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Banking News Dated 14th September 2018

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Banking News: September 14, 2018


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GST: TDS/TCS provisions to  come into effect from October 1


GST: TDS/TCS provisions to
come into effect from October 1

The Financial Express
Published on September 14, 2018


New Delhi, September 13: The government on Thursday notified the form for audit report and reconciliation statement that needs to be filed annually by taxpayers with a turnover of more than Rs 2 crore.


Additionally, the government notified October 1 as the implementation date for rolling out provisions of tax collected at source (TCS) and tax deducted at source (TDS).

While TDS is applicable for notified entities that supply goods and services worth over Rs 2.5 lakh, TCS is to be collected by e-commerce firms before making payments to sellers active on their portal.

The rate for both is 1%. Due to increased compliance burden, the GST Council had kept provisions of TCS/TDS, considered to be important anti-evasion tools, suspended since the new tax regime was rolled out in July last year.

Also, another provision of reverse charge mechanism, under which the liability to deposit tax falls on the registered taxpayers procuring supplies from unregistered dealer, has also been kept in abeyance since July 2017.

Shubham Mittal, DGM, Taxmann, said taxpayers who are required are eligible to be audited by a chartered account would electronically furnish the annual return in GSTR-9, reconciliation statement in GSTR-9C and copy of audited annual accounts.

The GST portal has not yet rolled out the functionality to furnish these two forms.

“The e-commerce companies for TCS and various PSUs/government companies for TDS would need to quickly gear up their ERP systems to comply with these provisions from October 1. With audit report as well being notified, the industry would now really need to buckle up, especially given the short timeframe,” Abhishek Jain, tax partner at EY, said.


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National Health Protection Mission: PM Narendra
Modi to roll out Ayushman Bharat on September 23

The Press Trust of India
Published on September 13, 2018


New Delhi, September 13 (PTI): Prime Minister Narendra Modi will roll out the Centre’s flagship Ayushman Bharat-National Health Protection Mission from Jharkhand on September 23, Union Health Minister J P Nadda said on Thursday.

At the flagging-off ceremony of battery-operated bus services at AIIMS here, he said whatever budget is required to implement the Ayushman Bharat programme will be allotted by the government as it is committed to provide affordable healthcare to the people.

The ambitious Ayushman Bharat scheme, touted as the world’s largest healthcare scheme, aims to provide a coverage of Rs five lakh a family annually, benefiting more than 10 crore poor families.


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New umbrella scheme to ensure
farmers get remunerative price

The Business Line
Published on September 13, 2018


New Delhi, September 13: The government on Wednesday announced the launch of a new umbrella scheme ‘Pradhan Mantri Annadata Aay SanraksHan Abhiyan’ (PM-AASHA), which aims to provide minimum support price (MSP) assurance to farmers.

Following the Cabinet decision, a government statement said the scheme has been designed to ensure that farmers get remunerative prices for their produce as announced in the General Budget earlier this year. The government has already hiked MSP for kharif crops on the principle of 1.5 times the cost of production — in line with the target to double farmers’ income by 2022.

Three components

The new scheme has three components — Price Support Scheme (PSS), Price Deficiency Payment Scheme (PDPS), and Pilot of Private Procurement & Stockist Scheme (PPPS).

PDPS has been framed on the lines of the Madhya Pradesh government’s Bhavantar Bhugtan Yojana (BBY) to protect oilseed farmers. The government said the other existing schemes of the Department of Food and Public Distribution for the procurement of paddy, wheat and nutri-cereals/coarse grains and of the Ministry of Textile for cotton and jute will be continued to provide MSP to farmers for these crops.

Private Procurement Stockist Scheme:

The Cabinet also decided that participation of private sector in procurement operation needs to be piloted so that based on the learnings, the ambit of private participation in procurement operations may be increased. For oilseeds, States have the option to roll out Private Procurement Stockist Scheme on a pilot basis in select districts or in Agriculture Produce Marketing Committees with the participation of private stockists. The pilot will cover one or more crop of oilseeds for which the MSP is notified. Since this is akin to PSS, in that it involves physical procurement of the notified commodity, it will substitute PSS/PDPS in the pilot districts.

The selected private agency shall procure the commodity at the MSP in the notified markets during the notified period from the registered farmers in consonance with the Private Procurement Stockist Scheme guidelines, whenever prices in the market fall below the notified MSP and whenever authorised by the State/UT government to enter the market; a maximum service charge of up to 15 per cent of the notified MSP will be payable.

The Food Corporation of India, the government’s nodal agency for procurement and distribution of food grains, already procures wheat and rice at MSP for supply through ration shops and welfare schemes.

The Centre also implements the Market Intervention Scheme for procurement of those commodities, which are perishable in nature and are not covered under the MSP policy. Under the MSP policy, the government fixes the rates for 23 notified crops grown in kharif and rabi seasons.
  

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IL&FS staring at more defaults;
SIDBI seeks plan for repayment

The Business Line
Published on September 13, 2018


Mumbai, September 13: Things are turning from bad to worse for Infrastructure Leasing & Financial Services Ltd, which is on the verge of defaulting on more borrowings. One of the group companies, IL&FS Financial Services, has already been banned from accessing the commercial paper market till February 2019, as it had defaulted on its short-term borrowing.

According to industry sources, IL&FS could be in default of inter-corporate deposits from the Small Industries Development Bank of India. The sources said that SIDBI may ask IL&FS to give a repayment plan ahead of the board meeting on Saturday. According to a Bloomberg report, this default is in the range of Rs. 300 crore and it has an additional Rs. 150 crore inter-corporate deposit payment due on Friday.

Letter to employees

Meanwhile, in a communication to its employees, IL&FS said its current liquidity woes arose because Rs. 16,000 crore of the Group’s funds is stuck in claims and termination payments.

“Our monies were used to fund the cost and time overruns caused by Concession Authority delays in handing over Right of Way. It is our case that if Concession Authorities release these (our) monies, we would not be in the situation we are in. What makes the situation worse is that none of the recapitalisation plans fructified,” the management communication said.

With its money stuck and no new capital to raise more money, the Group faces financial stress.

“This crisis has been brewing for some time now and with every attempt to rectify the situation coming to naught, it came to a head this quarter. Obviously, much depends on this infusion of liquidity,” the communication.

The letter described the special audit by RBI on the Group as “routine” inspection.

The consolidated debt of the diversified yet unlisted conglomerate is estimated at Rs. 1-lakh crore. CARE Ratings has downgraded various debt instruments and bank facilities (aggregating Rs. 14,249 crore) of IL&FS. It cited build-up of liquidity pressure on the Group due to the delay in raising funds.

IL&FS had called for an emergency board meeting last Friday, but it remained inconclusive as the shareholders could not agree on the way forward. The board was divided on the issue of seeking fresh funding of around Rs. 3,000 crore from the key shareholders, LIC and SBI.

Last month, the IL&FS board approved a rights issue of 30 crore equity shares at Rs. 150 apiece aggregating to Rs. 4,500 crore. The issue is to be completed by October-end.

Asset divestment plan

The company is also embarking on an asset divestment plan to reduce its overall debt by Rs. 30,000 crore.

Out of a portfolio of 25 projects identified for sale, firm offers have been received for 14 projects. The company expects to complete its divestment plan over 12-18 months.


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Four days before Vijay Mallya flew out,
lawyer told SBI to move court, stop him

Sandeep Singh & Sunny Verma
The Indian Express
Published on September 14, 2018


While the banks missed out on stopping Vijay Mallya from leaving the country, the SBI-led consortium of 17 banks finally filed a petition in the Supreme Court on March 5.

New Delhi, September 13: Four days before Vijay Mallya left the country, Kingfisher Airlines’ largest lender State Bank of India reportedly did not act on the legal advice it got to approach the Supreme Court seeking an order restraining Mallya’s overseas travel.

Senior Supreme Court lawyer Dushyant Dave says he offered this advice after top SBI management, having an inkling that Mallya may flee India, insisted on meeting Dave on Sunday, February 28, 2016.

Speaking to The Indian Express today, Dave said that in his meeting that Sunday, he “advised SBI to approach the Supreme Court on February 29, 2016, for getting an order restraining Mallya from leaving the country…SBI chairperson and people at the top within the government knew about this meeting and the advice given by me. However, there was no action taken on it.”

Mallya left the country four days later.

When asked to comment on Dave’s assertion, then SBI chairperson Arundhati Bhattacharya told The Indian Express: “Mr Dave may say what he has to say. I am no longer with SBI and you may contact the present SBI management for responses.”

Dave said that SBI’s legal advisors came for the meeting along with four top officials of SBI. “It was agreed that they would meet Monday morning to get an order from the Supreme Court restraining Mallya from leaving the country. It was a very specific advice and even as we agreed to meet next morning at 10 am (the court opens at 10:30 am), the SBI officials did not come,” said Dave.

Responding to queries sent by The Indian Express on Thursday, the State Bank of India spokesperson said: “State Bank of India denies that there has been any laxity on its part or its officials in dealing with loan default cases including Kingfisher Airlines. Bank has been taking proactive and strong measures to recover the defaulted amounts.”

While the banks missed out on stopping Mallya from leaving the country, the SBI-led consortium of 17 banks finally filed a petition in the Supreme Court on March 5.

Attorney General Mukul Rohatgi mentioned the consortium’s petition before a bench led by Chief Justice T S Thakur on March 8. Rohatgi said Mallya owed more than Rs 9,000 crore to these 17 banks and had also been declared a “wilful defaulter.”

Responding to a query sent by The Indian Express over Mallya’s meeting with Jaitley and details of offer of settlement, Clare Montgomery, Mallya’s lawyer in the extradition case in London, said: “I am not permitted under my professional rules to make any comment about this case, either on or off the record. I am sorry to say that I cannot therefore respond to your query.”


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CBI questions ex-MDs of three PSBs in Mallya case

Neeraj Chauhan
The Times of India
Published on September 14, 2018


New Delhi, September 13: The CBI has questioned several former managing directors and top serving officers of three public sector banks — State Bank of India, and Central Bank of India — in its probe into fugitive businessman Vijay Mallya’s alleged Rs 6,027 crore loan fraud involving a consortium of 17 banks.

Sources said the bank officers were summoned to the CBI office over the last couple of months and questioned about loans granted to Mallya’s now defunct Kingfisher Airlines between 2005 and 2010.

Without divulging names of the bank MDs, CBI officials said they were asked about documents submitted by Kingfisher, whether guarantees were verified or not and why a loss-making company was favoured.

The investigation found that Mallya diverted a large chunk (around Rs 3,700 crore) of the loans from 17 banks to seven countries including France, Ireland, the UK and the US. Some of the money went to a UK-based F1 motorsport firm, an IPL team and for private jet sorties.

Sources said Mallya took money from banks in a “systematic way” by repaying some part of the loan, which allowed him to gain confidence of the banks which unsuspectingly gave him further loans. The agency has sent letters rogatory (LR) to several countries, details of which will be part of the new chargesheet. Sources said a second chargesheet in the case was in the final stages and would be filed soon.

The CBI had registered an FIR in the matter in August 2016 on a complaint from SBI, the lead bank of the consortium which also had the largest exposure of Rs 1,600 crore. The SBI told the agency that the total outstanding along with interest stood at Rs 9,990 crore as of May, sources said.

Apart from SBI, Punjab National Bank had an exposure of Rs 800 crore, Bank of India Rs 650 crore, Rs 550 crore, Central Bank of India Rs 410 crore, Rs 320 crore, Corporation Bank Rs 310 crore, State Bank of Mysore Rs 150 crore and Rs 140 crore. Officials of other banks will soon be called for questioning, sources said.


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CBI to probe UPA Finance Minister angle in
loans to Vijay Mallya - The Economic Times

Pranab Dhal Samanta
The Economic Times
Published on September 14, 2018


New Delhi, September 13: The Central Bureau of Investigation has opened a probe with an intent to file a fresh charge-sheet on the involvement of finance ministry officials in the disbursal of loans from public sector banks to Kingfisher Airlines during the UPA govt.

ET has reliably gathered that the CBI has already officially approached the finance ministry and formally obtained relevant documentation to build its case. These files, sources said, are currently being scrutinised for further interrogation of officials.

Those familiar with the details of the proceedings told ET that some officials from the relevant period have already been questioned. Sources said these are initial inquires, which will continue as the probe widens.

Key to CBI’s probe are the correspondence and email exchanges recovered during the search of Kingfisher Airlines owner Vijay Mallya’s residence. These were also documented in the report of the corporate ministry’s Serious Fraud Investigation Office.

Most of these mails were between Mallya and his key company advisers in the financial restructuring of the airline, particularly AK Ravi Nedungadi, Harish Bhat and A Raghunathan.

CBI seized more than a lakh internal email exchanges that cover the period between 2008 and 2013. These, according to an insider, also document communications with PMO, finance ministry, civil aviation ministry and petroleum ministry among others. The focus was largely on bank loans and supply of aircraft turbine fuel on credit.

The agency is specifically investigating the role of the former joint secretary (banking) Amitabh Verma. Among the several references to Verma, the one which has caught the agency’s attention is Mallya’s email to Ravi Nedungadi on March 26, 2009 regarding a disbursement of Rs 500 crore from State Bank of India.

Mallya wrote: “Amitabh called me to ask how the SBI meeting went, I gave him a detailed report and emphasised the urgency and criticality of getting an adhoc disbursement of Rs 500 crore by March 31. Amitabh said he had spoken to Mr Bhat and that this disbursement would happen.”

The SBI, according to evidence available with CBI, did sanction this credit of Rs 500 crore by April. This was apparently reflected in SBI’s annual appraisal report as part of Kingfisher’s Rs 2,000-crore credit requirements.

The CBI is also investigating claims made in emails that this assistance was made possible by the political intervention of several UPA ministers. Until now, the case against Mallya has revolved around him defaulting on loan repayment, which was then converted to fraud after he fled the country. The Central Bureau of Investigation is already in the court in the UK seeking Mallya’s extradition.

The CBI’s premise is that public sector banks were forced into lending to Kingfisher without due diligence. Those being looked at closely are Punjab National Bank, Oriental Bank of Commerce, Canara Bank, Indian Bank, Indian Overseas Bank and Syndicate Bank.

Error of Judgement

Meanwhile, the CBI said on Thursday the change in a 2015 Look Out Circular against liquor baron Vijay Mallya from “detain” to merely informing about his movements was an “error” in judgement because he was cooperating in the probe and there was no warrant against him.


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Never mind who Mallya met. Why did the
Modi government dilute an airport
lookout notice against him?

Shoaib Daniyal
The Scroll Online
Published on September 13, 2018


Anonymous CBI sources told journalists that the businessman
was not seen as a flight risk. But conspiracy theories abound.

Did debt-burdened industrialist Vijay Mallya meet Finance Minister Arun Jaitley before he fled for the United Kingdom in 2016? On Wednesday, Mallya claimed that he had spoken to Jaitley and offered to reach a settlement with the banks, to which he owed an estimated sum of Rs 9,400 crore.

Jaitley soon refuted the allegation, claiming that “the statement is factually false in as much as it does not reflect truth”. He claimed that Mallya had “misused his privilege” as a member of the Rajya Sabha and accosted him in Parliament with an offer to settle. The finance minister says that he asked Mallya to talk instead to his creditors. Mallya clarified that he had indeed met Jaitley in Parliament but added that he had also informed the minister that he was leaving for London.

The news sent India’s media and political circles into a tizzy. The Congress and a clutch of Opposition parties jumped on the incident to attack the Bharatiya Janata Party. While the optics do not look good for the ruling party, the core of the issue is not who met whom – it’s how Mallya was allowed to leave India, given the enormous burden of his loans. As it turns out, a few months before the Kingfisher Airlines owner flew up to London, the Central Bureau of Investigation had diluted a lookout notice for him.

Hide and seek

The CBI circular, which asked the Bureau of Immigration to detain Mallya should he attempt to exit the country, had been issued on October 16, 2015. However, in a month, the Central Bureau of Investigation changed its mind. Instead, it instructed the Bureau of Immigration to simply inform the CBI if Mallya was entering or exiting India.

Within three months of this decision, Mallya resigned as chairman of United Spirits Limited, receiving a hefty payout of $75 million. At the time of resignation, Mallya had stated that he wished to go to England to spend more time with his family.

On February 26, the day on which Mallya resigned from the company, the State Bank of India – to which Mallya owes Rs 1,600 crores – moved to a debt recovery tribunal in Bengaluru, asking for his passport to be impounded. While the tribunal was hearing the matter, Mallya left the country on March 2. Thanks to the diluted Central Burea of Investigation notice, Mallya had no difficulty flying out from Delhi.

After Mallya left the country, the State Bank of India approached both the Karnataka High Court as well as the Supreme Court about recovering their loans – neither of which had any power over Mallya, since he was now in England. In February 2017, the Modi government submitted as extradition request to the United Kingdom, a case that is still being heard.

Who is answerable?

The question of how or why the Central Bureau of Investigation diluted its lookout notice has hung in the air for more than two and a half years. On Wednesday, anonymous sources in the Central Bureau of Investigation claimed to media outlets that it was the original circular asking for Mallya to be detained that contained the error. An officer had inadvertently ticked the detention box while filling out a notice. The bureau never wanted Mallya detained since he was cooperating with the investigation and was not seen to be a flight risk. This alleged mistake was reversed a month later.

If the Central Bureau of Investigation’s anonymous clarification is to be taken at face value, it would mean that the organisation had made a grave error. Clearly, Mallya was a flight risk and this decision had put Rs 9,400 crore of mostly public money at risk. Less charitable to the Central Bureau of Investigation are a number of allegations– including one from a BJP MP– that the dilution of the notice was a conspiracy to let Mallya escape.

This is not the only case of high-value debtors fleeing India for refuge abroad. In February, jeweller Nirav Modi and his uncle Mehul Choksi left India after allegedly defrauding a public sector bank of Rs 13,000 crore.


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How Delayed and Diluted Action by CBI, Government Banks Allowed Mallya to Flee

The Wire Analysis
Published on September 14, 2018


What exactly was the state of investigation in late 2015 and early 2016, months before the liquor baron skipped town? How strong was the case against Mallya at the time? The Wire breaks it down.

New Delhi, September 14: The puzzling and mysterious manner in which the Central Bureau of Investigation (CBI) downgraded its look-out-circular (LoC) against billionaire-turned-fugitive Vijay Mallya has once again become a matter of public scrutiny in light of the liquor baron’s recent comment on the manner of his departure from India in 2016. and the arguments this has triggered between the Modi government and the opposition.

The investigative agency’s primary defence – both back in 2016 and now – has been that it didn’t have enough evidence to issue an LoC for detention or arrest as that would allegedly require a non-bailable warrant.

Consequently, the LoC that had been issued for detention by the CBI in October 2015 was an “inadvertent error” and thus was downgraded to a mere track-and-intimate notice in November 2015.

Broadly speaking, there are two main categories of look-out notices or circulars (with a few variations) that India’s investigative agencies put in place. The first is where immigration authorities track the itinerary of an individual and inform the CBI of the person’s movements when she or he leaves or enters the country. The second is when immigration authorities are required to stop the individual from leaving or detain them when they return back to India.

This was the basis on which the Greenpeace activist Priya Pillai was stopped from boarding a flight to London in 2015. She was not detained or arrested, merely told that she would not be allowed to leave the country.

In the case of Mallya, a similar circular was in place briefly and the CBI – and the Modi government – have come under fire for changing its category from the ‘detaining’ type to the ‘informing’ kind.

Multiple media reports, quoting anonymous officials and CBI spokespersons, have pointed towards the investigative agency’s anger at India’s banks. The implication being if lenders had stepped forward earlier and helped out with the investigation, a stronger case could have been made out sooner, which in turn would have allowed the authorities to stop Mallya from leaving.

But what exactly was the state of investigation in late 2015 and early 2016, months before the liquor baron skipped town? How strong was the case against Mallya at the time? The Wire breaks it down.

Downfall of Kingfisher: 2012-2014

By 2013, there was not much left of a functioning Kingfisher Airlines. It had stopped operations in 2012, with its licence being confiscated in the same year. By March 2013, the company’s net-worth had fallen to a negative of nearly Rs 13,000 crore.

The holding company, United Breweries Holdings Limited, was approached in late 2013 by a consortium of banks including the State Bank of India (SBI) for payment of nearly Rs 6,500 in loans for Kingfisher Airlines. At the time, while there was much frustration within the banking community, Mallya assured his lenders that a large portion of the loan would be settled soon.

By early 2014, the CBI had started examining top NPA (non-performing asset) cases but without registering official cases. In May 2014, DNA ran a curious story that stated that when the CBI’s bank securities and fraud wing paid a visit to the SBI’s offices to ask for documents on the Kingfisher Airlines case, they were told that the bank was in the process of recovery and there was no instance of fraud.

SBI chief Arundhati Bhattacharya at the time publicly stated that there was “no question about not cooperating with any authorised investigative agency” and that the “CBI is always welcome to investigate”.

Nevertheless, if in early 2014 the general sentiment amongst the Indian banking community was that Kingfisher was merely a bad NPA, it slowly changed towards the end of the year.

In August 2014, the CBI registered a preliminary inquiry and stated its intention to probe a loan of Rs 950 crore given by IDBI to Kingfisher Airlines – the rationale being that IDBI gave a fresh loan years after the initial consortium funded the company and the loans had turned sour. At the time, media reports noted that the CBI could expand its probe to look at other banks.

In the same month, multiple government-owned banks including SBI, United Bank of India and Punjab National Bank started the process of declaring Mallya a “wilful defaulter” – a classification of borrower that potentially implies wrongdoing; where money could have been paid back but was not, or that the borrowed funds were used for other purposes.

Initial investigations: 2015

Both processes – banks declaring Mallya a wilful defaulter and the CBI starting its investigation – continued largely side-by-side throughout 2015. In July 2015, the CBI registered a case against Mallya, A Raghunathan, the airline’s CFO, and unnamed officials of IDBI Bank. At the same time, lengthy court hearings continued to stretch over declaring Mallya and Kingfisher Airlines as wilful defaulters. Mallya was finally declared a wilful defaulter by multiple banks in November 2015.

On October 10, 2015, the CBI carried out searches at five places, including the Mallya’s residential and official premises, in connection with the IDBI case. At the time, media reports noted that raids were carried out in Mumbai, Goa, Bangalore and other places.

Here’s where things get curious. The first look-out-circular (LoC) was issued on October 16 – this LoC allowed for detaining Vijay Mallya if he left the country or if he returned to India. At least one media report from the time says that this LoC was issued because CBI officials could not find Mallya during its October 10 raids. The liquor baron apparently was in London at the time.

Noted criminal lawyer Siddharth Luthra has pointed out that these LoCs are issued when there are reasonable circumstances of a flight-risk or when an individual is refusing to cooperate in an ongoing investigation.

The CBI has stated that its “inadvertent” mistake with regard to the LoC was discovered on November 23, 2015, when it “got a call from immigration authorities informing them of Mallya’s imminent arrival from London”. It was at the time the CBI apparently learned that it had mistakenly issued a LoC for Mallya’s detention, which was then changed.

The investigative agency’s official version of these events – that a junior officer accidentally ticked the wrong box on the form, and thus issued a wrong LOC – has been hotly contested by other media reports who quote former CBI officials as saying it would be highly unlikely that such a thing could happen.

But the CBI has also stated  that it didn’t have enough evidence at the time to issue an arrest warrant and that because Mallya did in fact turn up for questioning in India in December 2015, it didn’t have appropriate grounds to consider him a flight risk.

As for the CBI, it prosecution appears to have only started seeing traction  in August 2016, well after Mallya had flown the coop – when the Enforcement Directorate also registered a case of money laundering.

So what else was happening while the CBI investigation was muddling along at the end of 2015?

SFIO probe and Service Tax Department case

As pointed out above, in November 2015, the banks officially declared him a wilful defaulter.

A few months before that, in September 2015, perhaps in anticipation of the banks’ move, the Serious Fraud Investigation Office (SFIO) had launched a probe into alleged diversion of funds by Kingfisher Airlines.

The SFIO is a fraud investigative agency that comes under the ministry of corporate affairs.

United Spirits itself confirmed in a Bombay Stock Exchange filing that month that the SFIO had sought information from the company on possible diversion of funds to other group companies and that it was cooperating with the investigative agency.

At the same time, India’s service tax department had for a few years been waging a lonely court battle to get Kingfisher Airlines to cough up nearly Rs 500 crore in service tax. A few days after Mallya fled the country on March 2, 2016, the department finally approached the Bombay high court to get the billionaire’s passport impounded.

At the time of the hearing, however, Bombay high court justice C.V. Bhadang interestingly slammed the tax department for its delay in the matter. The judge noted that the agency had failed to serve notices on Mallya and his lawyers in September and December 2015 – right around the time the CBI investigation had gotten underway and the banks declared the liquor baron a wilful defaulter.

“If the service tax department was so serious about recovering its dues and bringing the guilty to book, why did it not serve notice to all parties immediately,” asked Justice Bhadang in his open court remarks, adding “why did it (the department) wait till March 2 to approach the high court again”.

Banks and Mallya fleeing

It was on February 26, 2016, that things really started moving. United Spirits announced on that day that it had reached a settlement with Mallya and that the controversial businessman would step down as a chairman and receive a $75-million golden handshake.

This effectively sent alarm bells ringing: the very next day, the SBI-led consortium moved the debts recovery tribunal (DRT) in Bangalore, asking that the severance payment be kept in escrow till the liquor baron cleared his dues and that Mallya’s passport be attached.

On March 2, 2016, Mallya fled the country for London. A few days after that, with the DRT and the Karnataka high court refusing to provide relief, the banking consortium finally approached the Supreme Court.

Shortly after Mallya fled on March 2, 2016, senior advocate Dushyant Dave revealed that the State Bank of India had consulted him on February 28, a Sunday, about their apprehensions that he was about to leave India for good. Dave advised SBI to move the Supreme Court on Monday, March 1, so that he be restrained from going abroad. But the bank delayed moving the court until it was too late, he said. Speaking to India Today TV on September 13, 2018, Dave said that SBI essentially failed to show up in court on March 1.

Other legal experts have also said the creditor banks could have approached the courts through a civil suit and asked for travel restrictions to be placed on Mallya.

As for the CBI, on the same day Mallya skipped town, the investigative agency’s chief Anil Sinha happened to give a speech at a conference organised by the Indian Banks’ Association, where he soundly criticised the manner in which Kingfisher’s lenders had handled the case.

“Despite our repeated requests, the banks did not file a complaint [about Mallya] with the CBI,” Sinha reportedly said.

“We had to register the case on our own initiative. The question is that the undue delay in identifying and reporting such a fraud has jeopardised the cause of justice to the offenders’ benefit, giving them opportunity to divert funds and destroy evidence. All of us must ponder over this issue.”


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The decade after 2008 crisis is a missed opportunity for structural reforms in the Indian financial sector

Somasekhar Sundaresan & Bhargavi Zaveri
The Moneycontrol Online
Published on September 14, 2018


How does India build a financial market that serves the needs
of the real economy without repeating the mistakes of the West?

On the tenth anniversary of the 2008 crisis, the discourse in India has largely focused on the measures taken by the Reserve Bank of India (RBI) in the immediate aftermath of the crisis. Indian financial institutions had limited exposure to the global financial markets since such exposure was intensely regu­lated.  Resultantly, in the short run, the effect of the crisis on India was largely limited to the sale of Lehman's Indian operations, speculation of a run on India's largest private sector lender, and liquidity crises for some financial institutions such as mutual funds.

This reinforced the doctrine that India is safer when less integrated with the global financial system; our banks were better off not dealing in complex derivative products; and that our controls on foreign capital served us well. Consequently, participants in an economy growing at a reported 8 percent continued relying largely on banks for their financing needs. However, in the absence of sound banking regulation, lending continued unabated to firms that were already stressed as well as those that became stressed due to the 2008 crisis. Ten years and a non-performing asset crisis later, it is evident that an under-developed and less globally integrated financial market is not the real answer to a 2008-like crisis.

Key questions

How does India build a financial market that serves the needs of the real economy without repeating the mistakes of the West? What lessons has she learnt from the world since 2008? How do we build a financial regulatory architecture that will support market development and keep us safe in times of crises?

Global financial regulatory reform after 2008 focused on three macro themes: regulation of systemic risk; making over-the-counter (OTC) derivatives markets safer; and avoiding over-concentration of risk, whether in the form of too-big-to-fail entities or otherwise. Other reforms that feed into these macro themes such as strengthening capital adequacy and liquidity norms for banks, and reforming credit rating agencies have also been part of the global work program. In the decade that followed, India took small ad-hoc steps to comply with the recommendations of international bodies such as the Financial Stability Council and the G-20, to which she was newly admitted.

However, we missed our local context and failed to implement structural reforms that could achieve the dual goals of market development and financial stability.

Missed chances

First, systemic risk regulation requires policymakers to move away from the notion of entity- or sector-specific regulation to cross-sectoral system-level thinking. A key lesson of the crisis is the impact of inter-connectedness of large firms (regardless of the sector they belong to) that can lead to contagions across the entire financial system. Financial interconnectedness is the network of credit exposures, trading links and other relationships between financial agents. It matters because it serves as a conduit for contagion. The failure of a large interconnected entity can spread rapidly and extensively across the financial system compared to entities that are not as inter-connected. For example, the failure of a large industrial house engaged in manufacturing activity could adversely affect the financial system.  Regulatory thinking on this front is near-absent.

Designing a regulatory framework for systemic risk involves three components- building an agency for monitoring cross-sectoral systemic risk; designing a regulatory framework for identifying systemically important financial institutions and their regulation (such as higher capital adequacy and liquidity norms and stricter surveillance); and a framework for their smooth resolution should they fail.

So far, India has largely taken a sector-specific and entity-driven regulatory approach towards systemic risk. For instance, RBI's framework for regulation of systemic risk deals with banks and lending entities only. Similarly, the Securities and Exchange Board of India’s (SEBI) framework focuses on the systemic risk embedded in infrastructure institutions (such as exchanges and clearing agencies) in the securities markets.  The Insolvency and Bankruptcy Code, 2016 does not cover resolution of financial institutions.

In the US, this realisation led to the establishment of the Financial Stability Oversight Council (FSOC), comprising state and federal financial sector regulators. The FSOC was tasked with the responsibility of identifying and regulating systemically important financial firms, across sectors. The law embeds checks and balances against the powers of the FSOC, by building in an appropriate rule-of-law framework. Elements of this framework came to the forefront in 2016 when Metlife, the largest life insurer in the US, appealed against the decision of the FSOC designating it as a systemically important institution.

In India, such inter-regulatory co-ordination has at best been half-hearted, even while turf consciousness has been further hardened. For instance, the Financial Stability and Development Council (FSDC), headed by the finance minister and comprising representatives of the ministry of finance, ministry of corporate affairs, RBI, SEBI, Insurance Regulatory and Development Authority of India, Pension Fund Regulatory and Development Authority and the recently constituted Insolvency and Bankruptcy Board of India, is intended to be a platform for such co-ordination without concrete legislative stipulation on its role and objectives. It is tasked with multiple motherhood goals (such as financial literacy, financial inclusion, and macro prudential supervision) but its objectives and effectiveness remain unclear. Most importantly, it would not be accountable for failure.

In 2017, the government took a decisive step by tabling the Financial Resolution and Deposit Insurance Bill, which contained the regulatory framework for identification of systemically important financial institutions. Largely based on the recommendations of the Financial Sector Legislative Reforms Commission (FSLRC), the draft law comprehensively provided for the governance of such firms, and their resolution should they fail, but the bill was withdrawn.

Regulatory short sightedness

Second, global regulatory reform for strengthening the OTC derivative markets since 2008 involved mandating compulsory reporting or centrally clearing OTC positions. It is noteworthy that despite the scale of the crisis, exchange-traded contracts were honoured and central counterparties did not fail. The key insight here was that OTC markets warrant more transparency and certainty of the contracts being honoured. Consequently, OTC positions of a certain kind and size must be compulsorily centrally cleared, that is, a central counterparty must take on the obligation of honouring the contract in case of default by either party to the contract.

Under Indian law, OTC derivative transactions in debt securities (such as interest rate forwards, credit default swaps) are envisaged with one of the counterparties compulsorily being a bank or a RBI-regulated entity. The regulatory constraints on participation has ensured a near-absent and shallow market. Consequently, the Indian market does not provide a platform that would allow people to hedge their risk from Indian debt. The same applies to OTC derivatives on currency and other RBI-specified instruments. Thus, on this front too, substantial work needs to be done to achieve the dual goals of market development and financial stability.

Finally, on over-concentration of risk, a key insight is the availability of a diverse array of financial products. As they say, diversification is the only free lunch in finance. Indian policymakers continue the approach of financial repression by compelling regulated entities to invest in safe Indian securities. The regulatory framework for capital outflows has not undergone much change since 2008, and Indian residents are still allowed to invest only in vanilla products outside the country within certain caps. The crisis, if anything, has made policymakers only more risk averse. Partly driven by currency management concerns and partly by financially repressive policy, Indian firms continue to be over-exposed to Indian securities, which exacerbates the possibility of contagion.

The short-term effect of the crisis of 2008 on India may have been muted. This is largely attributable to the un-integrated and underdeveloped nature of the Indian financial markets. What it does not mean is that being under-developed can remain a strategic policy.  A good politician never lets a crisis go to waste. These ten years may well present a missed opportunity for implementing long-term structural reforms. Yet, one need not wait for another crisis to effect the reform described above.  A lot of research literature and ground work in the wake of the FSLRC presents an excellent base to build on.

Somasekhar Sundaresan is an advocate and independent counsel; Bhargavi Zaveri is a researcher at the Indira Gandhi Institute of Development Research.

Source: Internet Newspapers and anupsen articles

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