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Corporate Affairs Ministry Mulling Setting of Threshold for Homebuyers for Starting Insolvency Proceedings

In the last three years 21,000 cases have come to IBC, out of which nearly 10,000 cases have been settled

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Corporate, Ministry, Homebuyers
There is a feedback from housing and urban affairs ministry and other quarters like real estate industry that this has to be looked at, and some threshold approached has to be followed. Pixabay

In a move to limit the abuse of the Insolvency and Bankruptcy Code (IBC), the Corporate Affairs Ministry is mulling the setting of a threshold for homebuyers for starting insolvency proceedings against real estate developers, Corporate Affair Secretary Injeti Srinivas said on Monday.

Speaking to reporters, Srinivas said the ministry is also looking at a distribution formula for financial and operational creditors to create a hybrid system of auction of properties with a rigorous examination of resolution applicants to make the system more transparent and legal hassle free.

“If a single homebuyer is the (insolvency) trigger because the Rs one lakh threshold has crossed, one day default has crossed..otherwise a well-functioning company comes to NCLT (National Company Law Tribunal, it is not a happy situation,” he said.

“There is a feedback from housing and urban affairs ministry and other quarters like real estate industry that this has to be looked at, and some threshold approached has to be followed. In the last three years 21,000 cases have come to IBC, out of which nearly 10,000 cases have been settled. 8,500 cases prior to admission and about 1,500 cases resolved and over 1,500 cases are ongoing. The whole issue of system getting clogged.

Corporate, Ministry, Homebuyers
Speaking to reporters, Srinivas said the ministry is also looking at a distribution formula for financial and operational creditors to create a hybrid system of auction of properties with a rigorous examination. Pixabay

“These are real issues but the typical approach which will be beneficial is that cases that involve large outstanding and where IBC is the best option should actually take recourse to IBC. Things which are not having smaller outstanding can be better settled outside IBC. IBC is a rigorous process with lot of phases” ,” he added.

The Secretary was briefing reporters here following a meeting between Finance Minister Nirmala Sitharaman with bankers on IBC issues.

The meeting, at which he was present, also discussed the treatment of operational creditors under the IBC which has been a bone of contention.

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“The possibility of formula-based distribution (of assets) which is fairly elaborate which can give best option and reduce litigation and reduce time for litigation with (section) 29A getting settled beyond doubt, the only litigation area essentially is who gets how much, if that can be resolved in an effective manner that could be the real thing”, he said.

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He also said the government is considering ways to to make the IBC process more transparent and less litigation prone

“Right now, there and both financial and non-financial considerations. The non-financial considerations determine the eligibility and the financial considerations determine the outcome of the bids. So, there is a feeling that the non-financial considerations can be use for shortlisting and then for the bidding we can have auction mode,” he said.

“There could be possibilities that we would examine to make it more transparent and less litigation prone, whether we can have a hybrid system where we can have the rigorous examination of resolution applicants’s eligibility in one stage and after we shortlist all eligibles can there be an auction platform where they actually bid..that can increase confidence in the system,” he added.

Billionaire L.N. Mittal-owned ArcelorMittal had last year won a long-drawn auction for Essar Steel but still has not been able to take over the company. While the NCLT approved ArcelorMittal’s bid in March, some operational creditors and British lender Standard Chartered have filed appeals in higher courts.

Corporate, Ministry, Homebuyers
If a single homebuyer is the (insolvency) trigger because the Rs one lakh threshold has crossed, one day default has crossed..otherwise a well-functioning company comes to NCLT (National Company Law Tribunal, it is not a happy situation. Pixabay

Essar Steel is saddled with debt of more than Rs 50,000 crore. As per ArcelorMittal’s proposal, financial creditors would receive Rs 41,987 crore against their admitted claims of Rs 49,395 crore. Operational creditors were to get Rs 214 crore initially but this was increased to Rs 1,214 crore later.

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Standard Chartered would get only Rs 60 crore against its claim of Rs 3,487 crore. Standard Chartered and the operational creditors have submitted that the financial creditors, that is banks such as State Bank of India and Edelweiss Asset Reconstruction Company, will receive almost 90-92 per cent of their dues. (IANS)

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Guest Column: Monetary ‘Teasing’ and Fiscal Expansion

Private Estimates in this regard are between 0.2 - 0.4 per cent shy of the governments estimate

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Fiscal Expansion
Unexpected corporate tax cuts alongside previous measures announced over the last few days by the government amount to a total fiscal expansion of around 0.8 per cent of GDP at face value. Pixabay

The unexpected corporate tax cuts alongside previous measures announced over the last few days by the government amount to a total fiscal expansion of around 0.8 per cent of GDP at face value. That said, private estimates in this regard are between 0.2 – 0.4 per cent shy of the governments estimate.

Here are the growth, monetary policy, and bond market aspects of the move:

Growth
With this the government has shown a clear commitment to shore up growth even with its back against the wall, fiscally speaking. Further, it has resisted an easy consumption stimulus which may have had very little multiplier effects and possibly may have eventually contributed to some macro-economic imbalances. Rather, the tax cuts will help improve corporate profits and hopefully improve our global competitiveness. Further, incentives for new units announced may also help with attracting some of the global supply chains reallocations that are underway given escalating trade tensions.

This may, however, not necessarily be a substantial shot in the arm for near-term growth prospects. The tax cuts may be used in a variety of ways, including stepping up investments, reducing debt, cutting product prices, increasing salaries, buyback and dividends, among others.

All told, the immediate pass-through and growth impulses created may be not as strong and thus the tax buoyancy hoped for on the back of stronger growth may have to wait for a while. This is especially true as general competitiveness in an increasingly challenging world requires other aspects of factor input efficiencies to fall in place as well.

Fiscal Expansion
Fiscal policy for fiscal expansion has indeed chosen to step up to the plate, then monetary policy need not be as aggressive. Pixabay

Monetary policy
Prima facie, if, unlike earlier expectation of limited further space, fiscal policy has indeed chosen to step up to the plate, then monetary policy need not be as aggressive, all else being equal. That said, the global and local context is weak enough to argue for yet some (though not substantial) incremental role for monetary easing. This is especially true because RBI Governor Das doesn’t appear to be as large a fiscal hawk, currently (indeed welcoming the bold step from the government, after observing one day prior that fiscal space seemed limited).

We would hence look for monetary “teasing” incrementally, as opposed to “easing” that we were expecting before and would expect the repo rate to bottom out in the 5 to 5.25 per cent area. The one caveat to this view is of further global growth deterioration which would then open up room for further easing, whereas liquidity policy is expected to remain one of substantial surplus.

Fiscsal Expansion
Government has shown a clear commitment to shore up growth even with its back against the wall, towards Fiscal Expansion. Pixabay

Bonds
As noted, before term spreads have been quite wide for this part of the cycle, largely reflecting the inadequate availability of risk capital versus the supply of bonds (the same inadequacy is being reflected as higher credit spreads in the loan and credit market).

Despite more than adequate liquidity now, risk capital has been cautious possibly due to lack of confidence on market risk, given the fiscal and bond supply overhang. Since a large term premium has already existed, we wouldn’t expect a significant further expansion just because the risk has now materialized.

Further we don’t expect the entire expansion to manifest in the Centre’s fiscal deficit. After sharing this with states and accounting for other levers built in, we are looking for a final fiscal deficit of 3.7 nper cent versus the 3.3 per cent budgeted. This will entail some additional bond supply eventually, but with the cushion that the Centre’s net bond supply was slated to fall substantially in the second half of the year versus the first.

Portfolio Strategy
With the prospects of monetary easing somewhat diminishing in incremental intensity, and accounting for the somewhat higher bond supply, we may expect some amount of curve steepening going forward. This may likely happen as market participants anchor themselves to 3 thoughts: One, liquidity will remain abundantly surplus. Two, repo rate is here or modestly lower. Three, prospects of a very large bond rally are somewhat diminished (although this view will evolve going forward depending also on how much net additional supply actually manifests for local absorption) . This will likely increase appeal for the front end of the curve versus the longer duration, hence creating steepening pressure.

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Reflecting the above thought, we have cut our recent duration elongation into the 10-14 year segment and are now refocussing on being overweight 5-7 year for government bonds in our active duration funds. For AAA corporate bonds, the relative value continues in up to 5 years. These segments could better align to what remains an environment of abundant surplus liquidity, a very attractive term spread, still general lack of credit growth, and continued global monetary easing. (IANS)