Why did banks ‘over-finance’ road projects, asks Parliamentary panel

SBI submitted before the committee that the projects may be approved only after ensuring 90 per cent of land acquisition is completed.

Observing that loan disbursed by banks in excess of an estimated project cost is “strange”, a parliamentary panel has expressed concern over a large chunk of about Rs 75,000 crore of loans extended to the road sector turning bad. In particular, the panel has raised questions about huge loans advanced to Jaypee Infratech turning into NPAs.

“Some of the banks have given information on total loan (Rs 74,088 crore) given to the road sector… for IDBI, the NPA percentage is as high as 52 per cent of loan disbursed for the road sector. The committee wants to know the reason why this huge amount has become NPA, that too to a single concessionaire, Jaypee Infratech Ltd,” the panel chaired by Kanwar Deep Singh said in its latest report.

Seeking full details of the project awarded to Jaypee, the 33-member standing committee on transport further observed that State Bank of India has lent Rs 19,502 crore out of which Rs 1,986 crore has slipped into NPAs. SBI submitted before the committee that the projects may be approved only after ensuring 90 per cent of land acquisition is completed.

The panel said, “The committee finds it strange as to how the concessionaire who has got a project for Rs 1,000 crore gets Rs 1,400 crore for the same project.” It also asked: “Why the concessionaire has been given a free hand to get the bank’s loan as per their wish?” It instructed NHAI to keep a watch on the excess loan amount obtained by the developer.

Incidentally, former road transport and highways secretary Vijay Chhibber has remarked that aggressive lending by banks which were “happily over-financing even non-serious highway players without assessing risks has virtually killed the sector”.

He told media, “The concessionaires and bankers are not realising that we are reaching a stage of impatience, and people who are users of these roads are not going to be waiting anymore.” Projecting that total NPAs of Rs 2.6 lakh crore may go up to Rs 4 lakh crore because of defaults, the panel recommended that banks be empowered more to make recovery of bad debt.

Asking the government to consider empowering the banks adequately to make recovery of bad debt easier, it said, “For example, in the case of a default, the banks may be allowed to take over the entire company.”

It also noted SBI’s contention that all approvals from statutory authorities and clearances from government agencies should be obtained before a particular project is sent for bidding. “Another area of discord is the project cost estimated by NHAI and the concessionaires, which results in lending delay by financial institutions,” the committee said.

NPA sales down to a trickle of just 2% of total bad loans

Notwithstanding rising bad loan problems in the system, sale of stressed assets to asset reconstruction companies (ARCs) in 2015-16 was only a trickle of the NPA mount at 2 per cent of the total of nearly Rs 5.8 trillion, which is down a whopping 20 per cent from previous year, says a report.

Notwithstanding rising bad loan problems in the system, sale of stressed assets to asset reconstruction companies (ARCs) in 2015-16 was only a trickle of the NPA mount at 2 per cent of the total of nearly Rs 5.8 trillion, which is down a whopping 20 per cent from previous year, says a report.

“The overall loans sold in FY2016 were lower by 20 per cent y-o-y and around 15 per cent of the overall loans in the banking system,” Kotak Institutional Equities said today in a report that is based on the analysis of 33 public and private banks.

The report did not offer any reasons for the massive dip in the sales, but it can be noted that banks are not happy with the cheap valuation that ARCs are offering while these companies are capital starved to make the higher upfront payments to the banks. The report also did not quantify the total amount of bad loans sold to ARCs.

As per RBI, total NPAS in the system jumped to 7.6 per cent in 2015-16, up from 4.6 per cent in the previous fiscal, which it warned could jump to a whopping 8.5 per cent by this fiscal end. The total stressed assets including NPAs stood at a staggering 13 per cent or over Rs 8 trillion in 2015-16.

State-run banks sold 75 per cent of their overall bad loans, lower than the 90 per cent of loans sold in 2014-15.

Axis Bank sold the largest quantity of loans but at a significant loss. The SBI Group, however, had the largest share of loans sold at 33 per cent of the overall loans compared to over 60 per cent in 2014-15.

Allahabad Bank and Central Bank were the two large public sector banks which sold a high share of their loans to ARCs last year.

Bankers to conduct marathon meetings to deal with stressed cases

Bankers also intend to evaluate the feasibility of a new financial structuring scheme introduced by the Reserve Bank of India in June

In March, lenders had held similar meetings over two days, where almost all large stressed cases were taken up and tough measures to counter stress were discussed

Lenders, led by State Bank of India (SBI) and ICICI Bank, will conduct extensive joint lender forum (JLF) meetings with the managements of at least 10 stressed firms this month, two people in the know said. Apart from taking stock of progress of these accounts, bankers also intend to evaluate the feasibility of a new financial structuring scheme introduced by the Reserve Bank of India in June.

According to one of the two persons quoted above, an official at a large state-owned lender, this is a quarterly process where banks talk to large stressed companies to monitor the progress of previously approved resolution plans and to decide on new recovery strategies. The banker spoke on conditions of anonymity as he is not allowed to be quoted in the press.

In March, lenders had held similar meetings over two days, where almost all large stressed cases were taken up and tough measures to counter stress were discussed. The companies that banks had met included Visa Steel Ltd, Uttam Galva Steels Ltd, Adhunik Metaliks Ltd, Aban Offshore Ltd, Bhushan Power & Steel Ltd and Bhushan Steel Ltd.

In many cases, banks had asked managements to implement these measures and show results by June end.

“We have already mandated necessary evaluation tests in almost all large stressed cases. In the meetings, we are only focussing on cases where the evaluation tests have established viability. In the other cases, we may look at some other stricter measures,” said the second person quoted above, also speaking on condition of anonymity.

An evaluation test is needed to establish viability if banks choose to go with the Reserve Bank of India’s (RBI’s) newly introduced scheme, Scheme for Sustainable Structuring of Stressed Assets (S4A). Under S4A, which was introduced last month, banks can convert up to half the loans held by corporate borrowers into equity or equity-like securities.

Banks put up a united front on stressed assets

The message from bankers to the top management of stressed firms was clear: banks are willing to help only if the need is genuine and promoters are doing their bit.

Mumbai: On one side were the bankers—from some of India’s top banks, many state-owned.

On the other side were promoters and CXOs of companies, including some storied ones, that had borrowed money from them and were finding it difficult to pay it back.

Earlier this week, when the two met at State Bank of India’s (SBI’s) headquarters in Mumbai’s Nariman Point, the proceedings were anything but pleasant.

The message, at the end of a series of meetings, was clear: the banks would work in concert; they wanted interest payments to restart; they would help but only if the promoters and management were doing all they could to pay back the money owed by their companies; else, they would take charge.

The banks present included SBI, ICICI Bank Ltd, IDBI Bank Ltd, Punjab National Bank, Central Bank of India, Union Bank of India and Dena Bank.

The companies included Visa Steel Ltd, Uttam Galva Steels Ltd, Adhunik Metaliks Ltd, Aban Offshore Ltd, Bhushan Power & Steel Ltd and Bhushan Steel Ltd.

“We have been patient with a lot of borrowers, but if someone is trying to take advantage of that, we will not shy away from taking them to task,” said a senior banker at a state-owned bank who was present at the meetings. He sought anonymity as the meetings were confidential.

The meetings dovetailed with a massive clean-up of bank balance sheets; the Reserve Bank of India (RBI) has given them a deadline of March 2017 to complete the exercise.

The banking regulator has asked banks to provide for and reclassify stressed assets as part of an asset quality review that took place in December. Banks were asked to make at least half the required provisions in the October-December quarter and the remaining in the fourth quarter of 2015-16 (January-March).

In a report on Wednesday, JP Morgan analysts Seshadri Sen and Dhiren Shah wrote that while aggressive recognition and reclassification of stressed loans was a positive for the banking system, inadequate bank capital and low prices quoted by stressed asset buyers could play spoilsport.

Experts say joint lender meetings with borrowers could prove beneficial.

“When borrowers and all their bankers sit together, the true nature of the stress can be identified. If there are any issues that can be fixed on the bank’s end or even on the borrower’s part, it can be solved. For problems which go beyond these two, banks can always reach out to the government, which seems to be keen on reducing stress in the system,” said Vibha Batra, senior vice-president at rating company Icra Ltd.

According to the banker mentioned above, bankers had previously discussed the need for joint meetings to ensure that all lenders are on the same page.

SBI, being the lead lender in a number of instances, took the lead. The options discussed by the lenders include reclassification of loans to non-performing category, bringing in more promoter equity, working with restructuring and turnaround of firms, invoking lenders’ rights to take over collateral and finally, taking operational control of companies.

“Most borrowers came with an open mind, which made the discussions easier. But there were a few who refused to even turn up. Over the next few days, we will decide on how to move against them,” said a second banker at another state-owned bank who spoke on condition of anonymity.

Bankers warn that given the external environment, it would be too much to expect an immediate improvement in asset quality. Some cases discussed at the meetings involved iron and steel companies, which are not only highly leveraged but are also having to cope with low demand, both domestic and global.

In such cases, lenders say, the best option is to wait it out. “Whether we do it with a new promoter or old is a case-specific decision to take. But we are open to giving time to these borrowers,” said the second banker quoted above.

In some cases, lenders may choose to classify the loans as a non-performing asset (NPA), giving themselves more time to find a resolution, after due provisioning. “If it (the asset) is standard, the timeline is too stringent for any process to take place,” the second banker said.

Once the asset is classified as bad and lenders are convinced that the resolution process will show results, they could allow the company to avail of fresh loans under the current credit limits.

According to Icra’s Batra, in highly leveraged sectors such as steel which are reeling under various pressures, the least that bankers can do is to recognize the stress and provide adequately. “Once banks have adequately provided for these loans, it becomes easier for everyone to identify the issues and evaluate bank balance sheets better,” she said.

The marathon meetings with promoters form part of a larger movement by the banking system to bring problematic borrowers to task.

Apart from this, lenders are also actively trying to find investors who can buy stakes in companies where they have acquired equity control in lieu of debt.

In a 3 March advertisement on its website, SBI asked for expression of interest (EOI) from interested parties that might want to acquire management control of a company which is setting up a 2.51 million tonne per annum integrated steel plant in Bokaro, Jharkhand. The deadline for submission of the EOI is 21 March.

Gross NPAs of 39 listed banks surged to Rs.4.38 trillion in the quarter ended 31 December from Rs.3.4 trillion at the end of the September quarter, according to data collated by corporate database provider Capitaline.

In a statement last week, ratings agency Crisil Ratings said that it expects stressed assets (a sum of gross NPAs and other troubled assets) in the Indian banking system to rise to over Rs.7 trillion (or 11.3% of total loans) by March 2017, from about Rs.4 trillion (7.2% of total loans) as of March 2015.

BANKSSTRESSED ASSETSBAD LOANSSTATE BANK OF INDIANPAS

Top 10 tips to boost investing results in 2016.

1. Keep an eye on the Fed (and other central banks)

Central banks may not be in the driver's seat when it comes to world markets right now, but they definitely have a hand on the wheel. A few words from Federal Reserve Board Chair Janet Yellen or European Central Bank President Mario Draghi can send stock markets across the world charging upward or downward hundreds of points.

A big part of the investing story in 2016 will undoubtedly hinge on how well Yellen manages the U.S.'s transition to normal, non-zero interest rates. If she raises rates too quickly, it could push the still-rickety U.S. economy back toward recession. If she raises rates too slowly, cheap credit could fuel a bubble in asset prices.


In general, higher interest rates mean slower economic growth and thinner profits for U.S. firms, so you'd think that the longer Yellen holds off in raising rates, the better for U.S. stocks.

But Yellen's reluctance to raise rates hasn't always been interpreted as a positive signal by the markets, perhaps because it's seen as evidence that the U.S. is on shakier economic ground than we'd like to think.

In short, the Fed is a wild card this year.
One stable investment is a certificate of deposit. Find the best CD rates.

2. Get ready for some volatility in 2016

A number of studies have shown that periods of intense volatility tend to cluster together. The 2nd half of 2015 featured several months of intense volatility, so that would seem to augur for more of the same in at least the 1st half of 2016.

On top of that, changes to the federal funds rate have tended to be accompanied by volatility in the markets over the past few decades, so it's shaping up to be a bumpy ride in 2016.

3. Keep enough cash on hand to avoid liquidating assets

In low-volatility times when asset prices are on an upward trend, it's tempting to be invested in the market as much as possible. Why hold cash that's earning next to nothing, the thinking goes, when you can have your money working hard in the markets for you? In an environment where the market is continually setting record highs, you can always liquidate investments at full value to fund whatever cash needs you may have.

With volatility likely to be strong in 2016, it might make sense for those who depend on their portfolio to pay some or all of their living expenses to set aside a larger cash cushion ahead of time. That's so they don't have to sell assets at temporarily depressed prices in order to meet routine or unexpected expenses.

4. Be aware of assets outside of your brokerage account

When you're planning out your portfolio, it's easy to lose track of non-financial assets because they don't appear on brokerage statements. That can lead to accidentally concentrating too much of your overall wealth in some sectors and not enough in others.

For instance, say you decide you want exposure to the residential housing market, and you go out and put a sizable chunk of your stock portfolio into the SPDR S&P Homebuilders ETF (XHB). If you're also a homeowner and have a big percentage of your net worth tied up in your home equity, as many homeowners do, your total exposure to residential real estate is your equity, plus whatever percentage of your overall assets are in XHB. At that point, you may be overexposed if the housing market goes sideways again.

The same applies to your human capital -- a complicated-sounding term that means the present value of all your future paychecks put together. For example, if you're a petroleum engineer, your paychecks, and consequently, the value of your human capital, are very much tied up in the fate of the oil industry.

If things go really bad, you could end up seeing your wages stagnate or, worse, you could become unemployed. In that case, it may not be a great idea to have a huge allocation to oil companies in your portfolio on top of that.

A good financial planner would take into account all of your assets, not just the financial ones, and so should you.

5. Make a plan and stick with it

When you see the value of your portfolio take a big hit, it's understandable to want to log on to your investment accounts immediately and sell, sell, sell.

But how do you avoid falling into the buy-high, sell-low trap? Mostly by having -- and sticking with -- a comprehensive investment plan. That plan should have 2 essential parts:

1. An investment policy statement, or IPS, that takes into account your particular time horizon, risk tolerance and goals.
2. A strategic asset allocation designed to help you reach the goals within the constraints outlined in your IPS.

Of course, your investment plan shouldn't be carved in stone. It's important to update it regularly, particularly if something fundamental changes with your investing needs or market conditions.
Stick to your plan through day-to-day fluctuations rather than going on a selling frenzy every time you get uncomfortable. Think of it as a guardrail to keep you between the ditches when market turns get twisty.

6. Dollar-cost averaging can be your friend

Research seems to suggest that if you have money on the sidelines, you're more likely to get better returns by putting it into the market all at once rather than making smaller securities purchases at regular intervals -- a practice known as dollar-cost averaging.

But dollar-cost averaging can have benefits from a behavioral finance perspective -- that is, it helps investors not to freak out and sell everything when the blue chips are down.

For example, say you get a $2,000 bonus at work and want to put some money into a tax-advantaged 529 college plan account for your kids' education.

If you put the entire lump sum in right before the market takes a big hit and your brand-new investments lose 10% of their value in a day, you're going to be tempted to sell it all and move into unproductive cash investments.

On the other hand, if you put $200 per month in for 10 months, day-to-day price fluctuations may not have the same emotional impact.

Particularly in a year that's looking to be fairly volatile, that type of strategy might be useful, especially for beginning investors.

7. Watch for bargains

When you're investing for the short term, big drops in asset values are bad news. The prices may never recover before you have to cash out, locking in your losses.

But when you're investing for the long term, bear markets and large-scale drops in asset prices should be looked at the same way you look at a buy-one, get-one-free sale at the supermarket -- as an opportunity to stock up (no pun intended) when prices are low.

There are a few key sectors that look likely to be depressed in 2016, most notably energy, materials and utilities. As long as it fits in with your overall investment plan, taking the opportunity to pick up some of the historically highest-performing companies in those sectors may help boost your returns over the long term.

8. Be skeptical of portfolio-based lending

Portfolio-based lending, or using securities in your portfolio as collateral for loans, has become a big business for banks' wealth-management arms. It's often sold this way: Why liquidate investments that are doing well when you can take out a low-interest-rate loan and pocket the difference?
But there's 1 big reason that portfolio-based loans are usually a bad idea: If the securities decline substantially in value, you could be on the receiving end of a margin call. If that happens, you may either have to put up more collateral or face having the loan come due immediately.

In an environment where security prices could be fluctuating more than in the recent past, that could end badly for investors. If you need cash to make a purchase, a better move might simply be liquidating part of your portfolio and using the proceeds from the sale instead.

9. Take advantage of tax management opportunities

One positive effect of rocky markets is that they allow for some substantial capital gains management on taxable investments.

Basically, any investment you own in a taxable account that has gone up in value a lot is a tax bomb waiting to explode and stick you with a bill for up to 20% of the gain, depending on your income.
The 1 thing that can defuse these tax bombs is using losses on investments that didn't work out to offset the gains.

Here's the basic trick: You see that stocks in a particular category are falling across the board because of some broad economic trend. You happen to own a stock in this category that's been a loser compared with its peers for some reason -- its products aren't as good, its management is clueless, whatever. You don't want to own it anymore, but you believe the sector it's in will recover at some point before the end of your time horizon.

But wait! There's another stock in that same category that's consistently beaten your bad stock and looks well-positioned for a comeback. You can sell the bad company's stock, use the proceeds to buy the good stock, and boom, you have a tax loss to offset gains elsewhere in your portfolio, and you haven't violated the wash-sale rule.
Times of elevated volatility, like 2016 is looking to be, are a perfect time to pull off just such a maneuver. So, if you have chronically underperforming investments that you've wanted to unload for a while and have some long-term capital gains issues that need to be addressed, keep tax-loss harvesting in mind.

10. Be aware of the difference between cyclical vs. secular trends

A cyclical trend is just what it sounds like: a market trend that will reverse itself within a few months or years and go back the other way, like how broad stock market indexes fall in the lead-up to a recession and then begin rising as an economy comes out of recession.

A secular trend is different. It's a longer-term trend in an industry or market brought on by some fundamental change, like the fall of Polaroid as digital cameras gained in popularity or the decline of newspaper stocks as Web-based news consumption became the norm.

Sometimes in the moment, it can be difficult to tell the difference between the 2. For instance, are current low oil prices a cyclical trend that will soon reverse, leading to prices rising to record levels in the future? Or are oil companies looking at more or less permanently slow growth, thanks to gains in renewable technologies and increasing environmental regulation designed to slow global warming?
Will financial stocks recover as they adjust to (and lobby against) new regulations designed to keep them from blowing up the global economy again? Or, are their low stock prices a symptom of disruption by prepaid debit card providers, robo-advisers and other fairly recent "fintech" competitors?

As the pace of technological change accelerates in 2016 and beyond, these types of questions will become even more pressing for investors, increasingly determining which investors win and which ones lose.

Sun Capital

Banks with strong networks will find takers

Mumbai The government, which recently stepped up focus on consolidating weaker public sector banks (PSBs), plans to reduce the number from 27 now to six or seven larger banks.While market capitalisation is a reflection of how the Street (investors, analysts, etc) views the bank's core fundamentals, the current state as well as the future prospects, a detailed look at the nine months' data of these banks provides some insight on their financial and business condition.In terms of asset quality, for instance, Indian Overseas Bank (IOB) and UCO Bank are the worst placed as they had the highest gross non-performing assets (NPA) at 12.6 per cent and 11 per cent, respectively, as on December 31, 2015.Dena Bank was the third on this list with gross NPA ratio of 9.9 per cent. 

However, if one adds the restructured assets, it would reflect the real asset quality picture of a bank. While the latest figures of total stressed assets for many banks are not available, the situation is not alarming, say analysts.Many PSBs also have low levels of capital to fund growth as well as any fresh losses that they may witness on account of bad loans. For example, while Dena Bank reported a net loss for the nine months ending December 31, 2015; its Tier-1 capital of 7.1 per cent is the lowest amongst its peers. United Bank's Tier-1 capital ratio, too, stood at 7.1 per cent in this period. Again, not all banks have declared their Tier-1 capital ratios as at the end of the December 2015 quarter.Notably, while PSBs consolidation will be largely driven by regulations, larger banks would not want to buy banks having low capital adequacy as well as poor asset quality, unless they prove to be of strategic importance. A key factor that will aid consolidation will be a bank's branch network. Historically, banks having larger presence in one region have bought smaller banks having stronger presence in another region. This ensures there is minimal overlap and the businesses are complementary in nature. The key hurdle and integration challenge, though, will be the employee unions in some of the PSBs that might resist such mergers and acquisitions. Nevertheless, with the advent of digital banking, the attraction of a branch network might not be enough.Analysts, however, believe most smaller and relatively weaker PSU banks could be potential takeover targets.Vaibhav Agrawal of Angel Broking says, "United Bank, IOB, OBC, Dena Bank, Vijaya Bank, Bank of Maharashtra, Andhra Bank, Indian Bank, Corporation Bank, among others, could be key takeover targets. The prime criteria will be complementary network, capital adequacy, asset quality, unions and actual integration of this merger."

Sun Capital

DRT freezes Vijay Mallya’s sweetheart deal with Diageo

Debt recovery tribunal says payment to Vijay Mallya can’t be made until case filed by SBI, other lenders is disposed of

Bengaluru: UB Group chairman Vijay Mallya received a setback on Monday when the debt recovery tribunal (DRT) in Bengaluru blocked him from getting his hands on a $75 million payout by Diageo Plc., responding to an application by creditors led by State Bank of India (SBI).

The tribunal said Mallya cannot access the money until a case filed against him by SBI is settled. The order came in response to one of the four so-called interlocutory applications filed last week by SBI, which also demanded the arrest of Mallya, the impounding of his passport and a full disclosure of his assets and liabilities.

SBI has also moved the Karnakata high court for similar directives.

Banks owed money by Mallya’s grounded Kingfisher Airlines have the “first right” to the Diageo money, according to SBI.

The tribunal on Monday also directed London-based Diageo and its Indian unit United Spirits Ltd (USL) not to disburse any money to Mallya before the case is disposed of. It set the next hearing for 28 March.

Sun Capital

Sebi may peg M&A ‘control’ cap at 25%

Regulator’s move is aimed at removing ambiguities that companies confront during takeovers

Mumbai: The market regulator is set to clarify what the term ‘control’ means in the context of mergers and acquisitions (M&As) by pegging the shareholding threshold of an acquirer at 25%, two persons familiar with the development said.

The move is aimed at removing ambiguities that companies currently confront during takeovers, one of the two persons said, requesting anonymity.

Currently, the definition of ‘control’ under the Substantial Acquisition of Shares and Takeovers (SAST) Regulations, 2011—popularly known as the Takeover Code—doesn’t specify a threshold for shareholding.

“The numerical threshold for determining control is a globally accepted norm and should be the prescribed criteria along with the other factors which may signify control,” said Tejesh Chitlangi, a partner at law firm IC Legal.

The current takeover code states that an acquirer is in ‘control’ only if the board of the company that’s being acquired gives the former the right to appoint a majority of the directors, and have the final say on management and policy decisions.

The control of management or policy decisions is through shareholding or management rights or shareholders’ agreement or voting agreements.

“The Securities and Exchange Board of India board will clear a discussion paper on Saturday, which proposes to peg the numeric threshold of voting rights (shareholding) at 25% and giving protective rights to the acquirer,” said the second person, who also declined to be named.

A Sebi spokesperson did not respond to an e-mail seeking comment.

According to the discussion paper, there could be a framework for protective rights with an exhaustive list of rights that do not lead to acquisition of control.

These protective rights would be granted to the acquirer if they are cleared by 51% of the minority public shareholders.

“While it will be important to have a list which considers the commercial realities of merger and acquisition transactions, it may be a practically onerous task to have an exhaustive list that captures all the exempted protective rights and Sebi may need to grant an exemption on case-to-case basis,” the second person said.

According to Lalit Kumar, partner at J. Sagar Associates, there is currently no clarity on whether or not protective (veto) rights to investors will lead to control.

“This issue came up in the matter of Subhkam Ventures where Sebi held that protective rights lead to control. However, in appeal to the Securities Appellate Tribunal (SAT), SAT held that protective rights only lead to negative control and not positive control,” Kumar said.

“The matter went in appeal to the Supreme Court, which did not pass any order on this issue but said that SAT’s order will not act as a precedent. Therefore, presently, there is no decided case on this issue although the general view is that protective rights do not lead to control,” he explained.

Kumar’s reference is to private equity investor Subhkam’s 17.9% stake in MSK Projects. In 2007, when it bought the stake, Subhkam sought and received several so-called negative rights (such as the power of veto on key decisions). In 2008, Sebi ruled that this constituted control. On appeal, SAT ruled in favour of Subhkam. Sebi appealed the case in the Supreme Court which dismissed the case. However, because it said SAT’s order would not be a precedent, private equity investors are still not sure as to whether negative rights such as the one Subhkam had constitute control (such rights are common in agreements between promoters and private equity firms).

Some in the legal fraternity say the definition of control cannot be set in stone.

“The question of control is a nuanced one primarily of fact and secondly of law… Anything set in stone on defining control would lead to false positives and negatives. Sebi should adopt a more nuanced approach and go by court rulings as precedents,” said Sandeep Parekh, founder, Finsec Law Advisors.

Sebi first started reviewing the definition of control in 2014. Finalizing a proposed framework took longer than expected, nearly 20 months, in wake of the number of suggestions.

Sebi decided to re-examine the definition of control following the 2013 acquisition of a 24% stake in Jet Airways (India) Ltd by Abu Dhabi-based Etihad Airways PJSC for Rs.2,058 crore.

In May 2014, Sebi ruled that the deal did not attract the provisions of the Takeover Code, as it found a lack of substantial controlling powers with Etihad after the transaction.

Private Equity

Banks will have to lower lending rates in April

Mumbai Irrespective of whether the Reserve Bank of India (RBI) cuts its policy rate on or before the April 5 policy review, banks will have to cut their lending rates by at least 25-30 basis points (bps) in April, to catch up with the lag in transmission.

The central bank has, so far, cut its repo rate by 125 bps and banks have passed on between 60-70 bps of the cut. If the central bank cuts some more, as is expected by the market, banks' lending rate cuts should be steeper, too. One basis point is 0.01 per cent.

But, the lending rate cuts might not happen immediately in March, as banks would ideally want to shore up their treasury profits by taking advantage of the recent dip in bond yields, and also enjoy an improvement in spreads in the last month of the financial year, when credit demand generally picks up.

The resultant profit will also mend their bottom line to some extent, as they have been severely hit by RBI's asset quality review programme, which will continue to exert pressure in the March quarter as well. "Transmission will happen, irrespective of the rate cut quantum (by RBI)," said Soumya Kanti Ghosh, chief economist, State Bank of India.

However, that will likely not be in March, said A Prasanna, chief economist at ICICI Securities Primary Dealership Ltd.

"There is pressure on bank balance sheets now. Transmission will improve with liquidity in April," Prasanna said.

From April 1, RBI's marginal cost-based lending rate (MCLR) would kick in, which will prod banks to use their incremental cost of funds, rather than average cost of deposits to arrive at the lending rate. Since money market rates move faster than deposit rates and banks tap into these money markets, the incremental cost will add dynamism in lending rate calculations. And, 10-year bond yields have fallen 15-20 bps since the Budget. If this trend continues till March-end, banks would have to factor in this drop.

Finally, with RBI infusing longer-term liquidity in the system through secondary bond market purchases, banks should have less reason to complain that system liquidity tightness is not letting them pass on rate cuts. Under the new liquidity framework, RBI ensures call money rates are anchored at around the repo rate, no matter how much liquidity infusion is needed. However, bankers have complained that the liquidity infused is short-term, and more permanent liquidity needs to be infused through secondary market bond purchase. The central bank does so through its open market operations, or OMO. Including a scheduled Rs 15,000-crore OMO purchase on Thursday, RBI's liquidity infusion is close to Rs 50,000 crore in recent months.

The OMOs, and with government spending picking up, have ensured that from an acute shortage of Rs 1.6 lakh crore at the end of January, banking system liquidity has improved to less than Rs 1 lakh crore now.

But there would be stress on the liquidity front again, starting March 15, when advanced tax outflow starts, pointed out Gaurav Kapur, India economist at Royal Bank of Scotland.

The tight liquidity condition would be needed to be evened out first before banks can move with rate cuts and that would be by the next financial year, Kapur said.

However, whether the rate cut would be of any meaning to revive growth is a different question altogether, articulated IDFC Bank's Chief Economist Indranil Pan.

"With MCLR pricing the incremental cost, pass-through of the cumulative 125-basis point rate cut is expected to be at 25-30 bps. So, even after a transmission of 85-90 bps if credit growth doesn't take place, one needs to ask if the problem lies with the RBI rate cuts and transmission mechanism or the credit channel itself," Pan said.

Investment Banking 

Six or more anchor banks likely to lead consolidation

The government will identify six to ten public sector banks which will drive the consolidation process among the state-owned banks, according to bankers.

Called the anchor banks, they will be identified by October 31, 2016, the bankers told The Hindu.

Large lenders like State Bank of India (SBI), Bank of Baroda (BoB), Punjab National Bank (PNB) and Canara Bank could become the anchor banks, they said.The government will set up an expert panel for the consolidation process. The Bank Board Bureau headed by former Comptroller and Auditor General (CAG) Vinod Rai, which was recently formed to select chief executives and board members of public sector banks, will also help in the consolidation process.

The idea of bank consolidation was discussed at length during the ‘Gyan Sangam’ bankers’ retreat at Gurgaon last week.

Top finance ministry officials, bankers and Reserve Bank of India (RBI) officials were present during the discussions.

Merger between the banks will be based on geographical and technological synergies, human resources and business profile, among others.

Consolidation among public sector banks has been under discussionfor about a decade now.The previous United Progressive Alliance (UPA) government also wanted consolidation among public sector banks but had maintained that such a proposal should come from bank boards.

However, no bank went ahead with such a proposal, formally. There are 22 public sector banks in the country apart from five associate banks of State Bank of India. The present National Democratic Alliance (NDA) government has looked at the consolidation process differently and initiated it, bankers said.

Interestingly, during last year’s Gyan Sangam in Pune, bankers had opposed the idea of consolidation among public sector banks on the ground that the financial health of most of the banks had deteriorated. Hence, no bank was ready to absorb even a weaker institution.The mood at in this year’sGyan Sangam was different, bankers said. “The tone was set from the beginning. It was not a question of whether to consolidate or not, rather how to consolidate,” said a banker who attended the retreat.

“We were given the choice of either merging with other bank or to perform without the support of capital infusion from government,” said another banker. He said it will be difficult for public sector banks to survive without government capital.

The financial performance of public sector banks reflected a sharp deterioration after the RBI conducted an Asset Quality Review (AQR). During the review, the central bank’s inspectors found that many accounts, which ideally should have been treated as non-performing, were not classified so by the banks. The RBI then directed the banks to classify those accounts as non-performing and provide accordingly during the October-December and January-March quarters. As a result, as many as 11 public sector banks including Bank of Baroda, IDBI Bank, Bank of India and Indian Overseas Bank reported losses last quarter. The current quarter will be equally challenging for many banks.

“Things have changed since the AQR,” another banker pointed out. “There are many banks which will find it difficult to survive without capital infusion from government. If a bank remains weak, then it will lose business. In such a situation, merging with a relatively stronger bank seems to be the only option.”

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