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#Outstanding Investments in Commercial Papers of NBFCs
investyadnya · 3 years
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Revival in Bank Credit to NBFCs in February 2021
Revival in Bank Credit to NBFCs in February 2021
Introduction: Bank credit to NBFCs has picked up for the first time during FY21 in February, indicating a positive impact of RBI’s liquidity measures and less risk aversion at banks. Recovery in lending by Banks to NBFCs is a good signal for both sectors. This process of lending loans by Banking to NBFCs is also called Shadow Banking. Key Role of NBFCs in improving Credit Growth through…
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legaladvisorr · 2 years
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NBFC COMPANY REGISTRATION IN INDIA WITH MUDS
NBFC Company Registration
The significance of NBFCs in any developing country's economy is highly outstanding and crucial for development and prosperity in the industrial, commercial, institutional, and service sectors. These NBFCs have now solidified their acknowledged position as important complements to the banking and financial sectors in every country. These non-banking financial institutions assist and support small to large investors and businesspeople in transactions including deposits, various loans, investment funds, hire-purchasing, leasing, capital and money market instruments, and financing. These firms' activities and services differ from those of banks and other organisations involved in agricultural, industrial, and real estate negotiations and transactions.
 These NBFCs are registered in accordance with the norms and regulations of the country's premier financial institution, which is overseen by the minister of finance. Our prominent and globally renowned law office has been offering legal services to persons and companies in various economic sectors in nations all over the world, including nbfc registrations as an auxiliary. In this extremely interesting and illuminating essay, we provide useful and elusive information on nbfc registration in India, as well as all nbfc registration services, for the benefit of our Indian and international visitors.
 *To know more about nbfc registration requirements kindly visit our website. 
 NBFC Registration Procedure
These NBFCs are significant and supported in India as well, and are essentially categorised as —- asset financing companies, lending companies, and investment organisations. Any firm registered legally under the Companies Act, 2013 of India and dealing with topics and transactions in any of the above-mentioned sectors is needed to hold the Reserve Bank of India's nbfc registration certificate. This type of registration is required if a company's total financial transactions exceed 50% of its own capital in any given year. Again, in order to be registered as a non-banking financial organisation, the aspiring firm must have a total capital of Rs. 2 Crore.
 The NBFC registration procedure consists of sending the specified application form to the Reserve Bank of India, together with all relevant papers, and then prosecuting for speedy registration. If the top bank determines that the firm meets all of the qualifications and conditions outlined in Section 45-IA of the RBI Act of 1934, it will give the applicant nbfc company registration certificate.
 Our NBFC Services
MUDS Management is a well-known brand in non-banking financial services. Our well-established legal practice in India has assisted several entrepreneurs, organisations, investors, retail dealers, and other persons and entities in obtaining quick and accurate nbfc registration online. Our nbfc registration services include expert advice on nbfc formation, filing the nbfc application, preparing necessary documents, obtaining necessary approvals from the concerned governmental authorities, and offering rigorous prosecution for the best possible and brisk nbfc registration, on behalf of individuals and entities located throughout India and abroad.
 To gather the necessary information regarding nbfc formation, you can book consultation with our expert panel composed of experienced and qualified CS and lawyers who will guide you throughout the process for nbfc registration online.
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vsplusonline · 4 years
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Cabinet approves ₹3 lakh crore funding for MSMEs
New Post has been published on https://apzweb.com/cabinet-approves-%e2%82%b93-lakh-crore-funding-for-msmes/
Cabinet approves ₹3 lakh crore funding for MSMEs
The Union Cabinet on Monday approved additional funding of up to ₹3 lakh crore to micro, small and medium enterprises (MSME) that was announced by Finance Minister Nirmala Sitharaman last week as part of the ₹20 lakh crore economic package.
Under the scheme, 100% guarantee coverage will be provided by National Credit Guarantee Trustee Company Limited (NCGTC) to eligible MSMEs and interested borrowers of the MUDRA scheme, in the form of a Guaranteed Emergency Credit Line (GECL) facility, the government said.
The tenure of loan under this scheme will be four years with a moratorium period of one year on the principal amount. No guarantee fee will be charged by NCGTC. Interest rates on loans extended by banks and financial institutions will be capped at 9.25%, and 14% for those extended by non-banking financial companies (NBFCs). The scheme would be applicable to all loans sanctioned under GECL till October 31, or till an amount of ₹3 lakh crore is sanctioned, whichever is earlier.
“For this purpose, a corpus of ₹41,600 crore shall be provided by the Government of India, spread over the current and the next three financial years,” the government said.
“All MSME borrower accounts with outstanding credit of up to ₹25 crore as on February 29, 2020, which was less than or equal to 60 days past due as on that date, i.e., regular, SMA 0 and SMA 1 accounts, and with an annual turnover of up to ₹100 crore, would be eligible for GECL funding under the Scheme,” the government said.
Bankers unimpressed
However, bankers said that since the government is not giving a direct guarantee, this may not solve the ‘risk averse’ issue that the lenders are facing.
“It is like the CGTMSE [Credit Guarantee Fund Trust for Micro and Small Enterprises] scheme. The claims will not be settled unconditionally. Questions will be asked… they may like to see the loan appraisal process once a claim is made when the borrower defaults,” an official from a public sector bank said.
Since the scheme is not directly guaranteed by the government, banks still have to attach a risk weight of 20% for the loans. And, if the claim is not settled, banks have to make provision in line with the age of default. Bankers said they may approach the Reserve Bank of India to allow them not to attach any risk weight.
“The government would probably issue a letter of comfort and based on that this corporation will issue guarantees and then when guarantees devolve, that is when banks will make a claim, which is likely in the next two to three financial years; so defaults will happen [over] a period of time. And, the budgetary impact will be spread over a period of time,” the chief executive of a government-owned bank said.
Among other proposals approved by the Cabinet on Wednesday was a subsidy of almost ₹3,110 crore for distribution of extra foodgrains to about eight crore migrant workers and their families.
The Cabinet also approved a new centrally-sponsored scheme to support micro food processing units at an outlay of ₹10,000 crore, the expenditure being shared by the Centre and the States on a 60:40 basis.
The scheme will be implemented over a five-year period and will benefit about two lakh self-help groups, farmer producer organisations and other small units through a credit-linked subsidy, providing money for working capital and tools, a marketing grant, skills training and technical upgrade.
It also approved the Pradhan Mantri Matsya Sampada Yojana, a scheme announced in the 2020 Budget, to develop the fisheries sector over a five-year period.
Of the total investment of ₹20,050 crore, the Centre will spend ₹9,407 crore, the States ₹4,880 crore while beneficiaries themselves will have to invest about ₹5,763 crore. The Cabinet Committee on Economic Affairs also approved the adoption of a new methodology for the auction of coal and lignite blocks on a revenue-sharing basis. The tenure of coking coal linkage was increased to 30 years.
It will also permit commercial exploitation of coal-bed methane in the mining lease area. Rebates in revenue share payments will be given in the event of an early production of coal from the mine. Further rebates will be offered for gasification of coal to encourage environment-friendly actions.
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EMIs put on hold, interest rate cut: RBI injects virus-fighting stimulus to tackle Covid-19 crisis
"COVID-19 is upon us, but this too shall pass. We need to remain careful and take all precautionary measures. I leave you with this comforting thought. Stay clean. Stay safe. Go digital, he concluded." RBI also pushed for more liquidity in the system to help banks increase liquidity to help businesses when the lockdown is removed. The Reserve Bank of India (RBI) on Friday introduced a barrage of relief measures to alleviate financial difficulties arising due to Covid-19 restrictions. From boosting banks' liquidity to providing relief to their customers, RBI seems to have come out all guns blazing to tackle the economic disruptions caused by the novel coronavirus outbreak.
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RBI on Friday announced several measures to boostthe ecnomy just a day after government released its Rs 1.7 lakh crore relief package for the poor.
HIGHLIGHTS
· RBI has permitted banks to give 3-month moratorium on term loans and EMIs
Central bank has also slashed repo rate by 75 basis points
The Reserve Bank of India (RBI) on Friday introduced a barrage of relief measures to alleviate financial difficulties arising due to Covid-19 restrictions.
From boosting banks' liquidity to providing relief to their customers, RBI seems to have come out all guns blazing to tackle the economic disruptions caused by the novel coronavirus outbreak.
The measures announced today also had a fair bit of firepower to get companies kickstarted after the lockdown, which will continue till April 14 to restrict the virus from spreading further.
Banks, too, were given massive leeway by the RBI to stabilise themselves in the wake of the deepening economic crisis.Let’s dive into the details.  
3-MONTH MORATORIUM ON LOANS, EMIs
The most important takeaway from RBI’s press conference was about the 3-month moratorium on term loans and equated monthly instalment payments. 
RBI Governor Das said, "All commercial banks (including regional rural banks, small finance banks and local area banks), co-operative banks, all-India Financial Institutions, and NBFCs (including housing finance companies and micro-finance institutions) (lending institutions) are being permitted to allow a moratorium of three months on payment of instalments in respect of all term loans outstanding as on March 1, 2020."
"Accordingly, the repayment schedule and all subsequent due dates, as also the tenor for such loans, maybe shifted across the board by three months.
This directive to all banks in the country could help millions of people who have exiting term loans and EMIs as they will not have to pay any instalments on them for a period of three months.
Finance Minister Nirmala Sitharaman lauded the move soon after Das addressed the nation.
"Appreciate RBI governor Shaktikanta Das’s reassuring words on financial stability. The 3-month moratorium on payments of term loan instalments (EMI) and interest on working capital give much-desired relief. The slashed interest rate needs quick transmission," she added.
On observing Das’s statement closely, it can be determined that RBI has "permitted" banks to extend this facility to customers and the final discretion, therefore, lies with the bank which has given the loan.
Further clarity is awaited as banks are yet to offer a statement on the fresh relief measures announced by the central bank.
REPO SLASH
Another important but expected announcement was about slashing repo rate by 75 basis points or 0.75 per cent from 5.15 per cent to 4.4 per cent.
A complete transmission of the fresh rate cut will significantly help the country in boosting growth and ensuring financial stability.
RBI Governor said the Monetary Policy Committee held its policy meeting on March 24, 25 and 27 ahead of the scheduled date in view of the current economic outlook.
"MPC voted unanimously for a sizeable reduction in the policy repo rate and for maintaining the accommodative stance of monetary policy as long as necessary to revive growth, mitigate the impact of Covid-19 while ensuring that inflation remains within the target," Das said.
"The MPC voted with a 4-2 majority to reduce the policy rate by 75 basis points to 4.4 per cent."
The fixed-rate reverse repo rate, which sets the floor of the liquidity adjustment facility (LAF) corridor, has also been reduced by 90 basis points to 4 per cent.
"The purpose of this measure relating to reverse repo rate is to make it relatively unattractive for banks to passively deposit funds with the Reserve Bank and instead, to use these funds for on-lending to productive sectors of the economy," Das explained.
"It may be recalled that during the month of March so far, banks have been parking close to Rs 3 lakh crore on a daily average basis under the reverse repo, even as the growth of bank credit has been steadily slowing down," he added.
MAJOR LIQUIDITY, CRR PUSH
RBI also pushed for more liquidity in the system to help banks increase liquidity to help businesses when the lockdown is removed.
"A multi-pronged approach, comprising both targeted and system-wide liquidity provision, has been adopted to ensure that COVID-19 related liquidity constraints are eased," Das said.
He announced that the central bank will conduct an auction of Targeted Long Term Repo Operations (TLTRO) of up to three years for Rs 1 lakh crore at a floating rate, linked to the policy repo rate.
"Liquidity availed under the scheme by banks has to be deployed in investment-grade corporate bonds, commercial paper and non-convertible debentures over and above the outstanding level of their investments in these bonds as on March 25, 2020. Eligible instruments comprise both primary market issuances and secondary market purchases, including from mutual funds and non-banking finance companies," the RBI governor said.
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Investments made by banks under this facility will be classified as held to maturity (HTM) even in excess of 25 per cent of total investment permitted to be included in the HTM portfolio.
The central bank also offered further help to banks by reducing the cash reserve of all banks by 100 basis points to 3 per cent of net demand and time liabilities (NDTL).
"This reduction in the CRR would release primary liquidity of about Rs 1,37,000 crore uniformly across the banking system in proportion to liabilities of constituents rather than in relation to holdings of excess SLR," Das said.
He also announced increasing the accommodation under the marginal standing facility (MSF) from two per cent of the Statutory Liquidity Ratio (SLR) to three per cent with immediate effect.
This was done to reduce the "exceptionally high" volatility seen in the market over the past month. The measure will be applicable up to June 30, 2020
Therefore, RBI announced three broad measures to help banks shore up more liquidity to tackle the post-corona slowdown blues. The measures taken will help inject total liquidity of Rs 3.74 lakh crore to the system.
'ROUGH TIMES NEVER NEVER LAST’
RBI Governor Shaktikanta Das left no stone unturned to instil some confidence to a battered financial system that had been awaiting a sound economic relief package to battle the crisis.
Das said, "Life in the time of Covid-19 has been one of unprecedented loss and isolation. Yet, it is worthwhile to remember that tough times never last; only tough people and tough institutions do."
"Clearly, a war effort has to be mounted and is being mounted to combat the virus, involving both conventional and unconventional measures in continuous battle-ready mode."
The fact that RBI has shown its intent to battle the long-term effects of the crisis, along with the fresh relief measures, is likely to lift moods of financial markets in coming days. However, the present volatility is expected to continue until the period of the lockdown.
"Let me assure all that the Reserve Bank is at work and in mission mode, monitoring the evolving financial market and macroeconomic conditions; and calibrating its operations to meet any need for additional liquidity support as well as other measures, as may be warranted," Das said.
"It is our effort to ensure the normal functioning of markets, nurture the impulses of growth and preserve financial stability."
While several other measures were announced, RBI’s message is also a strong booster for the market and the population at large as Governor Das assured Indians that the fundamentals of the Indian economy are stronger than what they were in the aftermath of the global financial crisis.
"The fiscal deficit and the current account deficit are now much lower; inflation conditions are relatively benign, and financial volatility measured by the change in stock prices from recent peaks and average daily change in the exchange rate of the rupee is distinctly lower," Das said.
"COVID-19 is upon us, but this too shall pass. We need to remain careful and take all precautionary measures. I leave you with this comforting thought. Stay clean. Stay safe. Go digital, he concluded."
https://agrawalconstruction.com
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ainvestops · 4 years
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RBI Steps: RBI provides much-needed shot in the arm to corporate debt market
NEW DELHI/MUMBAI: The Reserve Bank of India on Friday provided the much-needed shot in the arm to the non-SLR market in terms of liquidity support. Market participants gave a thumbs up to the central bank’s targeted LTROs (TLTROs), and said this will help in reducing the yield on corporate bonds, which have been reeling under pressure amid low volumes.
The central bank said it will conduct auctions of targeted term repos of up to three-year tenor of appropriate sizes for a total amount of up to Rs 1 lakh crore at a floating rate linked to the policy repo rate.
Liquidity availed under the scheme by banks has to be deployed in investment-grade corporate bonds, commercial papers and non-convertible debentures over and above the outstanding level of their investments in these bonds as on March 27, RBI said.
R K Gurumurthy, Head of Treasury, Lakshmi Vilas Bank said: “RBI has this time announced a TLTRO, where the funds raised under the scheme will be allowed to have an end-use of buying corporate bonds and commercial papers. And these can be held under the Held-To-Maturity (HTM) category. This will provide the much needed shot-in-the-arm for the non-SLR market in terms of liquidity support.”
CARE Ratings in a note said the fresh liquidity injection into the banking system, when there exists ample liquidity at the overall level would help address the liquidity asymmetry to an extent.
Investments made by banks under this facility will be classified as held to maturity (HTM) even in excess of 25 per cent of the total investment permitted to be included in the HTM portfolio. RBI said exposures under this facility will also not be reckoned under the large exposure framework.
The first TLTRO auction of Rs 25,000 crore was held today.
CARE also pointed out the condition that the liquidity created on account of TLTRO has to be deployed in corporate debt securities, is aimed at reducing the yields of these instruments, which in recent days have been pressured on account of large selloff along with low trading activity.
This should help sectors such as NBFCs, which traditionally borrow from the market through bonds and commercial papers, the ratings agency said in a note.
Overall, the Reserve Bank of India earlier in the day announced measures to inject Rs 3.74 lakh crore into the banking system through a slew of instruments, including the reduction in cash reserve ratio and interest rate cut.
The other liquidity support measures included targeted long-term repo operation (TLTRO) and increasing the limit under the marginal standing facility (MSF) to 3 per cent from 2 per cent.
These three measures relating to TLTRO, CRR and MSF will inject total liquidity of Rs 3.74 lakh crore into the system.
Commenting on the measures announced by RBI, Lakshmi Iyer, CIO (Debt) & Head of Products, Kotak Mahindra Asset Management Company, said: “The policy measures announced are big moves by the central bank to address concerns on liquidity and facilitating flow of credit in the economy. This will ensure that adequate liquidity is available in the system to tide over the prevailing crisis period.”
While quoting a song from the movie ‘ Hera Pheri’ – ‘ Dene Wala Jab bhi deta, Deta Chappar Phad Ke’, Iyer said the central bank has adopted a 4-pronged approach to manage the financial system. A) Increased liquidity – Rs 3.74 lakh crore additional liquidity, B) Lower policy rate and likely leading to better transmission of the cut policy rate. 3) Provision of loan moratorium and asset classification forbearance and lastly managing forex situation.
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investglobal · 4 years
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RBI Steps: RBI provides much-needed shot in the arm to corporate debt market
NEW DELHI/MUMBAI: The Reserve Bank of India on Friday provided the much-needed shot in the arm to the non-SLR market in terms of liquidity support. Market participants gave a thumbs up to the central bank’s targeted LTROs (TLTROs), and said this will help in reducing the yield on corporate bonds, which have been reeling under pressure amid low volumes.
The central bank said it will conduct auctions of targeted term repos of up to three-year tenor of appropriate sizes for a total amount of up to Rs 1 lakh crore at a floating rate linked to the policy repo rate.
Liquidity availed under the scheme by banks has to be deployed in investment-grade corporate bonds, commercial papers and non-convertible debentures over and above the outstanding level of their investments in these bonds as on March 27, RBI said.
R K Gurumurthy, Head of Treasury, Lakshmi Vilas Bank said: “RBI has this time announced a TLTRO, where the funds raised under the scheme will be allowed to have an end-use of buying corporate bonds and commercial papers. And these can be held under the Held-To-Maturity (HTM) category. This will provide the much needed shot-in-the-arm for the non-SLR market in terms of liquidity support.”
CARE Ratings in a note said the fresh liquidity injection into the banking system, when there exists ample liquidity at the overall level would help address the liquidity asymmetry to an extent.
Investments made by banks under this facility will be classified as held to maturity (HTM) even in excess of 25 per cent of the total investment permitted to be included in the HTM portfolio. RBI said exposures under this facility will also not be reckoned under the large exposure framework.
The first TLTRO auction of Rs 25,000 crore was held today.
CARE also pointed out the condition that the liquidity created on account of TLTRO has to be deployed in corporate debt securities, is aimed at reducing the yields of these instruments, which in recent days have been pressured on account of large selloff along with low trading activity.
This should help sectors such as NBFCs, which traditionally borrow from the market through bonds and commercial papers, the ratings agency said in a note.
Overall, the Reserve Bank of India earlier in the day announced measures to inject Rs 3.74 lakh crore into the banking system through a slew of instruments, including the reduction in cash reserve ratio and interest rate cut.
The other liquidity support measures included targeted long-term repo operation (TLTRO) and increasing the limit under the marginal standing facility (MSF) to 3 per cent from 2 per cent.
These three measures relating to TLTRO, CRR and MSF will inject total liquidity of Rs 3.74 lakh crore into the system.
Commenting on the measures announced by RBI, Lakshmi Iyer, CIO (Debt) & Head of Products, Kotak Mahindra Asset Management Company, said: “The policy measures announced are big moves by the central bank to address concerns on liquidity and facilitating flow of credit in the economy. This will ensure that adequate liquidity is available in the system to tide over the prevailing crisis period.”
While quoting a song from the movie ‘ Hera Pheri’ – ‘ Dene Wala Jab bhi deta, Deta Chappar Phad Ke’, Iyer said the central bank has adopted a 4-pronged approach to manage the financial system. A) Increased liquidity – Rs 3.74 lakh crore additional liquidity, B) Lower policy rate and likely leading to better transmission of the cut policy rate. 3) Provision of loan moratorium and asset classification forbearance and lastly managing forex situation.
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boldlykeenblizzard · 4 years
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RBI Steps: RBI provides much-needed shot in the arm to corporate debt market
NEW DELHI/MUMBAI: The Reserve Bank of India on Friday provided the much-needed shot in the arm to the non-SLR market in terms of liquidity support. Market participants gave a thumbs up to the central bank’s targeted LTROs (TLTROs), and said this will help in reducing the yield on corporate bonds, which have been reeling under pressure amid low volumes.
The central bank said it will conduct auctions of targeted term repos of up to three-year tenor of appropriate sizes for a total amount of up to Rs 1 lakh crore at a floating rate linked to the policy repo rate.
Liquidity availed under the scheme by banks has to be deployed in investment-grade corporate bonds, commercial papers and non-convertible debentures over and above the outstanding level of their investments in these bonds as on March 27, RBI said.
R K Gurumurthy, Head of Treasury, Lakshmi Vilas Bank said: “RBI has this time announced a TLTRO, where the funds raised under the scheme will be allowed to have an end-use of buying corporate bonds and commercial papers. And these can be held under the Held-To-Maturity (HTM) category. This will provide the much needed shot-in-the-arm for the non-SLR market in terms of liquidity support.”
CARE Ratings in a note said the fresh liquidity injection into the banking system, when there exists ample liquidity at the overall level would help address the liquidity asymmetry to an extent.
Investments made by banks under this facility will be classified as held to maturity (HTM) even in excess of 25 per cent of the total investment permitted to be included in the HTM portfolio. RBI said exposures under this facility will also not be reckoned under the large exposure framework.
The first TLTRO auction of Rs 25,000 crore was held today.
CARE also pointed out the condition that the liquidity created on account of TLTRO has to be deployed in corporate debt securities, is aimed at reducing the yields of these instruments, which in recent days have been pressured on account of large selloff along with low trading activity.
This should help sectors such as NBFCs, which traditionally borrow from the market through bonds and commercial papers, the ratings agency said in a note.
Overall, the Reserve Bank of India earlier in the day announced measures to inject Rs 3.74 lakh crore into the banking system through a slew of instruments, including the reduction in cash reserve ratio and interest rate cut.
The other liquidity support measures included targeted long-term repo operation (TLTRO) and increasing the limit under the marginal standing facility (MSF) to 3 per cent from 2 per cent.
These three measures relating to TLTRO, CRR and MSF will inject total liquidity of Rs 3.74 lakh crore into the system.
Commenting on the measures announced by RBI, Lakshmi Iyer, CIO (Debt) & Head of Products, Kotak Mahindra Asset Management Company, said: “The policy measures announced are big moves by the central bank to address concerns on liquidity and facilitating flow of credit in the economy. This will ensure that adequate liquidity is available in the system to tide over the prevailing crisis period.”
While quoting a song from the movie ‘ Hera Pheri’ – ‘ Dene Wala Jab bhi deta, Deta Chappar Phad Ke’, Iyer said the central bank has adopted a 4-pronged approach to manage the financial system. A) Increased liquidity – Rs 3.74 lakh crore additional liquidity, B) Lower policy rate and likely leading to better transmission of the cut policy rate. 3) Provision of loan moratorium and asset classification forbearance and lastly managing forex situation.
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IL & FS CRISIS
​Background
IL&FS Group is a vast conglomerate with a complex corporate structure that funds infrastructure projects across the world’s fastest-growing major economy like Chenani-Nashri road tunnel, India’s longest and has raised billions of dollars from the country’s corporate debt market.
IL&FS is a Systematically Important Non-Deposit Core Investment Company (CIC-ND-SI) i.e. any crisis at IL&FS would not only impact equity and debt markets but could also stall several infrastructure projects of national importance.
Many major corporates, banks, mutual funds, insurance companies, etc. such as LIC, HDFC and SBI have stakes in the IL&FS group.
Possible Reason for Default As per RBI, CIC-ND-SI is a Non-Banking Financial Company (NBFC)
With asset size of Rs 100 crore and above.
It holds not less than 90% of its net assets in the form of investment in equity shares, preference shares, bonds, debentures, debt or loans in group companies.
Its investments in the equity shares (including instruments compulsorily convertible into equity shares within a period not exceeding 10 years from the date of issue) in group companies constitutes not less than 60% of its net assets.
It does not trade in its investments in shares, bonds, debentures, debt or loans in group companies except through block sale for the purpose of dilution or disinvestment.
It accepts public funds
Shadow Banking System Shadow banking is that part of the financial system where credit intermediation involving entities and activities remains outside the regular banking system. The term was coined by economist Paul McCulley in 2007.
Working structure: They have a higher cost of funding. But the lack of regulatory oversight allows them to take on more risks than banks. So, they can cut corners and earn higher returns. They can also go bust more spectacularly.
Significance: They provides a valuable alternative to bank funding and helps support real economic activity. It is also a welcome source of diversification of credit supply from the banking system, and provides healthy competition for banks.
Critical lapse in Corporate Governance Norms: as Risk Management Committee, constituted met only once between 2015 and 2018.
Shareholder Negligence: Well-known institutions such as LIC, HDFC, etc. which were major shareholder in ILF&S are guilty of negligence. For example, HDFC had not nominated a director to the board of IL&FS since last year.
Asset-liability mismatch and weak corporate bond market: IL&FS owns long-term infrastructure financed with short-term funding because long-term (tenure of more than 10 years) debt is not available in India. This resulted in defaulting in one of the short-term repayment obligation due to various reasons like:
Slow pace of new infrastructure projects in India, and some of IL&FS’s own construction projects, including roads and ports, have faced cost overruns amid delays in land acquisition and approvals. Disputes over contracts have locked about Rs 9,000 crore of payments due from the government.
Lack of Effective Regulation:
RBI which oversees NBFCs like IL&FS and the union finance ministry which oversees major shareholders like LIC, SBI, etc. are at fault here as the crisis was allowed to develop over a period of time.
Impact of Crisis India’s Lehman Brothers moment: IL&FS debt papers enjoyed highest safety status by Credit rating Agency, for a long time on account of factors such as satisfactory liquidity conditions and the backing of major public sector units. However, current crisis reflects Failure of Credit Rating Agencies.
The lack of confidence in the credit ratings is in danger of undermining India’s financial stability, leading to a drying up of credit lines for shadow lenders and wider concerns about the impact on the economy.
Lack of Capital Expenditure: It’s impact may spill over into the wider infrastructure industry, pushing up funding costs and pulling government investment plans for achieving New India by 2022.
Impact on Stock Market: It might witness significant repercussions, including widespread redemption pressures, sell-off in the debt market, liquidity crunch and possible cancellation of licences of as many as 1,500 smaller non-banking financial companies (NBFCs) due to lack of adequate capital.
Liquidity crisis: There are concerns over short-term liquidity in the market for commercial papers raised by NBFCs.
Impact on Shadow Banking: According to RBI, India has about 11,000 shadow financing companies, out of which 248 are systemically important non-deposit taking institutions, who will face greater regulatory scrutiny and short term liquidity crisis, which could impact the sustainability of many NBFC’s.
Other cascading effects of IL&FS’s defaults: Rising borrowing costs, exacerbated by the turmoil in markets in recent days, will lead to a credit crunch in the sector.
Steps Taken by Government Taking Managing Control: Government superseded the IL&FS board under section 241(2) of the Companies Act, 2013, which enables supersession of a company’s board to prevent it from further mismanagement in order to protect public interest. Its Implications are
Increasing Confidence of Lenders by giving them assurance that their outstanding loans to IL&FS will be repaid.
Improving Financial Market Stability: It effectively stops the spread of systemic instability in an inter-connected financial system, especially as panic had started spreading across the financial, money and capital markets.
It helps in restoring the confidence of the financial market and Ease of doing Business in India.
Government has also ordered Serious Fraud Investigation Office (SFIO) to investigate into the affairs of crisis-hit IL & FS and its subsidiaries amid concerns over financial irregularities.
Way Forward
Short Term Measures like finalization of a restructuring plan, identification and valuation of assets, sale of the assets and repayment of outstanding loans.
Government must arrange adequate liquidity for IL&FS to obviate future defaults and ensure smooth implementation of infrastructure projects.
Strenghtening Corporate Governance norms by implementing Kotak panel recommendation and incentivize boards to play a more effective role in supervising company executives.
Shareholders awareness: Shareholders must be more actively involved in keeping tab on the key policy decisions of the companies.
Effective checks and balance system at the firm level to check any discrepencies at initial level.
Leveraging National Financial Reporting Authority for enforcement of auditing standards and ensuring the quality of audits to strengthen quality of audits and enhance investor & public confidence in financial disclosures of companies.
Creating an independent regulator for credit rating agencies, to have rating actions in a proactive manner rather than a reactive manner.
Rating agencies also need better market intelligence and surveillance rather than depending upon historical data and some structure based on past estimates.
Deepening the debt markets: The Centre and the RBI should look at ways to provide access to infrastructure players like ILF&S to borrow long-term funds.
The successful resolution of issues of banks’ non-performing assets (NPAs) through the Insolvency and Bankruptcy Code (IBC) can increase sources of long-term debt.
The Indian corporate bond market is currently skewed towards high-rated debt instruments (AA and AAA) as most regulators in India have set a minimum of ‘AA’ rating for bonds to be eligible for investment. In line with the budget announcement, the government should work with various regulators to allow increased investment in relatively lower-rated bonds.
Timely Project clearances: Ensuring timely clearances, especially to infrastructural projects is a must to minimise cost inflation of these projects. Expanding the “Plug and Play” approach to other sectors can be a possible solution.
Improved Ratings Accuracy: Securities and Exchange Board of India (SEBI) should examine the process for issuing ratings for corporate bonds and figure out why the rating agencies did not spot early signs of the crisis.
There should not be undue importance on who is the promoter backing the company while providing ratings. Instead loan amount, asset quality, profitability, etc. should be basis for assigning rating to the company.
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cvrnewsdirectindia · 4 years
Text
Fund flows to commercial sector down 88%: RBI data
One year after the funding availability issues emerged for non-banks, timely access to funding remains a challenge for many of them barring those that are backed by strong parents. (Representational)
OVERALL FINANCIAL flows to the commercial sector have declined sharply, by around 88 per cent, during the first six months of the current financial year amid the slowdown in the economy.
According to the latest RBI data, the flow of funds from banks and non-banks to the commercial sector has been Rs 90,995 crore in 2019-20 so far (April to mid-September) as against Rs 7,36,087 crore in the same period last year. The commercial sector does not include farming, manufacturing and transportation.
With the financial sector going through a turbulent phase, there was a reverse flow of Rs 1,25,600 crore from the commercial sector to non-deposit-taking NBFCs and deposit-taking NBFCs as against a flow of Rs 41,200 crore in the same period last year.
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Non-food credit flow from banks to the commercial sector also declined, from Rs 1,65,187 crore to a reverse flow of Rs 93,688 crore to the banks. Net issuance of commercial papers (CPs) subscribed by non-banks fell from Rs 2,53,669 crore to Rs 19,118 crore by mid-September 2019.
“Among domestic non-bank sources of funding, public issues of equity and private placement increased significantly. Among foreign sources, both external commercial borrowings and foreign direct investment (FDI) registered sharp increases. Notably, a new framework for external commercial borrowings was announced in January 2019 to improve the ease of doing business; subsequently, end-use provisions were also rationalised in July 2019,” the RBI said in its Monetary Policy Report (October 2019).
ECBs rose from an outflow Rs 653 crore to a flow of Rs 54,073 crore and FDI from Rs 106,961 crore to Rs 152,119 crore during April to mid-September, according to the RBI data.
“Overall flow of financial resources to the commercial sector moderated mainly due to reduced credit offtake from banks reflecting weak demand and risk aversion,” the central bank said. The RBI had cut the real gross domestic product (GDP) growth for 2019-20 to 6.1 per cent from 6.9 per cent in forecast in August, reflecting the ongoing slowdown in the economy.
Credit growth to services has decelerated sharply since January 2019. Of the incremental non-food credit flow during the year (August 2018-August 2019), personal loans accounted for the largest share, followed by services and industry. Within personal loans, credit offtake has been broadly concentrated in two segments — housing and credit card outstanding.
With muted credit offtake and decline in non-SLR (statutory liquidity ratio) investments, banks have augmented their SLR portfolios despite a reduction by the RBI. Banks held excess SLR of 6.9 per cent of net demand and time liabilities (NDTL) — or deposits — on August 30 this year as compared with 6.3 per cent of NDTL at March-end.
One year after the funding availability issues emerged for non-banks, timely access to funding remains a challenge for many of them barring those that are backed by strong parents. “Non-banks with wholesale-oriented loan books and without strong parentage continue to be most impacted in accessing funds. Overall, growth is expected to remain subdued in fiscal 2020,” rating firm Crisil said in a report.
Various regulatory initiatives and measures taken to enhance availability of funds have improved market sentiment to some extent in the past few months. In an environment where access to funding has become a function of market confidence, the quantum and quality of liquidity cushion would become a key differentiator between non-banks, it said.
from CVR News Direct https://cvrnewsdirect.com/fund-flows-to-commercial-sector-down-88-rbi-data/
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onlevelup01 · 5 years
Link
MUMBAI: Banks and mutual funds scrambled on Thursday to contain the fallout of the default by Altico Capital, with investor attention turning to non-banking finance companies’ liquidity problems on the eve of the first anniversary of IL&FS’ bankruptcy. On Friday, ratings agency India Ratings & Research cut Altico’s creditworthiness to ‘D’, or ‘default’ category, from A+ earlier. Care, another ratings agency, downgraded the finance company’s debt to below investment grade. Meanwhile, mutual funds such as UTI and Reliance Nippon AMC rushed to ring fence the value of their debt schemes by segregating, or ‘sidepocketing’, Altico’s securities.“The revision takes into account Altico’s significant exposure to real estate sector which is witnessing a slowdown and experiencing heightened refinancing risk which is reflected to an extent with moderation in asset quality of the company,” Care said in a statement.Shares of banks and nonbanking finance companies (NBFCs) ended mixed on Friday as some investors fretted about a possible repeat of last year’s scare and subsequent market meltdown caused by the default and eventual bankruptcy of IL&FS.The default in the last week of September 2018 had triggered a market crisis and brief credit shutdown to over-leveraged finance firms and their clients.Many NBFCs are yet to recover from the 2018 crisis, and investors are still nervous about the poor liquidity condition of many small players. On Friday, mutual funds were quick to take advantage of ‘sidepocketing’ rules put out by the Sebi after the IL&FS crisis, which allow funds to segregate illiquid securities from defaulting companies till the fund houses are able to realise some value from these papers. The process creates two schemes — one that contains the illiquid paper and the other holding the good ones. As and when fund houses are able to recover money from Altico Capital, it will be distributed to investors in proportion to their holdings in the segregated portfolio.UTI Credit Risk Fund, with assets of Rs 3,536 crore, has an exposure of Rs 202.82 crore to Altico papers (5.85% of assets under management). Reliance Ultra Short Duration Fund, with assets of Rs 3,258 crore, has an exposure of Rs 150 crore (4.61% of assets under management).In a note, UTI Mutual Fund said existing investors shall be allotted the same number of units in the segregated portfolio of the scheme as in the main portfolio. “No subscription and redemption will be allowed in the segregated portfolio. The AMC will disclose separate NAV of segregated portfolio and enable transfer of such units on receipt of transfer requests,” it said. Reliance Nippon AMC said it will suspend all subscriptions in the affected fund from September 13 till further notice. The fund house said it had informed investors about the segregated portfolio in the scheme and given them time till September 24 to redeem units. The AMC said it will create a segregated portfolio on September 25.Top Indian lenders including HDFC Bank, State Bank of India Yes Bank and UAE-based Mashreq Bank had provided a six-year, Rs 340-crore loan to Altico. On Thursday, the finance company failed to pay Rs 20 crore that was due as interest. The NBFC’s total debt amounts to about Rs 4,000 crore.Mashreq Bank has the highest exposure to Altico with Rs 660 crore of outstanding term loans, including external commercial borrowings. Among Indian lenders, HDFC Bank has the maximum exposure at Rs 500 crore, followed by Yes Bank at Rs 450 crore and SBI at Rs 400 crore, according to a report by India Ratings.BANKERS SAY EXPOSURE SMALL Spokespersons from HDFC Bank, Mashreq Bank, Yes Bank and SBI did not reply to emails seeking comment. However, officials of these banks said on the condition of anonymity that their exposure was relatively small and manageable. “Our exposure is peanuts compared to our Rs 12-lakh-crore loan book. It is half of what has been projected in the India Ratings report. I do not think this account poses any serious risk to us since we have enough securities covering the loan,” said a senior official from HDFC Bank. A senior SBI official too said his bank’s exposure was negligible. “I don’t think we have such an exposure. And even if true, it is too small to impact us. It looks like a case of cash flow mismatch that can be resolved,” he added. Some analysts, however, said the incident has heightened risks of contagion in the debt-laden NBFC sector. “If a company with such marquee investors faces liquidity stress, then it raises concerns for others. Banks will be reluctant to lend to these companies, which could worsen the liquidity squeeze,” said Nitin Aggarwal, an analyst at Motilal Oswal. from Economic Times https://ift.tt/2NdoQ0n
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Link
MUMBAI: Banks and mutual funds scrambled on Thursday to contain the fallout of the default by Altico Capital, with investor attention turning to non-banking finance companies’ liquidity problems on the eve of the first anniversary of IL&FS’ bankruptcy. On Friday, ratings agency India Ratings & Research cut Altico’s creditworthiness to ‘D’, or ‘default’ category, from A+ earlier. Care, another ratings agency, downgraded the finance company’s debt to below investment grade. Meanwhile, mutual funds such as UTI and Reliance Nippon AMC rushed to ring fence the value of their debt schemes by segregating, or ‘sidepocketing’, Altico’s securities.“The revision takes into account Altico’s significant exposure to real estate sector which is witnessing a slowdown and experiencing heightened refinancing risk which is reflected to an extent with moderation in asset quality of the company,” Care said in a statement.Shares of banks and nonbanking finance companies (NBFCs) ended mixed on Friday as some investors fretted about a possible repeat of last year’s scare and subsequent market meltdown caused by the default and eventual bankruptcy of IL&FS.The default in the last week of September 2018 had triggered a market crisis and brief credit shutdown to over-leveraged finance firms and their clients.Many NBFCs are yet to recover from the 2018 crisis, and investors are still nervous about the poor liquidity condition of many small players. On Friday, mutual funds were quick to take advantage of ‘sidepocketing’ rules put out by the Sebi after the IL&FS crisis, which allow funds to segregate illiquid securities from defaulting companies till the fund houses are able to realise some value from these papers. The process creates two schemes — one that contains the illiquid paper and the other holding the good ones. As and when fund houses are able to recover money from Altico Capital, it will be distributed to investors in proportion to their holdings in the segregated portfolio.UTI Credit Risk Fund, with assets of Rs 3,536 crore, has an exposure of Rs 202.82 crore to Altico papers (5.85% of assets under management). Reliance Ultra Short Duration Fund, with assets of Rs 3,258 crore, has an exposure of Rs 150 crore (4.61% of assets under management).In a note, UTI Mutual Fund said existing investors shall be allotted the same number of units in the segregated portfolio of the scheme as in the main portfolio. “No subscription and redemption will be allowed in the segregated portfolio. The AMC will disclose separate NAV of segregated portfolio and enable transfer of such units on receipt of transfer requests,” it said. Reliance Nippon AMC said it will suspend all subscriptions in the affected fund from September 13 till further notice. The fund house said it had informed investors about the segregated portfolio in the scheme and given them time till September 24 to redeem units. The AMC said it will create a segregated portfolio on September 25.Top Indian lenders including HDFC Bank, State Bank of India Yes Bank and UAE-based Mashreq Bank had provided a six-year, Rs 340-crore loan to Altico. On Thursday, the finance company failed to pay Rs 20 crore that was due as interest. The NBFC’s total debt amounts to about Rs 4,000 crore.Mashreq Bank has the highest exposure to Altico with Rs 660 crore of outstanding term loans, including external commercial borrowings. Among Indian lenders, HDFC Bank has the maximum exposure at Rs 500 crore, followed by Yes Bank at Rs 450 crore and SBI at Rs 400 crore, according to a report by India Ratings.BANKERS SAY EXPOSURE SMALL Spokespersons from HDFC Bank, Mashreq Bank, Yes Bank and SBI did not reply to emails seeking comment. However, officials of these banks said on the condition of anonymity that their exposure was relatively small and manageable. “Our exposure is peanuts compared to our Rs 12-lakh-crore loan book. It is half of what has been projected in the India Ratings report. I do not think this account poses any serious risk to us since we have enough securities covering the loan,” said a senior official from HDFC Bank. A senior SBI official too said his bank’s exposure was negligible. “I don’t think we have such an exposure. And even if true, it is too small to impact us. It looks like a case of cash flow mismatch that can be resolved,” he added. Some analysts, however, said the incident has heightened risks of contagion in the debt-laden NBFC sector. “If a company with such marquee investors faces liquidity stress, then it raises concerns for others. Banks will be reluctant to lend to these companies, which could worsen the liquidity squeeze,” said Nitin Aggarwal, an analyst at Motilal Oswal. from Economic Times https://ift.tt/2NdoQ0n
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legalseat · 5 years
Text
FAQs on Borrowing by Large Corporates: Unveiling the Perplexity
[Pammy Jaiswal is a Partner at Vinod Kothari and Company and can be reached at [email protected]]
Background
The untiring efforts of the Securities and Exchange Board of India (SEBI) as well as the Government in uplifting the bond market is quite commendable. SEBI has started taking major steps towards the accomplishment of the budget announcement by the Government for the year 2018-19. These include the introduction of an electronic bidding platform for privately placed debt securities, consolidation of ISIN of debt instruments and introduction of a secondary market for debt instruments.  Accordingly, India’s bond market is almost at par with the banking loans to stand at 422 billion dollars as compared to 561 billion dollars as on 31 March 2018.
However, a majority of bonds issued in the country are on a private placement basis. Despite gaining prominence, bonds issued in India currently lack an active secondary market. In its continued effort in deepening the bond market, SEBI issued a circular dated 26 November 2018 where it has mandated certain listed entities to borrow a certain percentage of its borrowings through the issuance of debt securities.
While it is true that SEBI does not want to leave any stone unturned in strengthening the Indian bond market, there certain grey areas in the framework, which need further clarification. This post intends to highlight these grey areas and potential answers to the problems. A summarised write-up on the said framework can be viewed here.
FAQ Section
When will the framework under the circular be applicable?
The framework under the circular is applicable with effect from the financial year (FY) 2019-20 (where the FY is from April to March) or FY 2020 (where FY is from January to December).
What is the meaning of the term ‘large corporate’?
The entities that fulfil all the three conditions provided below based on the financials of the previous year are termed as large corporates (LCs):
listed companies (specified securities, debt securities, non-convertible redeemable preference shares);
having long term (maturity of more than 1 year) outstanding borrowings excluding external commercial borrowings (ECBs) and borrowings between parent and subsidiary of Rs. 100 crore and above; and
carry a credit rating of AA and above of unsupported bank borrowings or plain vanilla bonds (highest rating to be considered in case of multiple ratings).
Whether the applicability of the said circular has to be examined every year?
LCs are required to check the applicability of the aforesaid circular every year and accordingly be termed as such.
What is the meaning of unsupported borrowings?
The circular speaks about the credit rating of unsupported borrowings or plain vanilla bonds. Clause (iii) of para 2.2 states:
have a credit rating of “AA and above”, where credit rating shall be of the unsupported  bank  borrowing  or  plain  vanilla  bonds of an  entity,  which have  no  structuring/  support  built  in;  and  in  case,  where  an  issuer  has multiple ratings from multiple rating agencies, highest of such rating shall be considered for the purpose of applicability of this framework.
A supported borrowing may referred to as a borrowing backed by a collateral or some sort of a guarantee for ensuring its repayment. Therefore, an unsupported borrowing is nothing but an unsecured loan. The reason behind maintaining the requirement of credit rating of AA and above for unsupported borrowing is to mandate entities having good creditworthiness for not only secured but also unsecured borrowings to issue a specified percentage of their debt securities in accordance with this circular. Further, only such highly rated entities shall encourage an investor to invest.
What are the various stipulations with respect to bond issuances imposed by this circular?
There are basically two stipulations imposed under this circular:
(a)        Initial requirement:
For the first two years in which the framework becomes applicable (i.e. FY 2020 and 2021), the LC is required to raise a minimum of 25% of the long term borrowings (maturity of more than 1 year) in each of the FY (for which the entity becomes an LC) excluding ECBs and borrowings between parent and subsidiary (incremental borrowings) by way of issuance of debt securities.
(b)       Continuous requirement:
From the third year of the applicability (i.e. FY 2022 onwards), the LC is required to mandatorily raise a minimum of 25% of its increased borrowing in such year from the issuance of debt securities over a period of one block of two years.
Further, in case of any shortfall of borrowing in any year, such shortfall is required to be carried forward to the next year in the block.
What is the manner of adjusting the shortfall in any FY?
As one reviews the illustration provided in Annexure C of the circular, it becomes clear that for the first year of implementation there is no concept of carrying forward the shortfall to the second year, since the LC is required to explain the reason for not being able to comply with the borrowing requirements.
Further, the shortfall for the second year onwards is required to be carried forward to the next year. It would be useful to elaborate on the manner of adjustment by way of an illustration:
X Ltd is an LC as on the last day of the previous year being 31 March 2019.
                                                                                                                        [Rs. in crores]
  2020 2021 2022 2023 2024   2025 [Not an LC] Increased Borrowing [IB] 200 500 700 600 650 100 Mandatory borrowing from debt securities of 25% of the IB [MB] 50 125 175 150 162.5 NIL Actual Borrowing from debt securities [AB] 40 100 75 200 100 5 Adjustment of the shortfall of the previous year NIL NIL NIL 100 50 12.5 Shortfall to carry forward NIL NIL 100 50 12.5 7.5 Penalty NIL NIL NIL NIL NIL 7.5* 0.2% = 0.015
Basically, the LC shall first adjust the AB towards the shortfall of the previous year of the current block and then ascertain whether it has complied with the MB requirements. Further, the penalty shall be levied if there is a shortfall of the previous year in the current block that could not adjusted with the AB of the second year of the current block.
What are the penal consequence for non- compliance?
For FY 19-20 and 20- 21, no penalty but explanation will be required;
From FY 21-22 onwards, the minimum funding requirement has to be met over a block of two years;
In case any shortfall of the first year of the block is not met as on the last day of the next FY of the block, a monetary penalty of 0.2% of the shortfall amount shall be levied and paid to the stock exchanges;
The manner of payment of the penalty has not been provided in the circular but stock exchanges are expected to provide for the same.
What are the disclosure requirements?
The fact that the entity has fulfilled the criteria of being an LC based on the financials of previous year has to be disclosed to stock exchange within 30 days of the beginning of the FY. The format is provided in Annexure A to SEBI’s circular.
The details of incremental borrowings made in the FY have to be disclosed to stock exchange within 45 days of the end of the FY.  The format is provided in Annexures B1 [(applicable for FY 19-20 & 20-21) and B2 (applicable for FY 21-22 onwards)] to the circular.
The aforesaid disclosures shall be certified both by the company secretary and chief financial officers.
The aforesaid disclosures shall also form part of the annual audited financial results.
Any other specific requirements? 
The entity will need to choose any one of the stock exchanges (where the securities are listed) for payment of the penalty.
The entity being an LC for the previous year and carrying a shortfall for that year in the current year for which the entity is not an LC shall also be required to make the requisite disclosures within 45 days of the end of the current year.
Whether the requirements of the circular are relevant for all the LCs?
While the ambit of the circular is broad enough to cover both non-banking financial companies (‘NBFCs’) and non-banking non-financial Companies (‘NBNFCs’), the circular is more relevant for NBNFCs.
NBFCs are financial institutions and are engaged in lending and investing activities in their day to day operations and, therefore, the major chunk of the working capital and long term funding requirements anyway arises from issuance of debt securities considering the leverage issues.
Therefore, one may construe that the circular is more relevant for NBNFCs since they are not mandated to borrow from the issue of debt securities as the funding requirements of these entities can also be fulfilled by banks. Further, the circular should have laid down a specified threshold on the increased borrowing which, if met, should be required to constitute debt securities also to the tune of 25%.
Whether relaxation is for any first two year of implementation or the year mentioned in the circular?
This circular was led by a consultation paper issued by SEBI on 20 July 2018 which clearly stated that “[a] “comply or explain” approach would be applicable for the initial two years of implementation.  Thus, in case of non-fulfilment of the requirement of market borrowing, reasons for the same shall be disclosed as part of the “continuous disclosure requirements”
However, the circular is clear on the initiation point of the said framework i.e. April, 2019; accordingly, one may take a view that FY 2020 and 2021 shall mandatorily be the first two years in which the relaxation of the “comply or explain” approach can be taken. Any entity that is covered by the aforesaid circular at a later date shall have to mandatorily comply with the borrowing requirements and be liable to penalty in case of non-compliance.
Whether the term ‘increased borrowings’ shall also cover Pass Through Certificates (‘PTCs’)?
According to the circular, “incremental borrowings” have been defined to include borrowings during a particular financial year with original maturity of more than one year, excluding ECBs and intercorporate debts between a parent and its subsidiaries. Further, IND AS 109 treats PTCs as collateralized borrowings. Here it is pertinent to note that the question of showing the investor’s share in PTC as financial liability arises only because the securitised pool of assets fails the de-recognition test.
The originator has no obligation towards the investors of the PTC. The investors are exposed to the securitised pool of assets and not to the originator. Therefore, merely because the investor’s share appears on the balance sheet of the originator as financial liability, according to Ind AS 109 it does not mean they are debt obligations of the originator. Accordingly, incremental borrowings shall not include PTCs.
In cases where an entity ceases to be an LC in one year and again gets covered by the circular in subsequent years, whether the initial disclosure to the stock exchange shall be required to be given again?
In our view, such entity should provide the exchange with the initial disclosure for the purpose and to enable the stock exchange to continuously monitor the compliance of the framework.
How will the stock exchange be apprised that an entity is not an LC anymore?
Ideally there should be an intimation to the exchange stating that the entity is not an LC anymore and accordingly the mandatory borrowing requirements should not be made applicable for such FYs in which it is not an LC. Further, this intimation may also indicate that the entity shall inform the exchange in terms of para 4.1 once it qualifies to be an LC.
What is the role of the stock exchange in terms of para 5 of the circular?
The exchange shall collate the information about the LC and submit the same to the Board within 14 days of the last day of the annual financial results;
The exchange shall collect the fine as mentioned under para 3.2(ii); and
The said fine shall be remitted by the exchange to the SEBI Investor Protection and Education Fund within 10 days of the end of the month in which the fine was collected.
Conclusion
SEBI has laid down penal provisions for not complying with the circular. However, if the issue size of mandatory borrowing is too small, then there may be a possibility that LCs may considering carrying out a cost-benefit analysis between the issue cost and the penalty amount. Therefore, SEBI should set a minimum threshold for increased borrowings and cover only those LCs to raise funds through bond market who exceed such threshold.
– Pammy Jaiswal
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investglobal · 4 years
Text
RBI Steps: RBI provides much-needed shot in the arm to corporate debt market
NEW DELHI/MUMBAI: The Reserve Bank of India on Friday provided the much-needed shot in the arm to the non-SLR market in terms of liquidity support. Market participants gave a thumbs up to the central bank’s targeted LTROs (TLTROs), and said this will help in reducing the yield on corporate bonds, which have been reeling under pressure amid low volumes.
The central bank said it will conduct auctions of targeted term repos of up to three-year tenor of appropriate sizes for a total amount of up to Rs 1 lakh crore at a floating rate linked to the policy repo rate.
Liquidity availed under the scheme by banks has to be deployed in investment-grade corporate bonds, commercial papers and non-convertible debentures over and above the outstanding level of their investments in these bonds as on March 27, RBI said.
R K Gurumurthy, Head of Treasury, Lakshmi Vilas Bank said: “RBI has this time announced a TLTRO, where the funds raised under the scheme will be allowed to have an end-use of buying corporate bonds and commercial papers. And these can be held under the Held-To-Maturity (HTM) category. This will provide the much needed shot-in-the-arm for the non-SLR market in terms of liquidity support.”
CARE Ratings in a note said the fresh liquidity injection into the banking system, when there exists ample liquidity at the overall level would help address the liquidity asymmetry to an extent.
Investments made by banks under this facility will be classified as held to maturity (HTM) even in excess of 25 per cent of the total investment permitted to be included in the HTM portfolio. RBI said exposures under this facility will also not be reckoned under the large exposure framework.
The first TLTRO auction of Rs 25,000 crore was held today.
CARE also pointed out the condition that the liquidity created on account of TLTRO has to be deployed in corporate debt securities, is aimed at reducing the yields of these instruments, which in recent days have been pressured on account of large selloff along with low trading activity.
This should help sectors such as NBFCs, which traditionally borrow from the market through bonds and commercial papers, the ratings agency said in a note.
Overall, the Reserve Bank of India earlier in the day announced measures to inject Rs 3.74 lakh crore into the banking system through a slew of instruments, including the reduction in cash reserve ratio and interest rate cut.
The other liquidity support measures included targeted long-term repo operation (TLTRO) and increasing the limit under the marginal standing facility (MSF) to 3 per cent from 2 per cent.
These three measures relating to TLTRO, CRR and MSF will inject total liquidity of Rs 3.74 lakh crore into the system.
Commenting on the measures announced by RBI, Lakshmi Iyer, CIO (Debt) & Head of Products, Kotak Mahindra Asset Management Company, said: “The policy measures announced are big moves by the central bank to address concerns on liquidity and facilitating flow of credit in the economy. This will ensure that adequate liquidity is available in the system to tide over the prevailing crisis period.”
While quoting a song from the movie ‘ Hera Pheri’ – ‘ Dene Wala Jab bhi deta, Deta Chappar Phad Ke’, Iyer said the central bank has adopted a 4-pronged approach to manage the financial system. A) Increased liquidity – Rs 3.74 lakh crore additional liquidity, B) Lower policy rate and likely leading to better transmission of the cut policy rate. 3) Provision of loan moratorium and asset classification forbearance and lastly managing forex situation.
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ainvestops · 4 years
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RBI Steps: RBI provides much-needed shot in the arm to corporate debt market
NEW DELHI/MUMBAI: The Reserve Bank of India on Friday provided the much-needed shot in the arm to the non-SLR market in terms of liquidity support. Market participants gave a thumbs up to the central bank’s targeted LTROs (TLTROs), and said this will help in reducing the yield on corporate bonds, which have been reeling under pressure amid low volumes.
The central bank said it will conduct auctions of targeted term repos of up to three-year tenor of appropriate sizes for a total amount of up to Rs 1 lakh crore at a floating rate linked to the policy repo rate.
Liquidity availed under the scheme by banks has to be deployed in investment-grade corporate bonds, commercial papers and non-convertible debentures over and above the outstanding level of their investments in these bonds as on March 27, RBI said.
R K Gurumurthy, Head of Treasury, Lakshmi Vilas Bank said: “RBI has this time announced a TLTRO, where the funds raised under the scheme will be allowed to have an end-use of buying corporate bonds and commercial papers. And these can be held under the Held-To-Maturity (HTM) category. This will provide the much needed shot-in-the-arm for the non-SLR market in terms of liquidity support.”
CARE Ratings in a note said the fresh liquidity injection into the banking system, when there exists ample liquidity at the overall level would help address the liquidity asymmetry to an extent.
Investments made by banks under this facility will be classified as held to maturity (HTM) even in excess of 25 per cent of the total investment permitted to be included in the HTM portfolio. RBI said exposures under this facility will also not be reckoned under the large exposure framework.
The first TLTRO auction of Rs 25,000 crore was held today.
CARE also pointed out the condition that the liquidity created on account of TLTRO has to be deployed in corporate debt securities, is aimed at reducing the yields of these instruments, which in recent days have been pressured on account of large selloff along with low trading activity.
This should help sectors such as NBFCs, which traditionally borrow from the market through bonds and commercial papers, the ratings agency said in a note.
Overall, the Reserve Bank of India earlier in the day announced measures to inject Rs 3.74 lakh crore into the banking system through a slew of instruments, including the reduction in cash reserve ratio and interest rate cut.
The other liquidity support measures included targeted long-term repo operation (TLTRO) and increasing the limit under the marginal standing facility (MSF) to 3 per cent from 2 per cent.
These three measures relating to TLTRO, CRR and MSF will inject total liquidity of Rs 3.74 lakh crore into the system.
Commenting on the measures announced by RBI, Lakshmi Iyer, CIO (Debt) & Head of Products, Kotak Mahindra Asset Management Company, said: “The policy measures announced are big moves by the central bank to address concerns on liquidity and facilitating flow of credit in the economy. This will ensure that adequate liquidity is available in the system to tide over the prevailing crisis period.”
While quoting a song from the movie ‘ Hera Pheri’ – ‘ Dene Wala Jab bhi deta, Deta Chappar Phad Ke’, Iyer said the central bank has adopted a 4-pronged approach to manage the financial system. A) Increased liquidity – Rs 3.74 lakh crore additional liquidity, B) Lower policy rate and likely leading to better transmission of the cut policy rate. 3) Provision of loan moratorium and asset classification forbearance and lastly managing forex situation.
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legalseat · 5 years
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FAQs on Borrowing by Large Corporates: Unveiling the Perplexity
[Pammy Jaiswal is a Partner at Vinod Kothari and Company and can be reached at [email protected]]
Background
The untiring efforts of the Securities and Exchange Board of India (SEBI) as well as the Government in uplifting the bond market is quite commendable. SEBI has started taking major steps towards the accomplishment of the budget announcement by the Government for the year 2018-19. These include the introduction of an electronic bidding platform for privately placed debt securities, consolidation of ISIN of debt instruments and introduction of a secondary market for debt instruments.  Accordingly, India’s bond market is almost at par with the banking loans to stand at 422 billion dollars as compared to 561 billion dollars as on 31 March 2018.
However, a majority of bonds issued in the country are on a private placement basis. Despite gaining prominence, bonds issued in India currently lack an active secondary market. In its continued effort in deepening the bond market, SEBI issued a circular dated 26 November 2018 where it has mandated certain listed entities to borrow a certain percentage of its borrowings through the issuance of debt securities.
While it is true that SEBI does not want to leave any stone unturned in strengthening the Indian bond market, there certain grey areas in the framework, which need further clarification. This post intends to highlight these grey areas and potential answers to the problems. A summarised write-up on the said framework can be viewed here.
FAQ Section
When will the framework under the circular be applicable?
The framework under the circular is applicable with effect from the financial year (FY) 2019-20 (where the FY is from April to March) or FY 2020 (where FY is from January to December).
What is the meaning of the term ‘large corporate’?
The entities that fulfil all the three conditions provided below based on the financials of the previous year are termed as large corporates (LCs):
listed companies (specified securities, debt securities, non-convertible redeemable preference shares);
having long term (maturity of more than 1 year) outstanding borrowings excluding external commercial borrowings (ECBs) and borrowings between parent and subsidiary of Rs. 100 crore and above; and
carry a credit rating of AA and above of unsupported bank borrowings or plain vanilla bonds (highest rating to be considered in case of multiple ratings).
Whether the applicability of the said circular has to be examined every year?
LCs are required to check the applicability of the aforesaid circular every year and accordingly be termed as such.
What is the meaning of unsupported borrowings?
The circular speaks about the credit rating of unsupported borrowings or plain vanilla bonds. Clause (iii) of para 2.2 states:
have a credit rating of “AA and above”, where credit rating shall be of the unsupported  bank  borrowing  or  plain  vanilla  bonds of an  entity,  which have  no  structuring/  support  built  in;  and  in  case,  where  an  issuer  has multiple ratings from multiple rating agencies, highest of such rating shall be considered for the purpose of applicability of this framework.
A supported borrowing may referred to as a borrowing backed by a collateral or some sort of a guarantee for ensuring its repayment. Therefore, an unsupported borrowing is nothing but an unsecured loan. The reason behind maintaining the requirement of credit rating of AA and above for unsupported borrowing is to mandate entities having good creditworthiness for not only secured but also unsecured borrowings to issue a specified percentage of their debt securities in accordance with this circular. Further, only such highly rated entities shall encourage an investor to invest.
What are the various stipulations with respect to bond issuances imposed by this circular?
There are basically two stipulations imposed under this circular:
(a)        Initial requirement:
For the first two years in which the framework becomes applicable (i.e. FY 2020 and 2021), the LC is required to raise a minimum of 25% of the long term borrowings (maturity of more than 1 year) in each of the FY (for which the entity becomes an LC) excluding ECBs and borrowings between parent and subsidiary (incremental borrowings) by way of issuance of debt securities.
(b)       Continuous requirement:
From the third year of the applicability (i.e. FY 2022 onwards), the LC is required to mandatorily raise a minimum of 25% of its increased borrowing in such year from the issuance of debt securities over a period of one block of two years.
Further, in case of any shortfall of borrowing in any year, such shortfall is required to be carried forward to the next year in the block.
What is the manner of adjusting the shortfall in any FY?
As one reviews the illustration provided in Annexure C of the circular, it becomes clear that for the first year of implementation there is no concept of carrying forward the shortfall to the second year, since the LC is required to explain the reason for not being able to comply with the borrowing requirements.
Further, the shortfall for the second year onwards is required to be carried forward to the next year. It would be useful to elaborate on the manner of adjustment by way of an illustration:
X Ltd is an LC as on the last day of the previous year being 31 March 2019.
                                                                                                                        [Rs. in crores]
  2020 2021 2022 2023 2024   2025 [Not an LC] Increased Borrowing [IB] 200 500 700 600 650 100 Mandatory borrowing from debt securities of 25% of the IB [MB] 50 125 175 150 162.5 NIL Actual Borrowing from debt securities [AB] 40 100 75 200 100 5 Adjustment of the shortfall of the previous year NIL NIL NIL 100 50 12.5 Shortfall to carry forward NIL NIL 100 50 12.5 7.5 Penalty NIL NIL NIL NIL NIL 7.5* 0.2% = 0.015
Basically, the LC shall first adjust the AB towards the shortfall of the previous year of the current block and then ascertain whether it has complied with the MB requirements. Further, the penalty shall be levied if there is a shortfall of the previous year in the current block that could not adjusted with the AB of the second year of the current block.
What are the penal consequence for non- compliance?
For FY 19-20 and 20- 21, no penalty but explanation will be required;
From FY 21-22 onwards, the minimum funding requirement has to be met over a block of two years;
In case any shortfall of the first year of the block is not met as on the last day of the next FY of the block, a monetary penalty of 0.2% of the shortfall amount shall be levied and paid to the stock exchanges;
The manner of payment of the penalty has not been provided in the circular but stock exchanges are expected to provide for the same.
What are the disclosure requirements?
The fact that the entity has fulfilled the criteria of being an LC based on the financials of previous year has to be disclosed to stock exchange within 30 days of the beginning of the FY. The format is provided in Annexure A to SEBI’s circular.
The details of incremental borrowings made in the FY have to be disclosed to stock exchange within 45 days of the end of the FY.  The format is provided in Annexures B1 [(applicable for FY 19-20 & 20-21) and B2 (applicable for FY 21-22 onwards)] to the circular.
The aforesaid disclosures shall be certified both by the company secretary and chief financial officers.
The aforesaid disclosures shall also form part of the annual audited financial results.
Any other specific requirements? 
The entity will need to choose any one of the stock exchanges (where the securities are listed) for payment of the penalty.
The entity being an LC for the previous year and carrying a shortfall for that year in the current year for which the entity is not an LC shall also be required to make the requisite disclosures within 45 days of the end of the current year.
Whether the requirements of the circular are relevant for all the LCs?
While the ambit of the circular is broad enough to cover both non-banking financial companies (‘NBFCs’) and non-banking non-financial Companies (‘NBNFCs’), the circular is more relevant for NBNFCs.
NBFCs are financial institutions and are engaged in lending and investing activities in their day to day operations and, therefore, the major chunk of the working capital and long term funding requirements anyway arises from issuance of debt securities considering the leverage issues.
Therefore, one may construe that the circular is more relevant for NBNFCs since they are not mandated to borrow from the issue of debt securities as the funding requirements of these entities can also be fulfilled by banks. Further, the circular should have laid down a specified threshold on the increased borrowing which, if met, should be required to constitute debt securities also to the tune of 25%.
Whether relaxation is for any first two year of implementation or the year mentioned in the circular?
This circular was led by a consultation paper issued by SEBI on 20 July 2018 which clearly stated that “[a] “comply or explain” approach would be applicable for the initial two years of implementation.  Thus, in case of non-fulfilment of the requirement of market borrowing, reasons for the same shall be disclosed as part of the “continuous disclosure requirements”
However, the circular is clear on the initiation point of the said framework i.e. April, 2019; accordingly, one may take a view that FY 2020 and 2021 shall mandatorily be the first two years in which the relaxation of the “comply or explain” approach can be taken. Any entity that is covered by the aforesaid circular at a later date shall have to mandatorily comply with the borrowing requirements and be liable to penalty in case of non-compliance.
Whether the term ‘increased borrowings’ shall also cover Pass Through Certificates (‘PTCs’)?
According to the circular, “incremental borrowings” have been defined to include borrowings during a particular financial year with original maturity of more than one year, excluding ECBs and intercorporate debts between a parent and its subsidiaries. Further, IND AS 109 treats PTCs as collateralized borrowings. Here it is pertinent to note that the question of showing the investor’s share in PTC as financial liability arises only because the securitised pool of assets fails the de-recognition test.
The originator has no obligation towards the investors of the PTC. The investors are exposed to the securitised pool of assets and not to the originator. Therefore, merely because the investor’s share appears on the balance sheet of the originator as financial liability, according to Ind AS 109 it does not mean they are debt obligations of the originator. Accordingly, incremental borrowings shall not include PTCs.
In cases where an entity ceases to be an LC in one year and again gets covered by the circular in subsequent years, whether the initial disclosure to the stock exchange shall be required to be given again?
In our view, such entity should provide the exchange with the initial disclosure for the purpose and to enable the stock exchange to continuously monitor the compliance of the framework.
How will the stock exchange be apprised that an entity is not an LC anymore?
Ideally there should be an intimation to the exchange stating that the entity is not an LC anymore and accordingly the mandatory borrowing requirements should not be made applicable for such FYs in which it is not an LC. Further, this intimation may also indicate that the entity shall inform the exchange in terms of para 4.1 once it qualifies to be an LC.
What is the role of the stock exchange in terms of para 5 of the circular?
The exchange shall collate the information about the LC and submit the same to the Board within 14 days of the last day of the annual financial results;
The exchange shall collect the fine as mentioned under para 3.2(ii); and
The said fine shall be remitted by the exchange to the SEBI Investor Protection and Education Fund within 10 days of the end of the month in which the fine was collected.
Conclusion
SEBI has laid down penal provisions for not complying with the circular. However, if the issue size of mandatory borrowing is too small, then there may be a possibility that LCs may considering carrying out a cost-benefit analysis between the issue cost and the penalty amount. Therefore, SEBI should set a minimum threshold for increased borrowings and cover only those LCs to raise funds through bond market who exceed such threshold.
– Pammy Jaiswal
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swedna · 5 years
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The fastest pace of growth since 2013 at India’s non-bank financiers is about to come to a grinding halt
A spate of money market defaults by Infrastructure Leasing & Financial Services Ltd. has put the spotlight on non-bank finance companies. With banks struggling with bad loans and low capital buffers, non-bank lenders had rushed to tap demand for long-term financing to build roads, power plants and homes. But these lenders borrowed from the short-term money markets to finance long-term loans, raising the risk of defaults should cash flows take a hit.
The central bank last week warned stricter regulations are in the offing to ward off default risks rising from the so-called asset liability mismatch. Depending on short-term debt to garner a bigger share of the South Asian nation’s lending market is a “myopic strategy,” Reserve Bank of India Deputy Governor Viral Acharya said in a briefing on Friday. The regulator is looking at strengthening guidelines for non-bank lenders to avoid “rollover risks,” Deputy Governor NS Vishwanathan said.
Borrowing rates in India’s money markets climbed to a four-year high this month following IL&FS’s defaults. Non-bank lenders have been hit by the rise in funding costs and by caution among mutual funds in buying more of their debt. Stricter rules at a juncture when funding is becoming difficult may force smaller NBFCs to shut.
As investors focus on non-bank financiers “it is creating incentives for bond fund managers to not buy NBFC paper,” Neelkanth Mishra, strategist at Credit Suisse Group AG in Mumbai said in an interview with BloombergQuint. “For some of the smaller NBFCs there is going to be no option to survive. The good thing is that, systemically it doesn’t matter. It hurts those firms, which is fine."
Fears of rising costs and tougher regulations led to a selloff in non-bank finance companies on Friday. Bajaj Holdings & Investment Ltd., Religare Enterprises Ltd, Mahindra & Mahindra Financial Services Ltd. and Edelweiss Financial Services Ltd. slumped more than 7 percent in Mumbai. Analysts are concerned they may fall further. Non-bank finance companies expanded their assets by an average 18 percent over the past year, according to data compiled by Bloomberg. IL&FS, a huge borrower, accounted for 2 percent of outstanding commercial paper, 1 percent of debentures and as much as 0.7 percent of banking system loans. It amassed debt of $12.6 billion as of March 31. Defaults at the company cased panic in the market prompting the government to seize control of the lender last week.
“Firms will need to raise retail bonds to maintain the growth rates but there would be an increase in the cost of funds,” said Umesh Revankar, managing director at Shriram Transport Finance Co., adding that his company focuses on retail and long-term funds.
Non-bank financiers say the crisis has hit them at a very inopportune time. Borrowings rise as India enters into the busy festival and wedding season in October. Buyers of homes, vehicles and even farm and factory equipment may slow purchases. This could also pose challenges to Prime Minister Narendra Modi’s efforts to bolster the economy and create more jobs before he seeks re-election next year.
“My worst fear is prolonged doubts and impression on this sector may increase borrowing and lending rates, that too during the festive period,” Shriram’s Revankar said. It will slow down the economy, he said.
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