Stepping up debt recovery

Amendments in debt recovery laws bring the rules in line with the recently introduced Insolvency and Bankruptcy Code, though it will take some time before changes are seen on the ground

Passage of the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Bill, 2016 in the Rajya Sabha last week has finally given the banking sector something to cheer about.

India’s stressed assets situation reached record highs of $ 133 billion in 2015, a five- fold increase since 2011, giving banks plenty to worry about. The Supreme Court’s concerns over the Kingfisher- Mallya story have further highlighted the extreme need to remedy the nation’s debt recovery structure.

The Bill seeks to incorporate certain important provisions into four laws — the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 ( Sarfaesi Act); the Recovery of Debts due to Banks and Financial Institutions Act, 1993; the Indian Stamp Act, 1988; and the Indian Depositories Act, 1996, to modernise the process of asset securitisation.

The Bill also seeks to bring the current debt recovery framework in line with the Insolvency and Bankruptcy Code of 2015, aiming to create a more functional environment for asset reconstruction companies (ARCs).

“Having a well- defined law is the first step. With these amendments, we can now hope to see a framework that will create a competitive, transparent and efficient market for distressed assets. As with most new legislative change, the proof will be in the taste of the pudding,” said Reshmi Khurana, managing director and head for South Asia at Kroll, the multinational corporate investigations and risk consultancy.

Under the new regime, non- institutional process of transferring stressed assets between banks and ARC’s exempt from stamp duties. This makes the asset reconstruction process more feasible and gives the banks a real opportunity to get their books in order.

Alongside the liberalisation of foreign investment norms and expected evolution of the ARC market, the Bill also extends the powers of the Reserve Bank of India (RBI) to regulate these entities. The central bank is authorised to audit, of ARC boards for illegality or non- competitive behaviour.

The Bill also creates a central registry to replace the previously decentralised system of registration, at both the central and state levels. This will make the process of undertaking due- diligence exercises simpler and more convenient. The changes make the process of registration with this central registry mandatory, to enforce securitisation of assets.

“The mandatory registration of requirements in a timely manner. This will help in establishing clarity on priority of claims and minimise competition which arise due to information asymmetry,” said Divyanshu Pandey, partner, J Sagar Associates.

The Bill further mandates a maximum of 30 days ( 60 days after extension) for a District Magistrate to clear an application for possession made by a secured creditor under Sarfaesi. It also clarifies the jurisdiction of Debt Recovery Tribunals ( DRT’s), backbone of the recovery structure. The amendments propose an online mechanism for these tribunals, including filing of applications and documents in online form.

Under the new system, debtors challenging DRT orders will first have to deposit half the adjudicated sum before approaching the appellate tribunal.

The Bill also brings hire purchase and financial leases under the Sarfaesi ambit. The changes also allow new classes of creditors, such as bondholders who subscribe to secured nonconvertible debentures, to seek remedies under debt recovery laws. This is expected to strengthen the bond market in the coming days.

Other amendments to Sarfaesi allow secured creditors the opportunity to take control of an indebted company ( if the amount of debt is equal to or greater than 51 per cent of the net worth of the concern) and restore its business to recover the necessary dues.

With liquidity issues still existent, the situation of non- performing assets might still be a worry even after the introduction of the new amendments but the changes are bound to improve the scenario for the banking sector.

“The impact of these legislative changes will only be visible on the ground over the next 12 to 18 months,” said Vaidyanathan.

UPI will make mobile payments easier

The new Unified Payments Interface (UPI) by National Payments Corporation of India, likely to be launched this month, is expected to make mobile payments much easier. But, there is an obvious question: What will UPI change? The question becomes all the more important because it also uses the same Immediate Payment Service (IMPS) platform that all existing mobile payment platforms already use.

Let's understand the difference. UPI plays the crucial role of the central registry, enabling complicated account information to be converted into a simple address. So, instead of sending a payment to Harsh Vardhan Roongta, Account No: 99999999999 with XYZ bank, Mumbai branch (IFSC code: XYZO09999), you can simply send the payment to harsh@xyzbank. The central registry will convert this into the information needed to make a transfer. This simplification can mean almost anybody will be able to provide their bank account information in an easily understandable manner.

The second big thing is that UPI will enable people to request for payments. Today, if you owe me money, it still requires an action on your part to send me the money. You have to key in the information as above, along with the amount, to enable the payment to go through. Now, imagine instead of pestering you for money over e-mail or phone calls, I were to send a collection request to your bank account that comes on your mobile, and if you approve (and provide a password), the payment is automatically made. If you don't approve the collection request, I know you don't really want to make the payment. This facility of receiving payments makes things very easy.

Imagine, your vegetable vendor sending you a request for making payment for the vegetables you just bought for say, Rs 82, and you approve it on the spot and the payment going through. The vendor hands over the vegetables to you as he receives confirmation of the payment in his account within seconds of your making the approval.

No issues about exact change, torn or counterfeit notes or having forgotten your purse at home.

With the Jan-Dhan Yojana ensuring almost everybody has a bank account, and if all of them start using the system to make and receive payments, we can probably have a situation where we can forget dealing in cash.

Of course, all this will require the entire system to stabilise around the UPI infrastructure. The other major issue will be around transaction charges for such payments and who will bear it. The government has made it clear that it will ensure the transaction charges are not a hindrance for online payments, which has several spin-off benefits for the economy. How much and who bears the transaction charges will decide how popular mobile payments will be in the country.

There is no doubt that the UPI project is a national infrastructure project akin to a railway line connecting a hitherto unconnected part of the country. I am sure everyone should be enthused by its success.

Independent living for senior citizens

Buy a retirement home for use, not for investment

Abhimanyu Jain, 65, has been living at Ashiana Utsav, Bhiwadi, a housing project for senior citizens for the past eight years. Jain, who has two daughters, was keen to live independently after he retired as a computer engineer from software services company IBM. What he likes about this retirement community is that even a single person can live comfortably, with dining and medical facilities, lots of activities that keep residents engaged, and chores like maintenance, laundry, bill payment, etc, taken care of.

Growing demand

Financially independent senior citizens like Jain are fuelling the demand for housing projects developed specifically for them. A mix of demographic and social trends is driving this. According to projections by the Census of India, the percentage of elders in the total population is expected to rise from 7.4 per cent in 2001 to 12.4 per cent by 2026. India had about 76 million senior citizens in 2011. This figure is expected to more than double to 173 million by 2025.

Among social factors, the break-up of the joint family as an option that one could fall back on in old age, children moving abroad or to another city for work, the desire to not be a burden on the children but live independently among peers from the same age group, the upscale nature of current projects, and the vanishing stigma around such a move are all leading to an increasing number of people opting for such projects.

Growing demand has elicited a strong supply response. Currently, at least 30 entities are developing housing for this segment, including Ashiana Housing, Max, Tata Housing, Mantri, Brigade and Paranjape Schemes. (WIDE RANGE OF OPTIONS AND PRICE POINTS)

Buy, rent or lease?

Buy: This option is well suited for people with deep pockets. "Buying ensures you can live in those premises all your life. There is no anxiety that you could be driven out," says Shashank Paranjape, managing director, Paranjape Schemes (Construction). People who sell off a house and reinvest the money in a retirement home can also save tax on capital gains. Whatever capital appreciation happens in the property will be enjoyed by the buyer or his heirs.

The only risk in this option is that the senior citizen could end up spending a large part of his retirement kitty on purchase. Also, his heir will be able to live in it only after he crosses the minimum age.

Lease: The buyer makes an upfront deposit and then pays a regular rent and other charges. The cost of entry is lower here. If the children live abroad, they are freed of the burden of selling off the property after the parents' lifetime. When the lease period gets over, a certain portion is deducted and the balance deposit is returned. "The disadvantage of this model is that the lessee does not enjoy capital appreciation," says A Sridharan, managing director, Covai Property Centre. If you wish to exit early, you can only do so if the developer gives his consent.

Rent: People who are not sure about whether they like the concept of living within such a project might test the waters by renting and living there for a few years. If they like it, they can go ahead and purchase. As a long-term model, it carries the risk that the developer could ask you to vacate at any point.

Do the due-diligence 

Prospective buyers should bear in mind that service is a critical component in a retirement housing project. "Invest only with a developer who has the capability to offer high-quality service," says Ankur Gupta, joint managing director, Ashiana Housing, which offers senior citizens' projects in Bhiwadi, Jaipur, Lavasa and Chennai. A Shankar, head of operations, strategic consulting, Jones Lang LaSalle, too, agrees. "While amenities can be created through capital investment, it is how they are managed and the service delivery arrangements that will determine the project's popularity," he says.

The developer and his project should also have the capability to support senior citizens in their later years. "As the senior citizen ages, he might need assisted care, both long-term and short-term. There is a need for specialised centres manned by doctors, nurses and care givers who can offer rehabilitation and care with advancing age," says Sridharan. Only if the retirement community offers such facilities will seniors be assured that they will be taken care of when they become physically dependent.

Go with a project where the developer has a mix of sell and lease/rent model. "A 100 per cent sale model typically promotes speculative buying. A large percentage of the project might remain vacant on commissioning," says Shankar. It becomes difficult to develop a vibrant community in such a project. Retirement communities where the developer has sold entirely and outsourced the services should also be avoided. "If the service provider doesn't earn a high rate of return, he could quit and the senior citizens would be left in the lurch. Go with a developer who has a track record of running his projects himself," says Paranjape.

Visit the project if it is already occupied or go to one of the builder's older projects. "Speak to the residents. If they are satisfied, go ahead and buy," advises Jain.

A sound investment?

Financial planners are of the view that it is best not to treat a retirement home as an investment product. Invest in one because you need it. While most developers might assure you that demand exceeds supply and you are likely to exit at a profit, your experience could be different. "You will only be able to sell to those above 50. The return such a property fetches will depend on demand-supply and the project's quality. If supply increases in the future, your return could be low. Quality of the project, its maintenance and vibrancy of the community will also determine your return," says Vishal Dhawan, chief financial planner, Plan Ahead Wealth Advisors.

BUYER'S CHECK LIST

• Quality of services and staff
   
• Reasonable maintenance and catering charges
   
• In-house availability of basic medical facilities, doctor on call, medical store, ambulance and trained paramedics
   
• 24-hour availability of nurses and care
   
• Proximity to large hospitals
   
• Senior-friendly design
   
• Availability of activities such as religious, cultural and entertainment
   
• The company has a record of regular payment of bills and filing of I-T returns
   
• Proximity to airport and railway station

GST has benefits for infrastructure

There are both positive and negative impacts of the tax, but the net result for the sector is advantageous

This is GST ( goods and services tax) season; and as the dust settles on the commencement of the long journey to implement the historic GST regime, it is worthwhile to take stock of how it impacts specific aspects of Indian infrastructure. Here are seven ways GST affects the sector — three positive, and four negative.

Electricity ( impact: negative): GST is expected to inflate electricity costs by up to eight per cent as the government has decided to keep electricity out of the ambit of this new tax dispensation. Power producing companies — both renewable and conventional — would have to pay GST for their inputs such as fuel and machinery but will not be able to get these taxes refunded, given that their output — electricity — is exempt. This higher cost of producing electricity will then be passed on to consumers under the “ change of law” clause in power purchase agreements ( PPA). Developers selling electricity in the spot market or on a non- PPA basis would have to factor in the higher cost.

Works contracts and EPC ( impact: positive): GST seeks to provide muchneeded clarity on works contracts, and therefore, on the engineering, procurement and construction ( EPC) business line. Works contracts are proposed to be taxed as “ services”. This means the GST rate and provisions, like place of supply rules et al, as applicable on services will apply to works contracts. The major gain from this treatment is that the tax would be now charged on the actual contractual base. Also, local versus inter- state works contracts, that at present leads to innumerable disputes, should get eliminated. Hence, EPC contract prices should come down somewhat on account of this new tax- efficient structure, which in turn should benefit project owners.

Cement ( impact: positive): Cement is acrucial input to the infra sector, and GST is expected to impact it positively. The overall indirect tax incidence is currently estimated to be around 25 per cent. The cement industry is also expected to benefit from lower costs of logistics. Overall, a decrease in cement prices is expected.

Logistics ( impact: positive): The GST is expected to enable a reduction in logistics cost by as much as 20 per cent to 30 per cent, as firms reconfigure their supply chains on four counts. First, as India becomes one big market, there will be larger but fewer warehouses. Second, it will lead to a larger number of bigger trucks on roads as there is greater adoption of the hub- and- spoke model. Third, these changes will lead to greater economies of scale for transport operators and lead to more companies outsourcing their logistics operations. Four, reduction in waiting and idling time at inter- state barriers and checkpoints is expected to provide a huge relief.

Advisory, consulting, engineering and project management services (impact: negative): As with all other services, firms providing these services to the infrastructure sector will have a negative impact due to the higher incidence of GST at 17 to 18 per cent vis- à- vis the current 15 per cent.

Abolition of tax holidays and exemptions (impact: negative): There are different tax holidays and exemptions for infrastructure development and operations at both the central and state levels. Whilst there is the hope that in the final analysis, these tax holidays and exemptions will be allowed to run their course, the lurking fear is that they will be removed.

Civil aviation ( impact: negative): Five petroleum products — crude, natural gas, aviation turbine fuel ( ATF), diesel and petrol — are excluded from the coverage of GST for the initial years while the remaining petroleum products —kerosene, naptha and liquefied petroleum gas ( LPG) — are covered. Flight tickets are likely to get costlier as airlines will not be able to claim credit on tax paid on jet fuel. The current service tax ranges from 5.6 per cent to nine per cent of the base fare, which is considerably less than the GST rate that is being spoken about, of 15 to 18 per cent. Currently, airlines can claim what is called a cenvat credit on the central excise duty for fuel. They stand to lose this in the GST regime as ATF is outside the purview of GST.

While there is this bundle of negatives and positives, this columnist is of the opinion that on the whole, GST has a positive impact on the sector. Increase in prices of airline tickets and electricity are soon absorbed and forgotten.

But the positives that emanate from rationalisation of taxes on works contracts, reduction in cement prices, the huge benefit to logistics and the elimination of a raft of complex exemptions and tax holidays has clear long- term advantages.

We can create GSTN identity for 90% of taxpayers anytime: Navin Kumar

Navin Kumar
Chairman, Goods and Services Tax Network

Take us through the GSTN journey so far.

We started from scratch in May 2013. At that time our target date was not clear.

We were told for the first time in October 2014 that April 1, 2016, was our target date. It was then we started the recruitment process, as we had already built the organisation structure.

Our first challenge was to prepare for the RFP ( request for proposals) in the absence of a GST framework. It was unclear what we should put in the RFP and what work we were supposed to do.

We took the permission from the stateempowered committee of finance ministers to work on the draft and had appointed PwC as our consultant. We floated the tender in April 2015 and selected the vendor, Infosys, in September 2015.

In November 2015, we gave the work order. According to the RFP, the vendor (Infosys) will provide us the support for five years from the date GST is rolled out. In between, we had interacted with the industry and went to Nasscom asking its members for suggestions and feedback about their needs and what could be the likely interface.

What was the industry feedback?

We were stunned by their feedback. We had told them we wanted to work on a built- own- operate- transfer ( BOOT) model. They said, thank you very much. The companies said they had burnt their fingers, and the BOOT model was dead and buried.

They cited instances where they had built the system, operated it but were still not getting the revenues because of various reasons. They said if you want to build the system, you have to pay the pre- operative cost, which is the capital cost.

There were instances when the central and the state governments had floated tenders and no one came to bid for them. The industry gave around 1,500 inputs and suggestions. We took most of them into account.

Did such meetings help?

We held a pre- bid meeting and incorporated their suggestions in the RFP through corrigendum. Finally, the big five — Microsoft, Tech Mahindra, Infosys, TCS and Wipro — sent their proposals. It was achallenge for us to select one because all the proposals were really good.

Where do we stand today on software development?

Prototyping of the user interface is almost over. Code writing is also half done. The software will be first tested by Infosys and then by us. The process will begin in October and last till January. We gave Infosys a go- ahead to purchase hardware a day after the Rajya Sabha cleared the GST Bill. Once the software is loaded and tested, we will take a final approval from the Standardised Testing Quality Certification ( STQC).

The approvals are expected by midFebruary. And then, we will have dry runs till March.

When will the migration of existing taxpayers take place?

Those who already pay VAT, service tax and central excise tax will be subsumed in the GSTN. Later other, small taxes, such as entertainment tax and luxury tax, will be migrated to GSTN. The current taxpayers will not be asked to register again. They will be asked to provide their PAN and be given a unique identification number under the GST. Currently, 6.5 million people pay value added tax, 2.5 million people pay service tax and another 300,000400,000 people central excise tax. We have already validated PAN of 90 per cent of these taxpayers and we can generate their

GSTN number any day.

With the Rajya Sabha passing the goods and services tax ( GST) Constitution amendment Bill, the focus has shifted to the Goods and Services Tax Network ( GSTN), the non- profit organisation that is building the information technology architecture. It will be the backbone of the reform, slated to be rolled out next year. NAVIN KUMAR, chairman, GSTN, tells Sahil Makkar and N Sundaresha Subramanian that his organisation was not caught by surprise by the quick turn of events. It is confident of putting in place hardware and software requirements.

NBFC, housing finance to be among major contributors to group: Ajay Srinivasan, Chief Executive at ABFS

    Interview with chief executive, ABFS

Aditya Birla Nuvo's merger with Grasim Industries and the subsequent demerger of Aditya Birla Financial Services (ABFS) into a listed entity is expected to consolidate all financial services businesses of the group under one roof. Ajay Srinivasan, chief executive, ABFS, details the deal contours of the financial services business. Business Standard: Q&A

Business Standard: Once Aditya Birla Financial Services is listed after the demerger, what segments would be the biggest contributor to growth?

Ajay Srinivasan: I have said consistently that all businesses will grow under Aditya Birla Financial Services. Growth will be there across the platform. But the non-banking financial company (NBFC) business will obviously be a large contributor. Housing finance will be a large contributor, as also asset management and insurance. Life insurance growth is coming back. These four will be the largest contributors.

Business Standard: How will this transaction benefit market participants? By when is it expected to be completed?

Ajay Srinivasan: For us, this was a good time to unlock value. It is a big opportunity which does not exist in the market. It will give the market an access to a wide array of diversified financial services which gives both breadth and scale. This transaction is expected to be completed by the fourth quarter of FY17 or the first quarter of FY18.

Business Standard: Now that ABFS will be listed, could this be taken as a precursor of an initial public offering (IPO) for the life insurance business?

Ajay Srinivasan: As ABFS will be listed, there is no plan to list the companies under it, including Birla Sun Life Insurance. There is no immediate move towards that.

Business Standard: With two large life insurers, HDFC Life and Max Life, set to merge, do you see any impact on your ranking?

Ajay Srinivasan: Birla Sun Life Insurance ranks fourth among private life insurers and we expect it to hold that ranking. We do not have a large bank partners like the other insurers, though we would distribute our insurance products through our payments bank.

Business Standard: Are you looking to enter the general insurance space as well?

Ajay Srinivasan: We already have Birla Sun Life Insurance and have recently received approval to roll out our standalone health insurance business under Aditya Birla Health Insurance, which through its differentiated products and solutions will be relevant to our target consumers. However, we are not planning to set up any separate general insurance company.

Market cheers UltraTech bold move

UltraTech Cement will issue two separate sets of secured redeemable NCDs amounting to Rs 175 crore and Rs 250 crore respectively, each on private placement basis. NCDs with issue size of Rs 250 crore has tenure of 5 years and NCDs with issue size of Rs 175 crore has tenure of 3 years. Both the sets of NCDs offer coupon rate of 7.57% per annum. Its consolidated net profit rose 29.2% to Rs 780.11 crore on 4.1% growth in net sales to Rs 6537.83 crore in Q1 June 2016 over Q1 June 2015. Market rewarded the move with the scrip gaining 4.5%