process of the restructuring
plan of the company before deciding on insolvency.

"Filing of an application may not result into mechanical admission of application as seen and
posed by RBI," noted the court. "It would be a decision based on judicial discretion." Essar
petitioned the Gujarat High Court against its inclusion in the list of 12 defaulters by the RBI
saying that its restructuring proposal was at an advanced stage and that its financial and
operational improvements since March 2016 have not been taken into account by RBI.
The ball is now in NCLT‘s court which will hear the main petition for insolvency against
Essar in the coming days.

Legitimacy of the Process

Some bankers said that the ruling underscores the legitimacy of the bankruptcy process.
"It has set a precedent establishing the jurisdiction of NCLT for corporate insolvency and
bankruptcy references going forward," said State Bank of India managing director Sunil
Srivastava.

The regulator said the selection of the 12 cases was based on due process.

"To ensure that the identification process does not include companies who have only recently
faced stress, the IAC (internal advisory committee) identified the seasoned NPAs (non-
performing assets) from List B, i.e., those companies which were classified as NPA to the
extent of more than 60 per cent as on March 31, 2016," RBI told the court.

The court declined to consider the point about jobs after the regulator said operations would
not be hampered.

"Though it may seem to be an attractive argument, in my humble opinion, at this stage, in a

petition under Article 226 of the Constitution of India, I do not wish to explore all such issues
and to determine anything precisely because, ultimately, all such issues would be raised
before NCLT, which has to ascertain that whether there is reason to admit the insolvency
resolution process immediately or not," said the order.

The order comes as a relief to the banking industry, which has been struggling under a bad-
loan burden of more than Rs 7 lakh crore, or 9.6 per cent of the total.
"This sets a very clear precedent as far as insolvency cases are concerned that the high courts
will not ordinarily interfere as the jurisdiction of the civil courts is expressly barred under the
code," said Amit Vyas, founder partner, Vertices Partners.

"Having examined the case, the Hon'ble Court has come to the conclusion that there is no
case for interference by HC in its writ jurisdiction. For the borrowers, they can fight these
cases under parameters that are contained in the code but not outside the framework of the
code."

The court reiterated that the central bank can‘t stipulate the kind of action NCLT can take,
referring to the line in a press release that said insolvency cases "will be accorded priority by
the National Company Law Tribunal (NCLT)".

"This also goes to show the manner in which RBI is functioning, inasmuch as there is a press
release even without a decision at certain level," said the order. "Nobody is entitled or
empowered to advise, guide or direct the judicial or quasi-judicial authority in any manner
whatsoever."

The line was removed from a later press release.