Banana banking and Reforms


Sbi orders forensic auidt on jet from 2015

SBI seems to be erring on the side of caution as it was also the largest lender for Kingfisher Airlines. SBI is unlikely to consider Jet's request for debt restructuring till EY submits the forensic audit report," said a source close to the development.

Jet Airways declined to comment. SBI said it does not comment on individual accounts or their treatment.

The airline is believed to have requested SBI for a lifeline, which entails fresh funds and conversion of a part of the existing debt to equity. Jet's debt stands at over Rs 8200 cr, and it recently declared a third straight quarter of losses of nearly Rs 1300 cr. Naresh Goyal has so far been unsuccessful in finding a white knight in Tata Sons as well as its existing 24% joint venture partner Etihad.

Jet Airways had been on the brink of collase in 2013 too, and then Naresh Goyal had brought Etihad on board and ensured cash infusion of nearly Rs 3600 cr. This time round Naresh Goyal may have no choice but sell a significant par of his 51% stake in the airline he founded nearly 25 years ago. The airline has not been able to pay salaries to nearly 15% of its workforce ie primarily pilots and senior management. It has stropped free meals for economy seats, and this week announced it would be cancelling seven routes




Genesis of CDR Mechanism in India
There are occasions when corporates find themselves in financial difficulties because of factors beyond their control and also due to certain internal reasons. For the revival of such corporates as well as for the safety of the money lent by the banks and financial institutions, timely support through restructuring of genuine cases is called for. However, delay in agreement amongst different lending institutions often comes in the way of such endeavors. Based on the experience in countries like the UK, Thailand, Korea, Malaysia, etc. of putting in place an institutional mechanism for restructuring of corporate debt and need for a similar mechanism in India, a Corporate Debt Restructuring System was evolved and detailed guidelines were issued by Reserve bank of India on August 23, 2001 for implementation by financial institutions and banks.
The Corporate Debt Restructuring (CDR) Mechanism is a voluntary non-statutory system based on Debtor-Creditor Agreement (DCA) and Inter-Creditor Agreement (ICA) and the principle of approvals by super-majority of 75% creditors (by value) which makes it binding on the remaining 25% to fall in line with the majority decision. 
The CDR Mechanism covers only multiple banking accounts, syndication/consortium accounts, where all banks and institutions together have an outstanding aggregate exposure of Rs.100 million and above. It covers all categories of assets in the books of member-creditors classified in terms of RBI's prudential asset classification standards. Even cases filed in Debt Recovery Tribunals/Bureau of Industrial and Financial Reconstruction/and other suit-filed cases are eligible for restructuring under CDR. 
The cases of restructuring of standard and sub-standard class of assets are covered in Category-I, while cases of doubtful assets are covered under Category-II.
Reference to CDR Mechanism may be triggered by:
  • Any or more of the creditors having minimum 20% share in either working capital or term finance, or
  • By the concerned corporate, if supported by a bank/FI having minimum 20% share as above.
It may be emphasized here that, in no case, the requests of any corporate indulging in fraud or misfeasance, even in a single bank, can be considered for restructuring under CDR System. However, Core Group, after reviewing the reasons for classification of the borrower as wilful defaulter, may consider admission of exceptional cases for restructuring after satisfying itself that the borrower would be in a position to rectify the wilful default provided he is granted an opportunity under CDR mechanism.
Structure of CDR System: The edifice of the CDR Mechanism in India stands on the strength of a three-tier structure: 
Legal Basis of CDRThe legal basis to the CDR System is provided by the Debtor-Creditor Agreement (DCA) and the Inter-Creditor Agreement (ICA). All banks /financial institutions in the CDR System are required to enter into the legally binding ICA with necessary enforcement and penal provisions. The most important part of the CDR Mechanism which is the critical element of ICA is the provision that if 75% of creditors (by value) agree to a debt restructuring package, the same would be binding on the remaining creditors.

Similarly, debtors are required to execute the DCA, either at the time of reference to CDR Cell or at the time of original loan documentation (for future cases). The DCA has a legally binding 'stand still' agreement binding for 90/180 days whereby both the debtor and creditor(s) agree to 'stand still' and commit themselves not to take recourse to any legal action during the period. 'Stand Still' is necessary for enabling the CDR System to undertake the necessary debt restructuring exercise without any outside intervention, judicial or otherwise. However, the 'stand still' is applicable only to any civil action, either by the borrower or any lender against the other party, and does not cover any criminal action.

Besides, the borrower needs to undertake that during the 'stand still' period the documents will stand extended for the purpose of limitation and that he would not approach any other authority for any relief and the directors of the company will not resign from the Board of Directors during the 'stand still' period.



























Willful defaulters vs witch-hunt on defaulters

Media reports suggest Gajendra Haldea, Principal Adviser (Infrastructure) at the Planning Commission has written a scathing letter to bankers slamming them for inadequate due diligence, reckless lending and ‘gold plating’ of sub-prime infrastructure projects. He described banks’ enthusiasm to lend to problematic projects in the power sector as ‘banana banking’.

But the latest to fire a salvo has been the banking regulator itself. 

First, the newly appointed Reserve Bank Governor Raghuram Rajan declared war against NPAs saying "Promoters do not have a divine right to stay in charge regardless of how badly they mismanage an enterprise…”

And now, RBI Deputy Governor KC Chakrabarty who’s been given charge of managing the restructuring and recovery process had this to say in the central bank’s September bulletin. “For the umpteenth time, I reiterate that the reason for NPA is non-performing administration…What is really puzzling is why this affects the Public sector banks the most… In our assessment, the project appraisal and the decision making in public sector banks has been more impressionistic rather than being information based. How else does one defend the eagerness of some banks to fund power distribution companies with negative net worth!."
The RBI continues to maintain that NPAs are not a systemic issue yet. But with a crackdown on reining in bad assets, it looks like neither banks nor defaulters are going have it easy any longer. The Indian Express quoting a Finance Ministry note lists out a number of stringent actions the government has advised PSBs to take to recover dues. This includes making use of debt recovery tribunals and the SARFAESI Act which empowers them to recover NPAs without court intervention. 
Clearly the noose is tightening with rapid pace around both defaulters and banks. And one only hopes the momentum continues so we no longer have ‘affluent promoters with sick companies’ as the Finance Minister calls them, eating away at public money.  
While public ownership of banks avoids Lehman Bros kind aggression,it may turn blind eye to other kind of issues like NPA.

Declaring defaulting borrower as wilful defualter - RBI measures for defaulting borrowers


On July 1,2014 the Reserve Bank of India (RBI) released a master circular on wilful defaulters, outlining instructions for lenders in the event of default. Bankers also explained the process of identifying and declaring borrowers as wilful defaulters, discussed below:Wilful defaulter
A borrower is classified as a 
wilful defaulter in any of the following events:
·         The borrower defaults despite having the capacity to repay his dues
·         The borrower defaults and has not used the money for the specific purpose for which the loan was availed
·         The borrower defaults, has siphoned off the funds, and the money is not available with him in form of other assets
·         The borrower defaults and has disposed the assets given as security against the loan without informing lenders

Identifying wilful defaulters
Bankers say there is an internal committee, normally headed by an executive director that examines cases of wilful defaults. The credit monitoring or recovery departments give their reports on borrowers deemed to have defaulted wilfully to this committee. The panel examines the efforts made by the bank to recover the dues, the repayment capacity of the borrower, end use of the funds before identifying an individual as wilful defaulter. The decision taken on classification of wilful defaulters is well documented and supported with evidence
Declaring wilful defaulters
Once a borrower is identified as a wilful defaulter, the bank sends him/her a notice with the reasons for the same. The borrower is generally given 15 days to make a representation against the decision to the grievance redressal committee. This committee is either headed by the chairman and managing director or by the executive director who is not part of the panel on identification of wilful defaulters. The bank declares a borrower wilful defaulter if he fails to offer a proper explanation or avoids the grievance redressal committee hearing repeatedly despite notices.
Penal measures
Banks are advised to send their list of wilful defaulters to RBI, Securities and Exchange Board of India (Sebi) and Credit Information Bureau India (Cibil). This is aimed at preventing wilful defaulters from accessing capital markets and borrowing from other banks and financial institutions. The penal measures include the following:
·         No additional facilities will be granted to listed wilful defaulters by banks and financial institutions
·         Promoters of companies that have been identified for siphoning of funds, misrepresentation of accounts and fraudulent transactions will be debarred from institutional finance for floating new ventures for a period of five years
·         Legal process against wilful defaulters will be initiated. Lenders may initiate criminal proceedings also
·         Banks will adopt a proactive approach for a change of management of the willfully defaulting borrower unit.
·         Wilful defaulters will not be allowed to take up board positions in any company

Reporting to RBI, other regulators
Banks have to give the list of suit-filed accounts of wilful defaulters of Rs 25 lakh and above at the end of every quarter to a credit information company. Lenders will give a quarterly list of wilful defaulters where suits have not been filed only to RBI. Banks are advised to send the data on wilful defaulters to 
RBI and credit information companies at the earliest but not later than a month from the reporting date. Banks have been directed to consider all cases of wilful defaults of Rs 1 crore and above filing of suits. Lenders can also consider criminal action where instances of fraud by the defaulting borrowers have been detected. Banks need not report cases
[i] where outstanding amount due is below Rs 25 lakh and
[ii] where lenders have agreed for a compromise settlement and the borrower has fully paid the compromised amount.

Business Standard

GST chargeability and compliance




IGST CGST SGST Adjustment

The government has amended CGST Act 2017 vide CGST Amendment Act 2018 with various changes w.e.f and one of the important amendment was made in Section 49 of CGST Act by introducing new section 49A after the section 49, which is as under:

*49A. Notwithstanding anything contained in section 49, the input tax credit on account of central tax, State tax or Union territory tax shall be utilized towards payment of integrated tax, central tax, State tax or Union territory tax, as the case may be, only after the input tax credit available on account of integrated tax has first been utilized fully towards such payment*

Section 49 (5) of CGST Act 2017 speaks about manner of utilising Input Tax Credit (ITC) for payment of GST output Tax liability, e.g IGST can be Set off against IGST and then CGST and SGST, CGST cane be set off against CGST and then against IGST, and SGST can be set off against SGST and then against IGST.

*Impact of amendment*

But now Government has changed the order of setoff by introducing section 49A w.e.f and now IGST Credit should be set off fully before taking any setoff of CGST or SGST. Which means earlier CGST/SGST ITC was used to set-off CGST /SGST liability, as the case may be, but now IGST Credit has to be 1st utilised fully for payment of IGST then for CGST and then for SGST liability as the case may be, even before utilisation of ITC of CGST or SGST.

*For e.g.*

Say supplier for February 2019 has following data for filing GST 3B

*Output tax liability*
IGST- Rs 200
CGST-Rs 200
SGST- Rs 200
Total- Rs 600
*ITC Available*
IGST- Rs 300
CGST-Rs 200
SGST- Rs 100
Total- Rs 600
*Before 01.02.2019 set off was as under*

*NO TAX IS TO BE PAYABLE*

IGST liability of Rs 200 set off from IGST ITC 

CGST liability of Rs 200 set off from CGST ITC

SGST liability of Rs 200 set off from remaining IGST ITC of Rs 100 and SGST ITC of Rs 100

*After 01.02.2019 (Section 49A) set off was as under*

*Supplier need to Pay Rs 100 from its pocket despite of having ITC available*

IGST liability of Rs 200 set off from IGST ITC 

CGST liability of Rs 200 set off from remaining IGST ITC of Rs 100 and CGST ITC of Rs 100

SGST liability of Rs 200 set off from SGST ITC of Rs 100 and rest liability of Rs 100 will be paid in cash

*Note*

*IGST credit 1st used against IGST, and also IGST 1st need to be set off against CGST and then only CGST credit can be set off against CGST, by amending the section 49A supplier need to pay Tax of Rs 100 from his pocket*

Illustration before Sec 49A is introduced

SGST,CGST,IGST exmple 







GST on Residenial Property from 1st April 2019






Applicability of Service tax and Vat on Right to use Tangible goods

Transfer of right to use goods is one of the elements of "deemed sale" under the enlarged meaning and scope of Article 366 (29A)(d) of our constitution post the 46th Amendment.
What realistically constitutes a transfer of right to use taxable under State laws has been a topic of long debate under the various Sales Tax laws in India since this amendment. The Supreme Court in the case of Builders Association of India 1989 73 STC held that
"transfer, delivery or supply of any goods shall be deemed to be sale of those goods by the person making the transfer, delivery or supply and purchase of those goods to whom such transfer, delivery or supply is made."
Hence the essence of taxability is transfer of goods by the seller by means of delivery of goods and receipt of the same by the purchaser. Essentially, for a transaction to be taxed under the Vat laws as regards "transfer of right to use goods", the transfer has to be coupled with possession.

Test of Effective control and possession 

The spate of litigation on what constitutes a transfer of the right to use, to be taxable under the state sales tax laws, had reached the Andhra Pradesh High Court in the case of Rashtriya Ispat Nigam Ltd. Vs. CTO 1990
77 STC 182
where it was held that in terms of the particular contractual agreement under reference, the effective control and possession of the machinery that was used in the execution of the contracted works continued to remain with the person who supplied the machinery for the purpose and hence sales tax cannot apply.