Month: January 2021

By Upmanyu Trivedi

Indian courts may rule in coming months on cases involving billions of dollars in distressed assets, and the decisions could clarify what roles banks play in helping companies devastated by the pandemic.

What may be among the first of the verdicts could also be one of the most important: the Supreme Court may decide within weeks on requests by big borrowers seeking relief on repayments and defaults, in what’s being called the loan moratorium case. Courts also need to rule on pending bankruptcies whose resolution in the coming year could bring billions of dollars of much needed cash to banks.

The legal tussles pit India’s lenders, central bank and government against corporate borrowers struggling to survive amid lockdowns prompted by Covid-19. Companies are asking for more relief as the Reserve Bank of India forecasts the economy will shrink by 7.5 per cent this fiscal year, but that could cause a deeper hit for lenders than the central bank is willing to allow.

Loan moratorium case
The Supreme Court in December completed hearing arguments in the case that lasted for around two months. It’s expected to give a verdict in coming weeks, though no date has been announced.

In the same case, the top court will also rule on petitions by the central bank and lenders to lift an order that barred banks from marking loans as non-performing assets. Read more background here.

Why it matters
Courts have recently issued orders favorable for borrowers, including barring lenders from selling pledged assets and stopping banks from marking accounts as bad loans. The top court also urged the government to subsidize a 65 billion rupee ($886 million) interest waiver for small borrowers.

Some argue that India’s banks, already stuck with one of the world’s biggest bad-debt piles, would be even more reluctant to lend if courts issue orders that conflict with their contracts.

Courts’ “borrower-friendly” approach despite clear contractual terms was among the biggest reasons for legal troubles for banks in 2020, said Veena Sivaramakrishnan, a partner at law firm Shardul Amarchand Mangaldas & Co. Banks would seek certainty in enforcing contracts and “would expect the courts and the judiciary to also respect the same to continue to provide financing,” she said.

Allowing banks to mark bad loans again would help uncover the impact of the lockdowns on their financial health. The central bank, lenders and the federal government have also urged the top court to not grant more relief to borrowers because that’s a matter to be decided with economic policy. Authorities unveiled from March measures to assist companies including a six-month moratorium on loan repayments and a bar on bankruptcy filings for a year.

Major bankruptcy cases
Half of the so called “dirty dozen” — 12 big bankruptcy filings in 2017 — are yet to be resolved. Three of them are pending in the top court and may reach a verdict in the coming year. These are the next tentative hearing dates, though rulings could possibly take months:

• Jan. 11: Amtek Auto Ltd. The auto parts manufacturer owes banks about $1.7 billion. While the National Company Law Tribunal earlier this year approved a bid led by U.S.-based hedge fund Deccan Value Investors LP to take over the company, the fund has since attempted to withdraw from that plan. The top court will decide whether to allow that and if banks should be asked to conduct another round of bidding.
• Jan. 13: Bhushan Power & Steel Ltd. The court will decide whether to allow a planned purchase of the firm by JSW Steel Ltd. to go ahead. If the deal does go through, it could fetch banks about $2.6 billion.
• No date set yet: Jaypee Infratech Ltd., the largest real estate bankruptcy in India. If the top court finalizes a takeover bid from NBCC Ltd. for the company, then banks would get assets worth about $3.2 billion, according to bankruptcy regulator Insolvency and Bankruptcy Board of India.

Japan’s MUFG Bank’s centralisation of operations to streamline its business functions has resulted in some roles and departments being made redundant in some of its Indian branches, said a spokesperson.

Responding to IANS questions on the sudden termination of 26 employees (workmen and officers) the bank’s spokesperson said: “For the past few years, MUFG Bank India has undertaken a series of centralisation initiatives in order to streamline our business functions.”

The official said the reorganising exercise is part of the bank’s transformation initiatives to align with global peers, enhance client experience, and build a strong and efficient operational platform for a sustainable future.

“As a result, we have had to make some roles and departments redundant in a few of our branches. For all such roles which became redundant, we made adequate compensation arrangements beyond the amounts contemplated in law,” the official said.

Adding further the official said the bank has conducted itself with the utmost professionalism and in full compliance with all the legal and statutory requirements during this difficult period.

“We have treated all our ex-colleagues with empathy and respect throughout this process, including extending comprehensive career transition benefit programmes to each one of them. We are grateful to them for their contributions to the bank, and intend to continue to do our best to support them in their transition,” the official said.

“The roles and departments have not become redundant but their functions have been shifted to Mumbai. The Treasury and Credit Administration Department has been centralised in Mumbai. My current role and work in TCAD have not at all become redundant, on the contrary I have not been given an opportunity to get transferred and perform those roles and functions in Mumbai. These are all facts and a matter of official record,” Virender Singh, Vice President of All India MUFG Employees’ Association told IANS.

Singh is one of the 26 MUFG Bank employees who were dismissed on Dec 29, 2020.

The MUFG Bank spokesperson declined to comment on the dismissed employees’ views that the bank could have asked them whether they were willing to work in Mumbai where hiring of a large number of employees happened.

Singh also said the career transition programme that the bank official talks about is nothing but a suggestion of a consultancy firm that the dismissed employees can contact for advice.

According to the MUFG Bank’s spokesperson, the Indian business remains core to MUFG’s growth and the organisation is resilient to ride out the storm of the current harsh environment.

“We are pained to read various accusations made by AIBEA (All India Bank Employees’ Association) post this redundancy. We refrain from making any specific comments with respect to them,” the spokesperson said.

A total of 26 employees of MUFG Bank India who have put in two or three decades of service with the bank were terminated on December 29 without any reason, two employees who had lost their jobs told IANS.

They said those who were dismissed include eight workmen and 18 officers.

“Some employees – like us – were terminated over phone. Owing to Covid-19, employees attend office in a planned manner. Some employees who were in the office were escorted out with the help of bouncers,” H.S. Chaudhary, General Secretary and Singh Vice President of All India MUFG Employees’ Association told IANS.

One of the MUFG Bank employee told IANS: “On Dec 29, 2020, I was told over phone that my services are terminated and my bank account would be credited with 11 months pay and pay for three months notice period. I was asked to fill and sign the papers to get my Provident Fund and Gratuity.”

The MUFG Bank has about 400 employees in India. It has five branches – one each in New Delhi, Chennai, Bengaluru, Mumbai and Rajasthan’s Neemrana.

“Complaints will be filed with the Labour Commissioners in Chennai and Delhi against the sudden dismissal of employees by the MUFG Bank,” C.H. Venkatachalam, General Secretary, AIBEA told IANS.

He said the complaint will be about the unfair labour practices of the MUFG Bank.

“We have asked our members not to withdraw the amount credited by the MUFG Bank as the final settlement as the termination is fundamentally wrong,” Venkatachalam said.

According to Singh, the MUFG Bank had brought in a Voluntary Retirement Scheme (VRS) in 2018 but not many employees opted for it.

The dismissed officials would be in the age group of late 40s and 50s, and also included women.

“At this age the dismissed employees would be having college going children and the sudden loss of employment and the bleak possibility of getting a new one at this age will put their families into dire straits,” Chaudhary said.

Chaudhary said the bank management is trying to deunionise as all the office bearers have been terminated in the garb of centralisation of operations.

He said the management is upset with the Union as it had helped a retired driver to file a case for an increased pension amount.

“The bank had offered him a pension of about Rs 20,000 per month as a part of the VRS package. That person didn’t opt for VRS and he retired. On his retirement the pension amount is only Rs 7,000. A case has been filed citing the huge variance in the pension amount,” Chaudhary said.

“MUFG India’s asset quality remains among the best in foreign banks, benefiting from its lending policy oriented towards global multi-national corporates and local subsidiaries/joint ventures of Japanese companies and high-rated domestic corporates,” India Ratings and Research in a report said in a report in August 2020.

MUFG Bank reported nil slippages in FY19 and FY20 and fully recovered an entire account (which had earlier slipped in FY18) in FY20 (100% provided), India Ratings said.

According to India Ratings, the bank’s loan growth is expected to be muted, driven by increased prepayment and the management’s strategy to consolidate small accounts and focus on large corporates.

The Comptroller and Auditor General of India (CAG) has written to the finance ministry seeking details about the ongoing performance audit of government’s massive recapitalisation excercise of public sector banks (PSBs).

CAG is doing performance audit on recapitalisation of PSBs after 2016-17 and it has written a letter to the Department of Financial Services, Ministry of Finance, seeking various information, including rationale for distribution of capital among different PSBs, sources said.

The Government of India made capital infusion to the tune of Rs 90,000 crore in 2017-18. This rose to Rs 1.06 lakh crore in the following year. During the last financial year, the capital infusion through bonds was Rs 70,000 crore.

For the current fiscal, the government has earmarked Rs 20,000 crore for the capital infusion into the PSBs. Of this, the government allocated Rs 5,500 crore to Punjab & Sind Bank in November 2020 for meeting the regulatory requirement prescribed under the Basel III guidelines.

The audit may be going to analyse the impact of capital infusion in PSBs and how it has been able to improve the financial parameters such as Return on Assets (ROA), Return on Equity (ROE) and rate of growth of advances, sources said.

In its last report released in July 2017, CAG had pointed out some shortcomings in distribution of capital to various banks.

It had also raised doubts over possibility of PSU banks raising about Rs 1 lakh crore from market by 2019.

“The rationale for distribution of government of India capital among different PSBs was not found on record in all cases. Some banks which did not qualify for additional capital as per decided norms were infused with capital, a bank was infused with more capital than required, while others did not receive the requisite capital to meet their capital adequacy requirements,” CAG had said.

The Centre infused Rs 1,18,724 crore in PSBs during 2008-09 to 2016-17. CAG had said. Of this, SBI received the maximum capital infusion of Rs 26,948 crore, which is nearly 22.7 per cent of the total capital infusion.

IDBI Bank, Central Bank of India, Indian Overseas Bank and Bank of India were also significant beneficiaries with 8.77 per cent, 8.61 per cent, 7.88 per cent and 7.80 per cent of the total capital infusion, respectively. Punjab & Sind Bank and Indian Bank received the lowest capital infusion, at 0.20 per cent and 0.24 per cent of the total funds infused.

Central Bank of India and UCO Bank were given capital in eight out of nine years under audit scrutiny while Indian Bank received capital only once, in 2014-15.

The ground seems to be ready to experiment new options for resolution of stress and the market is anticipating a hybrid framework between a court-supervised insolvency framework and an out-of-court restructuring schemes, IBBI Chairperson M S Sahoo has said.

In place for more than four years, the Insolvency and Bankruptcy Code (IBC) is helping in resolution of stressed assets in a market-linked and time-bound manner, and the proposal for “pre-pack” framework is also in the works.

“Since some tasks of an insolvency proceeding are completed before the formal process begins, and some elements of formal process are avoided, pre-pack saves both on costs and time,” Sahoo told PTI.

The Insolvency and Bankruptcy Board of India (IBBI), a key institution in implementing the IBC, has also taken various steps to address difficulties of stakeholders concerned.

According to him, insolvency regimes in most jurisdictions are not designed to address delinquencies arising from the COVID-19-like crisis when several viable businesses simultaneously fail to stand on their feet for force majeure conditions. Also, the availability of resolution applicants to rescue them remains a concern.

“This has highlighted the need for pre-pack which is considered fast, cost-efficient and effective in resolution of stress, with the least business disruptions.

In an e-mail interview, Sahoo also pointed out that with considerable learning and maturity of the ecosystem, and a reasonably fair debtor-creditor relationship in place, the ground seems ready to experiment new options for resolution of stress.

“The market has been advocating and anticipating a resolution framework which is a hybrid between the court-supervised insolvency framework and out-of-court restructuring schemes that incorporates the virtues of both the worlds sans their demerits. The most popular form of such dispensation is pre-pack,” he noted.

Generally, under a pre-pack (pre-packaged) process, main stakeholders like creditors, shareholders and the existing management/ promoter can come together to identify a prospective buyer. Then, they can negotiate a resolution plan before submitting the same to the National Company Law Tribunal (NCLT) for formal approval.

From December 1, 2016 till the end of September last year, total 4,008 CIRPs (Corporate Insolvency Resolution Processes) have commenced under the IBC.

Out of the total, 473 CIRPs have been closed on appeal or review or settled, 291 have been withdrawn, 1,025 have ended in orders for liquidation and 277 have ended in approval of resolution plans, as per data compiled by the IBBI.

The provisions relating to CIRP came into effect from December 1, 2016.

In the wake of the COVID-19 pandemic, the government has suspended fresh proceedings under the IBC since March 25 last year. Last month, the suspension period was extended till March, which means that fresh cases cannot be filed under the IBC for almost the whole of the current fiscal — April 2020 to March 2021 period.

On whether there is a possibility of a flurry of insolvency cases coming up once the suspension is done away with, Sahoo said the number of applications for initiating insolvency is likely to increase but the increase may not be significant.

He noted that stakeholders are continuing to resolve stress through various modes such as scheme of compromise or arrangement under the Companies Act, 2013, and the RBI‘s prudential framework. Entities are also going for corporate insolvency resolution process in respect of stress other than related to COVID-19.

According to him, stakeholders are exploring innovative options for resolution of stress while taking several cost cutting measures to avoid stress.

Also, Sahoo said viable companies would have normal business operations after the pandemic subsides, higher threshold of default for initiation insolvency proceedings keeps most MSMEs out of insolvency proceedings and COVID-19 period defaults remain outside insolvency proceedings forever.