Revised Framework on Resolution of Stressed Assets dated February 12, 2018

The Reserve Bank of India (RBI) vide its notification bearing ref. no. DBR.No.BP.BC.101/21.04.048/2017-18 dated February 12, 2018 (Revised Framework) brought into effect a new framework with a view to early identification and resolution of stressed assets in harmonisation with the principles of Insolvency and Bankruptcy Code, 2016 (IBC).

Withdrawal of extant instructions

With the notification of this Revised Framework, all the extant instructions on resolution of stressed assets such as Framework for Revitalising Distressed Assets, Corporate Debt Restructuring Scheme, Flexible Structuring of Existing Long Term Project Loans, Strategic Debt Restructuring Scheme (SDR), Change in Ownership outside SDR, and Scheme for Sustainable Structuring of Stressed Assets (S4A) stand withdrawn with immediate effect. Accordingly, the Joint Lenders’ Forum as an institutional mechanism for resolution of stressed accounts also stands discontinued. All accounts, including such accounts where any of the schemes have been invoked but not yet implemented, shall be governed by the Revised Framework.

Some important definitions under the Revised Framework:

  1. Default has been defined as non-payment of debt when whole or any part or instalment of the amount of debt has become due and payable and is not repaid by the debtor or the corporate debtor, as the case may be.

    For revolving facilities like cash credit, default would also mean, without prejudice to the above, the outstanding balance remaining continuously in excess of the sanctioned limit or drawing power, whichever is lower, for more than 30 days.

  2. Aggregate Exposure under the Revised Framework would include all fund based and non-fund based exposure with the lenders.

  3. ‘Specified Period’ means the period from the date of implementation of RP up to the date by which at least 20 percent of the outstanding principal debt as per the RP and interest capitalisation sanctioned as part of the restructuring, if any, is repaid.

    Provided that the Specified Period cannot end before one year from the commencement of the first payment of interest or principal (whichever is later) on the credit facility with the longest period of moratorium under the terms of RP.

  1. ‘Restructuring’ as an act in which a lender, for economic or legal reasons relating to the borrower’s financial difficulty (An illustrative non-exhaustive list of indicators of financial difficulty are given in the Appendix to Annex-I of the Revised Framework), grants concessions to the borrower. Restructuring would normally involve modification of terms of the advances/securities, which may include, among others, alteration of repayment period / repayable amount / the amount of instalments/rate of interest; rollover of credit facilities; sanction of additional credit facility; enhancement of existing credit limits; and, compromise settlements where time for payment of settlement amount exceeds three months.

 

1. Early identification of stress through stringent reporting requirements:

Lenders shall identify early stress immediately on Default by classifying stressed assets as special mention accounts as per the following categories:’

SMA sub-categories Basis for classification –

Principal or interest payment or any other amount wholly or partly overdue between

SMA-0 1-30 days
SMA-1 31-60 days
SMA – 2 61-90 days

Applicability:  All borrower entities having Aggregate Exposure  (i.e. including fund based and non-fund based) of Rs. 50.00 million and above.  

Reporting of Credit information –

  • The lenders shall now report credit information, including classification of an SMA Accounts, to Central Repository of Information on Large Credits [CRILC] on monthly basis effective April 01, 2018.

Reporting of Default –

  • For reporting of Default, the lenders shall now report to CRILC on a weekly basis, at the close of business on every Friday or the preceding working day if Friday happens to be a holiday.

2. Implementation of Resolution Plan (RP) :

The Revised Framework, in order to prevent defaults of borrower entities turn into non-performing assets has mandated the lenders to put in place Board-approved policies for resolution of stressed assets under this framework, including timelines of resolution.

The lenders are mandated to refer borrower entities for resolution under IBC if –

  1. the RP could not be implemented as per the timelines, after the expiry of 15 days of such timelines; and
  2. if the borrower entity defaults during the Specified Period of RP, within 15 days from the date of default.

Cross Default Rights –

Such a resolution can be proposed either singly or jointly by the lenders which mean that even in case of default of one single lender; other lenders can join such lender for resolution of the stressed asset.  This also substantiates cross default rights that are obtained by the lenders under their loan agreements.

The Revised Framework has described RP as any action/plans / reorganization including, any actions/plans/reorganization including, but not limited to, regularisation of the account by payment of all over dues by the borrower entity, the sale of the exposures to other entities/investors, change in ownership, or Restructuring.

Author’s Observations:

  1. This Revised Framework aims to give a statutory recognition to Cross Default Rights which though being a standard norm in banking, its implementation was always a subjective matter and was available to the other Lenders, whether within or outside the Consortium, only to the extent of mutual agreement between the Borrower and the Lender. This is a very welcome step by RBI.
  2. The RP does not include option of conversion of debt into equity which hitherto was available to the lenders under SDR and S4A. Does this mean under the Revised Framework, lenders will not be allowed to convert their debt into equity or the RBI does not envisage conversion of debt into equity as a viable option for Restructuring of stressed assets?
  3. Implementation Conditions of RP:
    The Revised Framework has also implementation conditions of RP and such an RP shall be deemed to be implemented only if the following conditions are met –

    1. The Borrower is no longer in default with any of the lenders;
    2. In case of restructuring, all the documentation pertaining to restructuring including execution of necessary agreements, creation and perfection of securities are completed by all lenders.
    3. Finally, the new capital structure and/or changes in the terms of conditions of the existing loans get duly reflected in the books of all the lenders and the borrower.
  4. Independent Credit Evaluation (ICE):
    RPs involving restructuring/change in ownership will require ICE of the residual debt as mentioned below –

    1. In case of ‘large’ accounts (i.e. accounts where aggregate exposure of lenders is Rs. 100.00 Crore and above), such ‘large’ accounts will require ICE of the residual debt by Credit Rating Agencies specifically authorised by RBI for this purpose.
    2. Accounts with aggregate exposure of Rs. 500.00 Crore and above will require two such ICEs.
    3. Only such RPs which receives a credit opinion of RP4 or better for the residual debt from one or two CRAs, as the case may be, shall be considered for implementation.

 

‘residual debt’ of the borrower entity, in this context, means the aggregate debt (fund based as well as non-fund based) envisaged to be held by all the lenders as per the proposed RP.

 

RP4 is the ICE symbol that has been separately defined under Annexure – 2 of the Revised Framework.

5. Default of Borrower Entities with Aggregate Exposure less than Rs. 100.00 Crore :

Clause D of the Revised Framework prescribes timelines for reference dates of borrower entities having Aggregate Exposure at Rs. 2000.00 Crore and above for implementation of RP. The reference date here shall mean March 1, 2018. The RP shall be implemented as per following timelines:

  1. If in default as on the reference date, then 180 days from the reference date.
  2. If in default after the reference date, then 180 days from the date of first such default.

The above timelines are applicable for accounts where resolution have been initiated under any of the existing schemes and also for those accounts where have been classified as restructured standard assets.

In respect of borrower entities with Aggregate Exposure of Rs. 100.00 Crore and above to less than Rs. 2000.00 Crore, RBI will announce reference dates for implementation of RP over a two year period.

Author’s Observations:

No Mechanism for accounts having Aggregate Exposure less than Rs. 100.00 Crore –

The Revised Framework does not explain how the lenders should deal with accounts having Aggregate Exposure less than Rs. 100.00 Crore nor does it specify any RP for borrower entities having Aggregate Exposure of less than Rs. 100.00 Crore. But that does not exclude stressed assets of less than Rs. 100.00 Crore from Revised Framework and this does not seem to be the intention of the drafters of the Revised Framework. Does this mean that the lenders have the liberty to resolve the stressed assets of less than Rs. 100.00 Crore on their own including write off, one-time settlement of such accounts or other recourse available to the lenders under extant laws?

Provisioning for Non-Performing Accounts (NPA)-

Through this Revised Framework, the lenders may have to increase their provisioning in respect of stressed accounts. But if one looks at the larger intent of this Revised Framework which, inter alia, is to arrest the slippage of a doubtful asset to an NPA, stopping evergreening of stressed Accounts and stringent reporting norms for default of Rs. 5.00 Crore or more, an RP will certainly help the lenders to take corrective actions in the event of a default.

Cleansing the Banking System in India –

The RP under this Revised Framework and the IBC, collectively, shows the intent of the Government and the RBI to clean the entire banking system in India by breaking the nexus of politicians-banks-businessmen and help the banking system to serve its ultimate objective i.e. to lend money for the benefit of the public at large.

The entire text of the Revised Framework can be viewed on the link given below –

https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11218&Mode=0


ABOUT THE AUTHOR

CS Nilesh Javker

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CS Nilesh Javker is Assistant General Manager – Legal in the Legal Department of Welspun Group at its corporate office in Mumbai and working with Welspun Group since April 2010. He has interests in studying and research of various commercial laws such as Companies Act, 2013, Securities Laws, Insolvency and Bankruptcy Code, 2016, The Foreign Exchange Management Act, 1999, The Competition Act, 2002, The Arbitration and Conciliation Act, 1996. He has also worked extensively in company secretarial matters of both listed and unlisted companies, banking and finance documentation, contracts, tenders, agreements, civil litigations and corporate transactions such as mergers, demergers and acquisitions.

The Insolvency and Bankruptcy Code, 2016: A Blessing for Outstanding Trade Creditors

The Insolvency and Bankruptcy Code, 2016 (IBC) has helped the operational creditors i.e. outstanding trade creditors to recover their dues. The definition of Operational Creditors also includes employees within its ambit.

A rough estimate of the total cases filed in National Company Law Tribunal (NCLT) across the country shows that 70% or more of them have been filed by Operational Creditors to recover their dues.

If the corporate debtor does not make payment of the dues within a period of 10 days from the date of delivery of demand notice in Form 3 or a copy of an invoice attached with a notice in Form 4 demanding payment under sub-section (1) of section 8 of IBC or brings to the notice of operational creditor existence of a dispute, if any, and record of the pendency of the suit or arbitration proceedings filed before the receipt of such notice or invoice in relation to such dispute, the operational creditor can file his application with NCLT within the jurisdiction of the registered office of the corporate debtor (“Adjudicating Authority”). The Adjudicating Authority, upon admission of such application of insolvency order for a moratorium for a period of 180 days with a onetime extension of 90 days.

Once the order for moratorium is passed, the Interim Resolution Professional (IRP) takes over the control of the corporate debtor and the management of affairs of the corporate debtor vests with the IRP. All the powers of the board of directors or the partners of the corporate debtor, as the case may be, stand suspended and are exercised by the IRP.

The IRP then collates all the claims received against the corporate debtor and after determining the financial position of the corporate debtor, constitute a Committee of Creditors (CoC) which includes both secured and trade creditors and is duty bound to work under the guidance and control of the CoC.

The next step here is the resolution of the corporate debtor under Regulation 37 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (“IBBI Regulations”) and if the revival/resolution plan doesn’t work out for CoC, liquidation of the corporate debtor is the ultimate weapon in the hands of CoC.

In fact, IBC has gone ahead and stipulated in Regulation 38 of the IBBI Regulations that the resolution plan shall identify specific sources of funds that will be used to pay the liquidation value due to operational creditors and provide for such payment in priority to any financial creditor which shall, in any event, be made before the expiry of thirty days after the approval of a resolution plan by the Adjudicating Authority. Through this regulation, the IBC legislation has given preference for recovery of the outstanding dues of the corporate debtor payable to the business community at large or the employees, as the case may be, ahead of the financial creditors which hitherto were never thought of in our earlier legislations relating to recovery of money.

Further, Rule 5 (3) of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, requires the Operational Creditor to file a copy of demand notice or invoice demanding payment served under this rule to be filed with an information utility, which at present is one, i.e. National E-Governance Services Limited (NESL) having its administrative office at Bengaluru and registered and corporate office at Mumbai. A copy of the demand notice or invoice demanding payment has to be submitted online with NESL at its website www.nesl.co.in. NESL does not acknowledge any hard copies of such demand notice or invoice demanding payment submitted with it.

A few public sector banks viz. State Bank of India, Oriental Bank of Commerce, Punjab National Bank and Union Bank of India have also signed information utility pacts with NESL.

The Information Utility serves the needs of the banking system by providing data to Insolvency Professionals/Adjudicating Authority/ Insolvency Bank Board of India about the borrowings/defaults committed by the corporate debtor.

Though, submission of a copy of demand notice or invoice demanding payment by an operational creditor to NESL is optional as per Rule 5 (3) of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, it is advisable to submit this information to NESL due to the very objective behind constitution of NESL is to collect and collate data of defaults committed by the Corporate Debtor and provide it to the Financial Creditors as and when they require. The Financial Creditors may then use this data of defaults committed by the Corporate Debtor to gauge the creditworthiness of the Corporate Debtor.

Once this information is submitted with NESL, the corporate debtor may find it very difficult to smoothly run his business until and unless he settles his dues with the operational creditor or submits his reply of existence of dispute or pendency of suit or arbitration proceeding to the corporate debtor and conveys such settlement of dues or existence of dispute, as the case may be, in writing to the said Information Utility.

There have been instances wherein the debtors who were unwilling to pay even the principal amount of the outstanding trade creditors, upon receipt of the demand notice under IBC, has paid the principal amount along with the overdue interest.

The credible threat of loss of control of the corporate debtor and subsequent steps mentioned above, itself, act as a major deterrent to the promoters of the corporate debtor. The admission of insolvency application with the Adjudicating Authority may also result in the deterioration of credit ratings of the borrowings and depict an unsatisfactory picture about the financial soundness of the corporate debtor amongst the investors, its prospective customers and to the public at large.

Thus, this legal recourse made available to outstanding trade creditors has come as a real blessing to the operational creditors to recover their dues in a time bound and cost effective manner which otherwise was not possible for the operational creditor under any of the previous laws.


ABOUT THE AUTHOR

CS Nilesh Javker

Picture1

CS Nilesh Javker is Assistant General Manager – Legal in the Legal Department of Welspun Group at its corporate office in Mumbai and working with Welspun Group since April 2010. He has interests in studying and research of various commercial laws such as Companies Act, 2013, Securities Laws, Insolvency and Bankruptcy Code, 2016, The Foreign Exchange Management Act, 1999, The Competition Act, 2002, The Arbitration and Conciliation Act, 1996. He has also worked extensively in company secretarial matters of both listed and unlisted companies, banking and finance documentation, contracts, tenders, agreements, civil litigations and corporate transactions such as mergers, demergers and acquisitions.

Board Independence

This article has been written by Sonali Srivastava. Sonali is currently a third-year student in National Law University Odisha.

India, see concentrated shareholdings in companies majorly.  The fact that directors are under direct influence of controlling shareholders leads to scams and prevent any foreign investments in company.  To prevent increased skepticism about independence of directors and to increase credibility and reputation of Indian Companies in International Market lead to enhancement of corporate governance norm in Clause 49 of listing agreement, SEBI LODR Regulations and in Companies Act 2013. Section 149 of Companies Act, defines the role, responsibilities and liabilities of Independent Directors. Clause 49, requirement that public listed companies board should at least consists of one third of independent director and if chairman of board is executive or promoter or any person related to him, than half of the board must consist of independent Director.

Insider model shows controlling shareholders directly influence the election of Independent Director. Recent changes lead to establishment of Nomination and remuneration committee which is going to appoint all directors now. The interesting condition put forth is that majority in nomination committee will be Independent directors. Functions of committee are to set criteria for determining qualifications required to be a director, identify and recommend deserving candidate and also to evaluate director.  This is a major step towards strengthening of board independence concept in India.

However some shortcomings in the new regime for independent director appointment is that again controlling shareholders will only appoint the members which give rise to same concern regarding board independence.  If we suppose that there is no influence of controlling shareholder, eventually the names nominated by the committee will be finalized by the majority again.  Therefore it can say that independence is peripheral and reforms failed to provide solution for the agency problems existing in Indian Companies.

Moreover, whole appointment and removal game is in hand of majority as it requires three fourth majority to take any decision in this respect.  As we seen movement from shareholder to stakeholder theory, independent director might confront conflict of interest between controlling shareholder and other stakeholders or minority shareholder. For enforcement of stakeholder’s interest, no right or remedy has been provided to them in recent reforms. This in a way again hinder the growth as it give independent director indirect discretion to his choice as to whose interest he has to protect.

Talking about the liabilities of Independent Director as provided in Companies Act, 2013, it suggest that monitoring the affairs of the company is regarded as primary function of independent director.  The shareholders has been given power to bring restraint order like injunction order and right to claim damages/ compensation from director for breaching of his duties  and for criminal breach, punishment like imprisonment and other penalties are imposed.

 Companies Act, provides for Class Action under Section 254 for all fraudulent and wrongful activities committed by directors.  It also laid to establishment of National Company law Tribunal for effective and speedy disposal of cases. Various reforms done shows greater liabilities and burden is imposed on shoulder of Independent Director by way of severe penalties. No reforms provide potential solution regarding agency problem and other difficulties which will be raised during implementation of these norms.

No doubt reforms bring higher penalty and stringent laws to regulate corporate governance in India. However such norms may in a way will take away deserving candidates capable of regulating board Independence in Companies. In order to achieve Ultimate motive of regulations, I suggest we should adopt such a voting which exclude such shareholders having interest in transaction and thereby solving agency problem to an extent. So although board independence plays a significant role in corporate governance, yet much is required to learn about the concept.



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Corporate Social Responsibility

This article has been written by Sonali Srivastava. Sonali is currently a third-year student in National Law University Odisha.

Corporate Social Responsibility is seen as an initiative taken by the companies whereby they take responsibility of and accountability for their activities. The effects company have on environment and society around it is the basic concern with which corporate social responsibility deal. Somehow in india the term CSR is highly misunderstood among companies. Some companies think that it is merely a regulation with which they have to comply, however the perspective behind CSR is the wider impact which company have on its surrounding .

The ‘Triple Bottom Line” model, emphasis on three responsibility of firm which comes on it wityh the type of activities it carry out. They are: social, economic and environmental. These responsibilities are necessary to ensure economic prosperity, environmental quality and social justice.[1]

We can see corporate social responsibility is integral part of corporate governance which bring a change as it shift the idea with which a firm works i.e. from shareholder’s theory to stakeholder’s theory.  Basically actions of the firm which are not for their profit maximization but have good impact on society and environment can be called as Corporate social responsibility. Today according to certain survey conducted in Indian Companies, we came across certain drivers and barriers of CSR in India. The most prominent driver for CSR is seen to be Philanthrophy, however others being image building, employee morale amd ethics. The survey report suggests that this may be attributed to an enabling corporate environment that is more conscious of the implications of involvement of business in CSR activities with specific reference to the Indian context.[2] However talking about the challenges faced by CSR are like Lack of community participation in CSR activities, Need for capacity building of the local, non-governmental organizations, sues of transparency.   It seems unless the poverty is eliminated from the society, the growth of economy can never be achieve in full fledged manner. Here comes the role of corporations and their corporate social responsibility which they need to play honestly and have tactful implement of their policies which they made for community welfare.

However previously we saw corporate social responsibility as voluntarty step taken by corporations for betterment of society . however now, with the massive efforts of Mr. Sachin Pilot and other parliamentary members, CSR has gained importance in New Companies Act, 2013.[3]  Section 135 of Companies Act determines Corporate Social Responsibitly. Certain new additions to CSR provision are:

  • Constitute a CSR committee of Board which shall consist of minimum three directors, out of which one shall be independent director.
  • The committee shall formulate and recommend CSR Policy which indicates company’s activity as specified in Schedule VII and also amount recommend for the same.
  • At least 2% of the average net profit of the immediately preceding three financial years of the company shall be used for spending in accordance with the CSR Policy.
  • According to the approach “Comply or Explain”, Board should explain the reason for not spending such amount if it fails to do so.
  • The company shall give preference to its local area from where it operates, for CSR activities.

Earlier the corporate self regulation was seen as the only and dominant aim of corporation in their area of Corporate Conduct. However the laws now address the issues relating to stakeholders and protection of their interest as one of the main aims which the corporation has to fulfill as part of their corporate conduct.

They is also one more view to Corporate Social Responsibility which is generally called as negative aspect of it. It is said that under CSR company must not carry out any activity which has negative impact on its stakeholders and community. Now it is seen that Indian companies are more focused on positive aspect of CSR which says only to do philanthropy and companies keep doing it in order to compensate for the disastrous impact which their activities have on society. Noted Indian philanthropist Rohini Nilekani has called the provision an “outsourcing of governance” that is taking the failure of the state and the corporate and trying to create a model out of it[4]. In India, there are less chances of CSR existing smoothly with profit making goals of company. It is diversity of stakeholder interests that make it difficult for companies and boards to measure performance and Corporations in India have concentrated shareholding so still board members are puppet in hand of promoters or majority shareholders. The CSR provisions show the responsibility of board to manage CSR policies. Now this shows that there is risk of promoters serving their own self interest in the name of CSR policies.

However, the challenge for the companies is to determine a strong and innovative CSR strategy which should deliver high performance in ethical, environmental and social areas and meet all the stakeholders‟ objectives. It can be said, extensive research and studies need to be done in order to make CSR more effective and innovative.


[1] Grahame F. Thompson, Global Corporate Citizenship: What Does it Mean?, 9Competition & Change 131–152, 131-152 (2005).

[2] A Review of Corporate Social Responsibility in India by Bimal Arora and Ravi Purnik

[3]Corporate Social Responsibility is the continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as of the local community and society at large”, Lord Holme and Richard Watts, available at:
http://megamindservices.in/pdfs/CORPORATE%20SOCIAL%20RESPONSIBILITY.pdf

[4] See Corporate Social Responsibility in India: No Clear Definition, but Plenty of Debate, KNOWLEDGE@WHARTON (Aug. 2, 2011).



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Role of Lawyers in Capital Market Transactions

This article has been written by Piyush Bajaj. Piyush is currently a BCom LLB student at Amity Law School, Noida.

Capital market is a market where buyers and sellers engage in trade of financial securities like bonds, stocks, etc. The buying/selling is undertaken by participants such as individuals and institutions.Capital markets help channelize surplus funds from savers to institutions which then invest them into productive use. Generally, this market trades mostly in long-term securities.Capital market consists of primary markets and secondary markets. Primary markets deal with trade of new issues of stocks and other securities, whereas secondary market deals with the exchange of existing or previously-issued securities. Another important division in the capital market is based on the nature of security traded, i.e. stock market and bond market.

CAPITAL MARKET TRANSACTIONS

The capital market transactions are made while trading in the capital market securities. Stocks and bonds are the two types of securities where the capital market investments are done. Capital market transactions are monitored by the financial regulatory bodies. A typical capital market includes the trading of securities.
This is also the ideal market place for the companies and governments to raise funds. There are financial regulatory bodies in every country that monitor and regulate the capital market transactions to protect the investors from being cheated. U.S. Securities and Exchange Commission, Australian Securities and Investments Commission, Canadian Securities Administrators, Financial Services Authority (UK) and Securities and Exchange Board of India are some of the major financial regulators that regulate the capital market transactions in their respective countries.

The investment in the capital market can be done either in the new issues or in the existing securities. The primary capital market controls the new issue transactions while the secondary capital market takes care of the trading of the existing securities.
The corporations, banks or governments release stocks and bonds in the capital market to raise the long-term funds. The individual investors, companies, agencies and corporations can invest in these stocks and bonds either by purchasing or selling them. The trading of stocks and bonds in the capital is not easy for the novice and not even for the seasoned investors. It’s difficult to predict the trends of a capital market.

Every investor wants to play safe with their investments. There are financial advisers available to guide the investors telling them where to invest and where not to. There are stock brokers also who are experienced and eligible to guide people with stock and bond investments.

The capital market transactions are done by the brokers who are registered with the exchange to carry out the trading on behalf of their clients. Any individual cannot just walk in the stock exchange and invest on the stocks or bonds. He must have to go through the brokers to make any kind of transaction in the capital market.

EXAMPLES OF CAPITAL MARKET TRANSACTIONS

A government raising money on the primary markets

When a government wants to raise long term finance it will often sell bonds to the capital markets. In the 20th and early 21st century, many governments would use investment banks to organize the sale of their bonds. The leading bank would underwrite the bonds, and would often head up a syndicate of brokers, some of whom might be based in other investment banks. The syndicate would then sell to various investors. For developing countries, a multilateral development bank would sometimes provide an additional layer of underwriting, resulting in risk being shared between the investment bank, the multilateral organization, and the end investors. However, since 1997 it has been increasingly common for governments of the larger nations to bypass investment banks by making their bonds directly available for purchase over the Internet. Many governments now sell most of their bonds by computerized auction. Typically large volumes are put up for sale in one go; a government may only hold a small number of auctions each year. Some governments will also sell a continuous stream of bonds through other channels. The biggest single seller of debt is the US Government; there are usually several transactions for such sales every second,which corresponds to the continuous updating of the US real time debt clock.

Trading on the secondary markets

Most capital market transactions take place on the secondary market. On the primary market, each security can be sold only once, and the process to create batches of new shares or bonds is often lengthy due to regulatory requirements. On the secondary markets, there is no limit on the number of times a security can be traded, and the process is usually very quick. With the rise of strategies such as high-frequency trading, a single security could in theory be traded thousands of times within a single hour. Transactions on the secondary market don’t directly help raise finance, but they do make it easier for companies and governments to raise finance on the primary market, as investors know if they want to get their money back in a hurry, they will usually be easily able to re-sell their securities. Sometimes however secondary capital market transactions can have a negative effect on the primary borrowers – for example, if a large proportion of investors try to sell their bonds, this can push up the yields for future issues from the same entity. An extreme example occurred shortly after Bill Clinton began his first term as President of the United States; Clinton was forced to abandon some of the spending increases he’d promised in his election campaign due to pressure from the bond markets. In the 21st century, several governments have tried to lock in as much as possible of their borrowing into long dated bonds, so they are less vulnerable to pressure from the markets. Following the financial crisis of 2007–08, the introduction of Quantitative easing further reduced the ability of private actors to push up the yields of government bonds, at least for countries with a Central bank able to engage in substantial Open market operations.

ROLE OF LAWYERS

“There are lots of laws which regulate the trading of loans and debts,like whether they are public or privately traded. Lawyers also get involved in creating the product: the packaging of loans and selling of the interests in them.”

Lawyers are key players in the transactional processes which permeate the world of capital markets. They advise debt and equity issuers and the investment banks which structures and sells the financial instruments. The role of lawyers includes advising on legal and regulatory matters, drafting documents, negotiating contracts, and working with bankers to obtain approval from various external parties such as regulators, listing agencies and rating agencies. Some transactions are straightforward (‘cookie cutter’) deals because some parties are frequently active in the market and use standard documents. Some transactions are bespoke and more complex. Junior lawyers cut their teeth on cookie-cutter deals, but as lawyers gain more experience they (hopefully) work on more specialized deals.

Legal and regulatory advice: In equity capital markets an IPO is transformatory for a company. It requires hours of lawyers’ time to ensure the company is ready to list on an exchange and take the company’s board through every step in the process. A first-time borrower in the debt capital markets also requires a lot of lawyer time to prepare it for the new transaction. Much of this type of activity is cross-border, which means considerable time need to be spent working out how various regulations fit together and liaising with local lawyers. For example, it is not unusual for a UK firm to lead on the IPO of a Kazakh company, listed in the EU, with offerings in other jurisdictions, including in the USA. And there’s nothing cookie-cutter about all that.

When it comes to drafting documents, there are key clauses to get right, and in many cases huge volumes of documents to prepare and amend. While swap confirmations and other derivatives contracts are often short (although complex), most capital markets transactions are just the opposite. The selling document for securities (a prospectus) can range from 15 pages to more than 500, and the contractual documents are not far behind. Securitization probably tops the charts for most documentation and therefore worst hours! At university, the longer the essay the more likely you were to stay up all night, nothing much changes in a law firm.

Negotiating contracts is a big part of the job. There are a lot of contracts which need to be signed off by a lot of parties and every contract is of great importance to every party. As such, negotiations can be protracted. Issuers want the best terms; investment banks need the clauses to be acceptable to their internal credit committees, and in the case of securities, they want terms that make the product optimal for selling. Investors are usually not involved in the negotiations; however, if they don’t like the way the instruments are structured, they won’t buy them!

Regulatory and other approvals are a necessary step. They range from simple listing approvals for frequent bond issuers, to more time-consuming activities like a first listing approval of a securitization of Russian credit card loans on the London Stock Exchange. Ratings agencies also require legal advice when determining a product’s rating.

Long hours, complex contracts, demanding clients – What is the attraction? The opportunity to work with a client on a huge transaction; the sense of teamwork involved when grafting alongside people from banks, client companies and other law firms; the fun of negotiation and the buzz of finally creating a transaction that complies with all the different laws and regulations and which an investor will still want to buy.


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Balance of Payments: The Weak Link Of Indian Economy

This article has been written by S. Mahavir Prasad Sahu. An aspiring CA and young IPCC student, Mahavir loves to discuss Tax and Finance.

Balance of Payment is one of the oldest and most important statistical statements for any Country. It is a Systematic record of all economic transaction between the resident of one country and the resident of the rest of the world in a year.

Balance Of Trade:  Balance of trade may be defined as the difference between the value of goods sold to foreigner by the residents and firms of the home country and the value of goods purchased by them from foreigners. If value of exports of goods is equal to the value of imports of goods, we say that there is a balance of trade deficit. But if the former exceeds the latter, i.e., if value of exports of goods is more than the value of imports of goods, we say there is surplus balance of trade.

Balance of Current Account:   Balance of current account is a broader concept than the balance of trade. It includes balance of services and balance of unilateral transfers (i.e., unrequited transfer) besides including balance of trade. Balance of service records all the services exported and imported by the country in a year. Unlike goods which are visible and tangible, services are invisible and are not tangible. The services transaction basically include : (i) Transportation, banking and insurance receipt and payments from and to the foreign countries, (ii) Tourism, travel services and tourist purchases of goods and services received from foreign visitor to home country and paid out in foreign country by home country citizens, (iii) Expense of  diplomatic and military personnel from overseas as well as receipts from similar personnel from overseas who are stationed in the home country, and (iv) interest, profits, dividends and royalties received and paid from and to the foreigners. Balance of service is the sum of all invisible service receipt and payments which could be zero, positive or negative. Balance of unrequited transfers includes all gifts, donation, grants and reparation, receipt and payments to foreign countries.

Balance of Payment on Capital Account:

Balance of payment on capital account includes balance of private direct investments, private portfolio investment and government loans to foreign governments. Balance of capital account basically deals with debts and claims of the country in question or we say it deals with borrowing or lending of the country in question.

Balance of Payments:

Overall balance of payment is the sum of balance of current account and balance of capital account. It includes all the international monetary transaction of the reporting country vis-a-vis the rest of the world. The balance of payments must always balance in a book keeping sense. This is because for any surplus (or deficit) in the overall balance of payments there must be a corresponding debit (or credit) entry in the net changes in external reserves. In other words, if there is a surplus it adds to external reserves of the country and if there is deficit, it reduces down the external reserves of the country.

Trends In Balance Of Payments Of India:

A country, like India, which is on the path of development generally experience a deficit in balance of payments situation. This is because such a country requires imported machines, technology and capital equipments in order to successfully launch and carry out the programme of industrialisation. Also, since initially it has only primary goods to offer as exports, it generally has an unfavourable balance of payments situation. As pace of development picks up it has to have ‘maintenance imports’ although it has now more sophisticated goods to offer for exports. But the situation remains the same i.e. deficit balance of payment.

This has exactly happened in India. Over the period of planning India’s balance of payment has generally remained unfavourable. However, deficit in balance of payments sharply increased after the fifth plan. During the whole of the fifth plan India experienced surplus in the balance of payment due to a sharp increase in the export surplus on account of invisible remittance.(Money sent by foreign worker to his home country) From 1979-80 onwards, India started experiencing very adverse balance of payments. This happened because growing trade deficits, which till then were offset by net receipts could not be made good by them.

The Sixth Plan characterise balance of payments position as ‘acute’.

The balance of payments continued to be under strain during seventh Plan. In early 1990-91, the already poor BOP position worsened because of Gulf War. In 1992-93, many important changes such as a new system of exchange rate management, liberalisation of import licensing and tariff reduction were introduced. India saw a remarkable turnaround from a foreign exchange constrained control regime to a more open, market driven and liberalised economy (Free Economy). The trade liberalisation and a shift to a market determined exchange rate regime have had a significant positive impact on the country’s BOP.

Recent Trend and Eleventh Plan:

We had a surplus for three successive years from 2001 to 2004. Buoyant invisible flows, particularly private transfer comprising remittance, along with software services exports, have been instrumental in creating sustaining surplus for India for the above period. However, since 2003-04 trade deficit has widened sharply, particularly in 2004-06, because of higher outgo on import of petroleum, oil and lubricants. As a result, current account surpluses have once again turned into deficit inspite of the fact that invisible flows have continued to swell. In the eleventh plan exports were projected to grow at about 20percent per year in US Dollar terms, the imports were projected to grow at 23 per cent, current account deficit could range between 1.2 per cent to 2per cent.

The 2008 Global finance crisis and subsequent slowdown in the world of economy has clearly demonstrated that tremor originating in one corner of the world can quickly reach the other parts among others via the trade channel. Mirroring the global trend, India’s exports which also had robust growth of 30.1 per cent in the five post crisis years(2009-10).

Foreign Exchange, Laws and Rights:

India’s foreign exchange reserves comprise exchange assets (FCA), gold, special drawing rights (SDRs) and reserve tranche position (RTP) in the International Monetary Fund(IMF). When there is volatility in exchange rate, the reserve bank of India (RBI) intervenes to smoothen it. This results in increase or decrease in the level of foreign exchange reserves depending upon the type of intervention. Exchange Market Intervention’ by RBI means the sale of rupee vis-a-vis on or more currencies. If there is too much demand for foreign currency (say Dollar), it will appreciate too much and Indian rupee will depreciate. At this point RBI intervenes by releasing the dollars (from its reserve) in the market to stabilize the exchange rate. If there is too less demand for foreign currency, it will depreciate and rupee will appreciate too much. At his point, the central bank will intervene by purchasing dollars from the market to stabilize the rate. 

Special drawing Rights:

The special drawing rights were created in 1969 by the IMF, to supplement a shortfall to preferred foreign exchange reserve assets, namely gold and the US Dollar. SDA, neither a currency, nor a claim on the IMF, Rather it is a potential claim on the freely usable currencies of IMF members. Holders of SDRs can obtain these currencies in exchange for their SDRs in two ways: first, through the arrangement of voluntary exchanges between members, and second, by the IMF designating members with strong external positions to purchase SDRs from members with weak external position. The SDR today is redefined as a basket of currencies, consisting of the euro, Japanese Yen, pound sterling, and US Dollars. The Primary means of financing the international Monetary Fund is through members’ quotas. Each member of the IMF is assigned a quota, a part of which is payable in SDRs or specified usable currencies and part in the member’s own currency. The difference between a member’s quota and the IMFs holdings of its currency is a country’s Reserve Tranche Position (TRP). It is accounted among a country’s foreign exchange reserves.

Current Situation and Conclusion:

During Manmohan Singh’s regime as PM of India has seen both the fall from grace to absolute darkness to reaching a surplus balance of payments situation. For it the due credit has to go to Former PM Dr. Manmohan Singh who was one of the best economic brains of the country. The main reason behind the rise foreign trade in India is diversification of trade. Earlier, Europe and USA used to be main partners of India’s International trade. Now, Asia and ASEAN (Association of South East Asian Nations) have become India’s major trade partners. This has helped India weather the global crisis emanating from Europe and America.

India’s Balance of payments has been in check for a while but the ever changing trade scenario and IMF’s Ignorance to developing nation has India in a precarious situation. If India is to become a Developed nation one day, than the Balance of payment situation has to be absolute surplus (Surplus shouldn’t include foreign debt). But the ever fluctuating rupee and its fringe demand has left the most with one question, Will We be Able to Achieve an Absolute Surplus situation? Will we be able to achieve the goal in the next 5 years, or we still be waiting? Do let me know your thoughts.

Reference:

 http://www.imf.org/external/np/sta/bop/bop.htm/

 IMF Balance of Payments Manual, Chapter 2 “Overview of the Framework”, Paragraph 2.15 [1]

http://www.econlib.org/library/Enc/BalanceofPayments.html

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