Friday, May 13, 2016

Do You Know?
This week the Rajya Sabha passed, Insolvency and Bankruptcy Code Bill, that seeks to create time-bound processes for insolvency resolution of companies and individuals. The Lok Sabha had passed it on May 5, 2016. This is one of the major reforms brought about by the Narendra Modi government. 

To ensure effective implementation of the procedure prescribed under the bill, there is provision for establishment of a new board to deal with this specialised matter because strong financial institutions have a major role in sustainability of the economy of any country, which will be ensured after enactment of the bill. Another unique feature of the bill is that it gives right to operational creditor to initiate procedure and the right is not limited to big creditors only who want their money back.

The operational creditor will also have a say in the procedure. Workmen and other employees have priority as per the bill. This code is here to say, “enough playing around with scattered laws and living a lavish life with unlimited debt.” There will be a limit in waiting for repayment of debt. In short, either restructure, repay or windup. One of the unique features of the bill is to establish an information utility for collection of all authentic information at one place.

It is a new concept in India that will facilitate one to check  the information before investing. It will consequently ensure one’s investment is secured. Information utility will collect, collate, authenticate and disseminate financial information to facilitate insolvency, liquidation & bankruptcy. The bill has provisions for the creation of a class of professionals, who will be specialised in dealing with such matters and will be accessible to the persons who need them because they will be registered with the agency as ‘insolvency resolution professionals’, who will ensure an efficient, effective and professional handling of repayment of debt.

One of the most important challenges before investors was to deal with bad debt in India with assets outside Indian jurisdiction. The bill has provisions to tackle issues of cross-border insolvency. If one cannot repay debt, then assets situated outside India can also be considered for repayment if the Indian property is insufficient.

For this purpose, two provisions have been included and details will be available in rules framed subsequently for the legislation. The bill, in short, will ensure that creditors are secured in India and could usher in a new economic era, where India could attract investors more than ever.

Taking cues from this new act, most of the Bank Stocks including HDFC Bank and SBI, rallied on Thursday; as the passage of the Bankruptcy Code in Parliament has rekindled investor hopes on the country's banks hit by rising bad loans.

Analysts, across the board expect a number of rating upgrades in the next few months as the implementation of the code, which suggests a time-bound settlement process for insolvent entities, at a time when some bank stocks are trading at their 2-3-year lows due to high non-performing assets (NPAs) in their books.

The bankruptcy legislation will set a time limit of 180 days - which can be extended by 90 days if three-fourths of creditors agree - to make a resolution when a borrowing entity fails to make loan repayment on schedule. If the borrowing entity fails to stick to the time limit, then the company will be liquidated.

Most analysts said this would give much needed confidence to long only funds to buy into the banking sector.

"Long only funds with contrarian bets are expected to invest in lenders such as ICICI Bank, Axis Bank, SBI, Bank of Baroda that stand out as major beneficiaries from the bankruptcy bill," said Kunj Bansal, chief investment officer-equity at Centrum Wealth Management.

Here are some inputs regarding my recommendations on banking stocks: 

(i) Allahabad Bank Ltd (Rs.53.40): As long as the scrip does not break Rs.52.35, on the downside, the investors can continue to accumulate it on dips and can wait for it to break out above Rs.55.50.

(ii) State Bank of India Ltd (Rs.188.40): It closed near the day's high of Rs.189.40, adding to the further bullishness. As long as it does not break Rs.183.80, on the downside, the traders can continue to accumulate the stock and wait for a break out above Rs.191.55.

(iii) Punjab National Bank Ltd (Rs.79.50):  As long as the scrip does not break below Rs.77.50, the traders can accumulate the scrip, waiting for it to break Rs.83.50 on the upside.

Nomura in a report said, “India currently ranks 136 in the World Bank’s resolving insolvency ranking; It takes 4.3 years to resolve insolvency and the recovery rate (at 25.7 cents to a dollar) is very low. The Code will play a key role in improving the ease of doing business in India.”

Insolvency is a situation where an individual or a company is unable to repay their outstanding debt.

The government expects that the new framework will help in improving India’s position in the World Bank’s ease of doing business ranking.

The World Bank estimates that winding up an ailing company in India typically takes four years, or twice as long as in China and Russia, with an average recovery of 25.7 cents on the dollar, one of the worst rates in emerging markets.

Under the new law, a debtor could be jailed for up to five years for concealing property or defrauding creditors. Bankrupt individuals would be barred from contesting elections as well.

Bankers say the courts are usually reluctant to sign "death warrants" against defaulting companies to safeguard jobs, often resulting in delays in winding-up procedures and poor loan recoveries.

The new law virtually empowers creditors to decide whether a defaulter is declared insolvent or not, though legally their decision could still be challenged in the higher courts.

Currently, over 70,000 liquidation cases are pending in debt recovery tribunals and courts.

To conclude, I would like to point out that:  the new bankruptcy code has provisions to take tough and time bound action against corporate defaulters and help Indian banks to recover nearly 8 lakh crore, in troubled loans. In other words, the insolvency and bankruptcy code, will strengthen hands of lenders to recover outstanding debts by setting a deadline of 180 days for companies to pay or face liquidation.

You can go full hog on the banking counters, on Friday.
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