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Crises in the Indian Financial system

Crises in the Indian Financial system. 2018. Twin Balance sheet problem. Disproportionate corporate debt Decline in economy ( infrastructure , housing, steel, power sectors, etc.) Poor governance Payment default Stimulus to the Economy. Bank NPAs (loan > value of assets)

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Crises in the Indian Financial system

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  1. Crises in the Indian Financial system 2018

  2. Twin Balance sheet problem • Disproportionate corporate debt • Decline in economy (infrastructure, housing, steel, power sectors, etc.) • Poor governance • Payment default • Stimulus to the Economy • Bank NPAs (loan > value of assets) • Resolution of bad loans (haircuts) • Banks under PAC • How to improve liquidity without money?

  3. Reform: IBC 2016 • Case must be resolved within (180 +90) 270 days of admission, else face liquidation • Resolution of NPAs tilts in favour of the lender • Paradox: Does the lender really gain? • Is the recovery market driven? or is it Corporate network & power play? • Does IBC benefit the financial system?

  4. Resolution depends on… • The enterprise value of defaulter • Number of buyers/bidders in the market, • The value offered by them • Last resort: liquidation of the borrower; a basic characteristic of the company- it has perpetual succession , can never die

  5. Evolution in the IBC 2016… • 29A - eligibility criteria (impeccable credentials);bars wilfuland errant promoters of defaulting companies, and their related and connected parties from bidding for stressed assets in the resolution process. • Exemption from disqualification granted to MSMEs • 75% creditors must agree; diluted to 66%, (for extentionbeyond 180 days); 51%; and 90% consent for withdrawal of case

  6. Evolution in the IBC 2016… • Allotteesof real estate projects included as operational creditors • Where will be the ranking of home buyersin the waterfall clause? Will home buyers get the status of secured creditors? • Legal victory but benefit depends on due diligence done earlier by banks

  7. Evolution in the IBC 2016… • Rights of minority shareholders? • Any protection? • SEBI exempted buyers of shares in distressed firms from the requirement of making an open offer even if the purchase triggers such an event under the takeover code.

  8. IBC 2016 in action Synergies Dooray Automotive Ltd, (1995) a maker of alloy wheels for cars, share capital 19.59 cr; declared sick in 2007 with respect to net worth filed for bankruptcy (not the crediors) the first case to be resolved under the IBC, saw lenders take a 94% haircut. Lenders (ARCs) recovered only Rs54 crore against a claim amount of Rs972 crore. .

  9. IBC 2016 in action • Liquidation ordered for InnoventiveIndustries Ltd, a Pune-based steel products maker after a committee of creditors (CoC) rejected two resolution plans. • The liquidation value for the company is about Rs130-140 crore, which translates to less than 10% of its total debt.

  10. IBC 2016 • According to a recently released report by Pricewater house Coopers, corporate resolution proceedings for 304 cases were completed within the 180-day deadline, while the process for 185 companies took between 180 and 270 days. • The resolution process of 241 stressed companies went beyond the mandatory 270 days of which 73 firms are going into liquidation.

  11. Alok industries

  12. Electrosteel Steel

  13. Bhushan Steel

  14. Amtek Auto

  15. Jyoti structures

  16. Monnet Ispat

  17. ABG shipyard

  18. Lanco

  19. Essar Steel

  20. Bhushan Power and Steel

  21. Success of the IBC depends on… • Adherence to lending norms is a pre-requisite • No corporate is declared a willful defaulter • Need to lift corporate veil - promoters are personally wealthy, expenses on rentals to sister concerns are being met; Web of networked companies • Soft spot for corporate distress vis a vis retail borrowers or farmers, etc.

  22. Waiting for another crises? • One person company • Long term capital gains @20% and STCG@15% • Stock lending and borrowing- sell shares you do not own, hoping to buy back at lower prices in the future…legitimize the new value system –can destabilize the stock market

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