VOLUME – 9 NO. – 1 APRIL - JUNE – 2017 FOR PRIVATE CIRCULATION

FIDC News • 1

F i n a n c e

I n d u s t r y

Development

C o u n c i l

MR. RAMAN AGGARWAL ...Chairman, FIDC

MR. ALOK SONDHI ... Co-Chairman

MR. T. T. SRINIVASARAGHAVAN

MR. MAHESH THAKKAR ... Director General

MR. MUKESH GANDHI

MR. SRINIVAS ACHARYA

MR. K. V. SRINIVASAN

MR. N M MUKHI ... Editor

AT A GLANCE1

EDITORIAL COMMITTEE

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RBI NOTIFICATIONS & CIRCULARS : S e c u r i t i s a t i o n a n d R e c o n s t r u c t i o n o f Financial Assets and Enforcement of Security In te res t Ac t , 2002 - Sect ion 3 (1) (b) -

Requirement of Net Owned Fund (NOF) for Asset Reconstruction Companies: RBI/2016-17/295; DNBR. PD (ARC) CC. No. 03/26.03.001/2016-17; April 28, 2017. [All registered ARCs]

Master Direction - Information Technology Framework for the NBFC SectorRBI/DNBS/2016-17/53; Master Direction DNBS.PPD.No.04/66.15.001/2016-17, June 08, 2017.

RBI has made further changes to the guidelines governing Masala Bonds [rupee-denominated overseas bonds] in order to plug existing loopholes and to make them more attractive. Masala bonds are superior to external commercial borrowings (ECBs) because the bonds are denominated in rupees, though the settlement takes place in dollars. The buyer of the bonds assumes the exchange rate risk. There are three changes that have been made in the masala bonds issuance rules in the current policy: [1] it has been stated that for issuances of up to $50 million or

Getting the right mix for masala bonds

REGULATORY PERIMETERREGULATORY PERIMETER

Raman Aggarwal, chairman, FIDC

GST switch-over from June 30 midnight is the biggest and boldest national landmark that is destined to transform India’s fiscal, economic and constitutional fabric, people’s lives and the way economic activities and trade relations are conducted. It has generated hopes and aspiration of forward looking nation to an unprecedented level putting aside all differences of federal polity, claims and counter claims and apprehensions.Let us also wholeheartedly welcome and join this process of building up a biggest market for goods and services with all enthusiasm as an innovative and exponentially growing group of financial agencies- that is known as NBFCs. All physical barriers in movement of goods and services and burden of most complex taxation regime of several taxes and levies’ disappearance obviously give a sigh of relief and prospects of better future. But we have to equip ourselves for smooth sailing into GST regime in short run.Members will be happy to know that at FIDC we have left no stone unturned so that sailing in unknown waters for NBFCs become smooth. In order to bring to the attention of authorities NBFC sector’s growth requirements be it a “crying need to promote leasing of movable assets, especially for the development of MSMEs (including start-ups) and farm sector” for which a ‘100 per cent input tax credit’ is inevitable FIDC had represented cogently. Likewise, GST exemption on any receivables assigned by NBFCs to banks and financial institutions which may ensures blood infusion in securitization process, exemption for the sale of repossessed assets (input tax credit not utilised cases) from levy of GST as well as penal interest/ charges for delayed payments etc. were also discussed with the GST Working Group on Banking, Financial and Insurance Sector headed by Mr. Upendra Gupta, Commissioner, GST [please see page-7].Currently, banks as well as NBFCs with pan-India operations can discharge their service tax compliances through a single ‘centralised’ registration. But under the GST, they are to obtain a separate registration for each state where they operate. However, they have been allowed to submit a single invoice per state per month instead of multiple invoices for each transaction. However, FIDC to ensure our requirement, has pleaded that “NBFCs must be permitted to discharge the GST liability from the head office. Electronic credit register can be maintained at HO and GST liability for all branches in India is to be computed and paid by HO. As per CGST Bill, the definition “recipient” includes agent also, for the purpose of goods and services, the definition to include head office of NBFCs for discharge of GST liability”. FIDC is happy and grateful to IBA as well as SIAM for their help and cooperation for supporting the cause of NBFC sector from time.In a changeover of this magnitude there may be kinks and issues which might be needed to be reconsidered by the authorities at various levels and stages. Members are welcome to share their views and make constructive suggestions in this regards.

GST: the biggest and boldest fiscal, economic and constitutional landmark

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Financial solutions for all your needs

GST: the biggest and boldest fiscal, economic & constitutional landmark ..Raman Aggarwal, Chairman, FIDC

Regulatory Perimeter

How bankruptcy code gives faster resolution for creditors .. .Neha Malhotra, Executive Director, Nangia & Co

Performance of Private Sector Non-Banking Financial and Investment Companies, 2015-16

FIDC Engaging in 3 Big Events-PHOTO STORY ...............FIDC

Moves

Legal Eagle

Sebi Moves

Periscope

FIDC In Action

How bankruptcy code gives faster resolution for creditors

Neha Malhotra, Executive Director, Nangia & CoThe Insolvency and Bankruptcy Code, 2016 (Code), consolidates and amends a slew of legislations governing the legal framework relating to reorganisation and insolvency resolution in a time-bound manner.Insolvency is a state or condition of a person who is unable to pay his debts. Bankruptcy on the other hand is a situation whereby a court of competent jurisdiction has declared a person or an entity insolvent, having passed appropriate orders to resolve it and protect the rights of the creditors.At present, the laws governing insolvency and bankruptcy in India are not consolidated and are at time overlapping, involving several institutions such as the Company Law Board, Debt Recovery Tribunal, high courts, etc. A coherent and unified structure under a consolidated legal framework to deal with insolvency and bankruptcy in India has long been overdue.

The Insolvency and Bankruptcy Code, 2016 (Code), consolidates and amends a slew of legislations governing the legal framework relating to reorganisation and insolvency resolution in a time-bound manner. The code is set to promote entrepreneurship, balance the interests of all stakeholders and make the much-needed credit available in the market. Under the code, the insolvency test has moved from ‘erosion of net worth’ to ‘payment default’.In case of individuals and partnership firms, the code applies in all cases where the minimum default amount is Rs 1,000 and above. However, since the regulations in respect of insolvency resolution and bankruptcy of individuals have not been issued, it remains to be seen if the government revises the minimum amount of default to a higher threshold.The code envisages two distinct processes in case of insolvencies: Automatic fresh start and insolvency resolution. Under the automatic fresh start process, eligible debtors can apply to the Debt Recovery Tribunal (DRT) for discharge from certain debts not exceeding a specified threshold, allowing them to start afresh. The insolvency-resolution process consists of preparation of a repayment plan by the debtor, for approval of creditors. If approved, the DRT passes an order binding the debtor and creditors to the repayment plan. If the plan is rejected or fails, the debtor or creditors may apply for a bankruptcy order. Once the regulations in this regard are issued by the Insolvency Board, it seems that if a business fails, the businessman doesn’t necessarily fail, he can still have a new lease of life by undergoing the insolvency resolution process and start afresh. The creditor whose dues have not been paid had to undergo the cumbersome and long-drawn process of recovery before the courts of India, where the resolution may take anywhere from one year to seven years, by when the money would have lost its value for the creditor and the creditor would have lost any hope of recovering the same.Under the new regime, a time-bound resolution is possible and seems achievable since the process shall be driven by insolvency professionals, members of insolvency professional agencies registered with the Insolvency and Bankruptcy Board of India.Similarly, a businessman whose business idea did not work the expected way and led to losses, leading to his inability to pay his debts in time, had to continue his business come what may, because he is not expected to give-up on his own idea. Under the new regime, however, the businessman has a chance to start afresh with a new business idea by filing for automatic fresh start under the code. [Financial Express, April 25]

Insolvency & Bankruptcy Code

Rs.325 crore, minimum maturity period should be three years. In case of issues that are over $50 million in size, minimum maturity period should be five years. [2] Cost ceiling for these issuances should be 300 basis points above the yield of Government of India securities of corresponding maturity. [3] Entities or persons associated with the issuer do not subscribe to the issue. This step is to prevent round-tripping of funds through this route. [Business Line, June 7]

With an aim to prevent any conflict of interest, RBI wants to make drastic changes in the operating framework of credit rating agencies in India. The central bank is planning to create a fund from which payments will be made to rating agencies, according to Indian Express report. RBI believes that once this fund system is implemented, it will replace the existing practice wherein the borrower or the issuer company pays the agency rating its credit worthiness, the report says. According to IE report, RBI and other banks will contribute from which the proposed fund will be created. It is expected to be implemented for large borrower accounts in the first place, a senior government official told IE.The RBI also had said it envisages an important role for the credit rating agencies in the scheme of things and, “with a view to preventing rating-shopping or any conflict of interest, is exploring the feasibility of rating assignments being determined” by the central bank itself.Rating agencies, however, said the move is unlikely to impact their overall issuer-pays model. They (RBI) are talking about some specific mandate (NPA accounts) and not for the overall rating business, Naresh Takkar, MD and Group CEO, ICRA Ltd, said. [Financial Express, May 25]

The RBI, in a notification issued on April 28, has said that all the current, Asset Reconstruction Companies (ARCs), must have a minimum net-owned corpus of Rs 100 crore by March 2019. An enhanced role and greater cash based transactions for ARCs in resolving stressed assets have been envisaged by the government as well as by the RBI. [IIFL News Service, May 1]

RBI has released on April 7 a discussion paper on a proposal to set up ‘differentiated banks’ in the form of wholesale and long-term finance banks to fund large projects. The new banks—wholesale and long-term finance banks—will focus on lending long-term and cater to the funding needs of sectors such as infrastructure and core industries, RBI said in a discussion paper seeking comments on a new category of banks. Such banks will focus primarily on lending to the infrastructure sector and small, medium and corporate businesses. They will also securitize assets for banks and financial institutions which do priority-sector lending. The regulator has been trying to bring in new types of lenders into the banking system in an effort to introduce new ideas and develop niches to ensure that more segments are covered. In 2015, RBI allowed 11 payments banks and 10 small-finance banks. [Live Mint, April 7]

The Reserve Bank has imposed penalties of Rs 20 lakh and Rs 5 lakh on two finance companies for violating fair practices code guidelines. The regulator had conducted scrutiny of sample loan accounts of one of them and found it to be in violation of various provisions of Fair Practices Code guidelines. The RBI said it served a show cause notice to the company and also called for a personal hearing, but response to the notice was not satisfactory. RBI came to the conclusion that violations as observed during scrutiny were substantiated which warranted imposition of monetary penalty on the company. Accordingly, a penalty of Rs 20 lakh has been imposed on the company, the RBI said. In another case an inspection of books and accounts of the company was conducted. “It was observed that charging of interest and its communication to the borrower was done in non-transparent manner which was in violation of the Fair Practices Code guidelines,” the RBI said. [Business Standard, April 11]

To check conflict of interest, RBI mulls creating fund for firms paying rating agencies

ARCs must have minimum net corpus of Rs 100 crore by 2019, says RBI

RBI paper seeks views on long-term finance banks

RBI imposes monetary penalty on two finance cos

FIDC News • 2

Reaching out to the MSMEs in the remote corners has always been a complex issue in view of lack of brick and mortar branches across the country. One possible solution for this problem is convergence of efforts between banks on one hand and the NBFCs, MFIs on the other who are more familiar with local conditions, business viability, better information about the credit worthiness of individuals, their repayment capabilities etc.

R GANDHI, Dy. Governor, RBI

CONVERGENCE BETWEEN BANKS AND THE NBFCs, MFIs

FIDC News • 3

In terms of Paid-up Capital [PUC] and financial income, the composition of select 21,186 NGNBF&I [Private sector NBFC] companies showed that “Loan Finance” has the largest share followed by “Share Trading and Investment Holding” and “Asset Finance” companies ( ).

1.1 The gross value added (GVA) of NGNBF&I companies witnessed a higher growth of 19.8 per cent in 2015-16 as against 15.8 per cent registered in 2014- 15. The improvement in GVA was mainly on account of higher growth in the financial income as compared to total expenditure during 2015-16. Among the activity groups, “Loan Finance”, “Asset Finance” and “Miscellaneous” companies, witnessed increase in GVA during 2015-16 as compared with the previous year ( and

).1.2 Financial income recorded a growth of 18.7 per cent in 2015-16 as against 17.1 per cent in 2014-15. This growth in financial income was mainly driven by higher dividend income during the year ( and ).1.3 Total expenditure, on the other hand, grew at a lower rate as compared to total income, resulting in higher operating profits (EBDT) growth of 22.3 per cent in 2015-16 as against 13.3 per cent in 2014-15. Significant drop in the growth rate of employee's remuneration was also seen in 2015-16 (Chart-1 ). The growth rate of employee’s remuneration was also seen in 2015-16 ( ).1.4 The growth in net profits had slowed down to 12.5 per cent in 2015-16 from 21.0 per cent in 2014-15 due to significant growth in the tax provision during 2015-16 ( ).1.5 The growth rate of total borrowings rose to 21.9 per cent in 2015-16 from 20.2 per cent in 2014-15. However, the growth in borrowings from banks had decelerated to 19.6 per cent in 2015-16 from 26.5 per cent in the previous year. It was also observed that the growth in investments (short and long term

investments together) had dropped to 3.7 per cent in 2015-16 from 7.5 per cent witnessed in the preceding year ( ).

2.1 The liquidity position of the companies to meet its

Table 1

Chart 1Statement 1

Chart 1 Statement 1

Chart 1

Statement 1

Statement 1

1. Growth Rates: Gross Value Added improved significantly

2. Liquidity Position a n d O p e r a t i n g Efficiency: Net Working Capital decline, while Return on Investments Improved

Performance of Private Sector Non-Banking

Financial and Investment

Companies, 2015-16

Performance of Private Sector Non-Banking

Financial and Investment

Companies, 2015-16

The gross value added (GVA) of

NGNBF&I companies witnessed

a higher growth of 19.8 per cent

in 2015-16 as against 15.8 per cent

registered in 2014- 15.

Financial income of

NGNBF&I recorded a growth of

18.7 per cent in 2015-16 as against

17.1 per cent in 2014-15.

On the operational side,

return on investments (RoI)

(measured as a ratio of net

profits to total investments)

of NGNBF&I increased to 15.6

per cent in 2015-16 from

13.8 per cent in 2014-15.

The return on equity (RoE)

(measured as a ratio of

net profits to net worth)

of NGNBF&I increased to

8.7 per cent in 2015-16 from

8.2 per cent in 2014-15.

Increase in the RoE was

witnessed among all the

activity groups in 2015-16.

An analysis of the financial performance of select 21,186 non-government non-banking financial and investment companies (NGNBF&I) for the year 2015-16 showed that their overall performance improved, with growth at an accelerated pace and a distinct improvement in operating profit margin as well as in the return of equity. However, their liquidity position deteriorated and both leverage ratio and bad debts to expected receivables ratio rose from their levels a year ago*.

* An analysis of the performance of non-government non-banking financial and investment (NGNBF&I) companies (excluding insurance and banking companies) for the financial year 2015-16 is based on the audited annual accounts of 21,186 companies which closed their accounts during the period April 2015 to March 2016. Of these, data pertaining to 20,655 companies are based on Ministry of Corporate Affairs (MCA) systems, data for 361 companies are as collated by Department of Statistics and Information Management (DSIM) from Department of Non- Banking Supervision (DNBS), Regional Offices of Reserve Bank of India, while the data for the remaining 170 companies are obtained from other sources. A comparative picture on performance of these companies during the last three-year period i.e., from 2013-14 to 2015-16 has been assessed in this article. Identification of NGNBF&I companies were based on National Industrial Classification (NIC) 2004 code and they were further classified into five major activity groups, viz., (1) Share Trading and Investment Holding, (2) Loan Finance, (3) Asset Finance, (4) Diversified and (5) Miscellaneous(including Chit Fund and Mutual Fund companies).

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short-term obligations as measured by the current ratio (ratio of current assets to current liabilities) decreased marginally to 1.2 in 2015-16 from 1.3 in the previous year. Further, the cash ratio (ratio of cash and cash equivalents to current liabilities) and net working capital (current assets minus current liabilities expressed as a percentage of total assets) also declined in 2015-16 from its position in the preceding year ( ).2.2 On the operational side, return on investments (RoI) (measured as a ratio of net profits to total investments) increased to 15.6 per cent in 2015-16 from 13.8 per cent in 2014-15. However, the net interest margin expressed as a percentage of total assets remained at 3.7 per cent as in the previous year ( ).

3.1 The operating profit margin, measured as a ratio of operating profits to financial income increased marginally to 34.1 per cent in 2015-16 from 33.1 per cent in the previous year. Among the activity groups, “Share Trading and Investment Holding”, “Loan Finance” and “Asset Finance” companies witnessed increase in operating profit margin during 2015-16 as compared with the previous year.3.2 The return on equity (RoE) (measured as a ratio of net profits to net worth) increased to 8.7 per cent in 2015-16 from 8.2 per cent in 2014-15. Increase in the RoE was witnessed among all the activity groups in 2015-16.3.3 The dividend payout ratio (measured as a ratio of dividends paid to net profits) declined from 23.5 per cent in 2014-15 to 22.5 per cent in 2015-16. However, “Loan Finance” and “Diversified” companies witnessed increase in the dividend payout ratio among the activity groups during 2015-16.

4.1 The select NGNBF&I companies witnessed increasing trend in leverage ratio (measured as a ratio of debt to equity) over the three-year period and had gone up to 121.1 per cent in 2015-16. The leverage ratio of “Loan Finance” and “Asset Finance” companies was at significantly high level with increasing trend during the three-year period as compared to other activity groups ( ).

4.2 Though the overall financial operation of NGNBF&I companies had improved in terms of RoE and RoI in 2015-16 as compared with

2the preceding year, their bad debts to expected receivables ratio had gone up to 4.9 per cent in 2015-16 from 4.3 per cent in 2014-15, which is a drain on their profits. Bad debts to expected receivables ratio was observed to be higher for “Loan Finance” and “Miscellaneous” companies though the position has improved marginally for “Loan Finance” companies (Chart 4).

Chart 2

Chart 2

Chart 3

3. Profitability Ratios: Operating Profit margin as well as RoE improved

4. Vulnerability: Leverage and Bad Debts to Expected Receivables Ratios increased

5. Income and Expenditure: Share of Interest Income in Total Income as well as share of Interest Expenses in Total Expenditure increased

6. Liabilities Structure: Share of Shareholders’ Funds declined gradually but share of Short and Long term Borrowings increased

7. Assets Pattern: Share of Long-term Loans and Advances increased while that of Investments in Total Assets declined

5.1 The fund based income continued to play a dominant role in generating income for NGNBF&I companies as compared to the fee-based income. The share of interest income, which is the main source of fund-based income for NGNBF&I companies in the total income increased to 66.5 per cent during 2015-16 from 65.5 per cent in the previous year. This increase in share of interest income during 2015-16 was observed for “Loan Finance”, “Diversified” and “Miscellaneous” companies.5.2 On the expenditure side, the share of interest expenses in the total expenditure increased marginally to 48.6 per cent in 2015-16 from 48.1 per cent in 2014- 15. However, the shares of employees benefit expenses (Salaries, Wages and Bonus plus Provident Fund plus Employees Welfare Expenses) in the total expenditure declined during 2015-16 mainly contributed by the declined in the salaries, wages and bonus. The decline in the share of salaries, wages and bonus was witnessed for “Loan Finance”, “Diversified” and “Miscellaneous” companies.

6.1 The share of shareholders’ funds in total liabilities witnessed a gradual decline from 33.2 per cent in 2013-14 to 29.6 per cent in 2015-16 ( ). Similar trends were also witnessed for reserve and surplus as well as share capital. The decline in the share of shareholders’ funds in the total liabilities during 2015-16 was witnessed among all the activity groups except for “Diversified” companies.6.2 The capital structure showed that the share of short-term and long-term borrowings in the total liabilities increased to 13.8 per cent and 35.9 per cent, respectively, in 2015-16 from 12.5 per cent and 35.5 per cent in 2014-15. Further, the share of short-term and long-term loans from banks also increased in 2015-16 ( ).6.3 An increase in the share of short-term and long-term borrowings in the total liabilities was seen among all activity groups, except for “Diversified” companies, which experienced decline in 2015-16. For “Share Trading and Investment Holding” and “Asset Finance” companies, the share of both short-term and long-term borrowings increased during 2015-16.

Chart 5

Chart 5

FIDC News • 4

7.1 The composition of assets for the select NGNBF&I companies showed that total loans and advances (inclusive of both short and long-term loans and advances) constituted more than 60.0 per cent of the total assets. The share of total loans and advances in the total assets had gone up to 65.7 per cent during 2015-16 from 61.9 per cent in 2014-15. This increase in the share of total loans and advances extended by these companies was mainly on account of increased in long-term loans and advances. The share of long-term loans and advances in the total assets increased to 43.0 per cent in 2015-16 from 39.0 per cent in 2014- 15, while that of short-term loans and advances declined marginally. The increase in the share of long-term loans and advances in the total assets was seen among all the activity groups during 2015-16 ( ).

7.2 The share of both current and non-current investments in the total assets declined to 2.6 per cent and 13.9 per cent, respectively, in 2015-16 from 3.4 per cent and 15.4 per cent in 2014-15. This decline in the share of both current and non-current investments in the total assets was witnessed among all the activity groups, except for “Share Trading and Investment Holding” and “Diversified”, which experienced increased in current investments during 2015-16 as compared with the previous year ( ).7.3 Further, the share of cash and cash equivalents in the total assets declined gradually from 6.7 per cent in 2013-14 to 4.7 per cent in 2015-16.

8.1 With larger role of short-term and long-term borrowings in the liabilities structure of NGNBF&I companies (covering more than 50.0 per cent in total liabilities), the external sources continued to play a major role in expanding the business. The share of funds mobilised through external sources in the total sources of funds increased to 88.0 per cent in 2015-16 as against 86.8 per cent recorded in 2014-15. The increase in the share of external sources of funds in the total sources of funds was observed for “Share Trading and Investment Holding” and “Loan Finance” companies.8.2 The funds raised through short-term borrowings increased to 21.2 per cent in 2015-16 from 11.2 per cent in the previous year. While the share of funds mobilised from long-term borrowings in the total sources of funds declined to 37.9 per cent in 2015-16 from 49.2 per cent witnessed in 2014-15. The share of fund raised through term loans from banks (short and long term loans together) in the total sources of funds declined to 21.7 per cent in 2015-16 from 30.9 per cent in the previous year, mainly on account of declined in the funds raised through long-term

Chart 6

Chart 6

8. Sources of Funds: Share of Funds raised through Debt Finance in Total Sources of Funds increased

loans from banks.8.3 The share of internal sources of funds in total sources of funds declined marginally to 12.0 per cent in 2015-16 from 13.2 per cent in the previous year, which was largely contributed by the decrease in the share of reserve and surplus and paid-up capital during 2015-16. The decrease in the share of internal sources of funds in total sources of funds was observed for “Share Trading and Investment Holding” and “Loan Finance” companies among the activity groups.

9.1 The short-term and long-term loans and advances constituted more than 85.0 per cent in the total uses of funds. The share of short-term and long-term loans and advances extended by the NGNBF&I companies in the total uses of funds increased to 21.8 per cent and 65.4 per cent, respectively, in 2015-16 from 20.7 per cent and 52.8 per cent recorded in 2014-15. Further, the share of non-current investments in total uses of funds improved to 5.4 per cent in 2015-16 from 4.9 per cent in 2014-15.9.2 An increase in the share of long-term loans and advances in the total uses of funds during 2015-16 was witnessed among all the activity groups, except for “Asset Finance” companies. While, the share of non-current investments in the total uses of funds improved for “Loan Finance” and “Asset Finance” companies during 2015-16 as compared with the previous year.

10.1 The aggregate results shows that the overall performance of the select 21,186 NGNBF&I companies had improved in 2015-16. The gross value added (GVA) along with financial income had accelerated in 2015- 16 as compared with the preceding year. Total expenditure grew at a lower rate as compared to the total income, leading to significant growth in the operating profits (EBDT) during 2015-16. However, the growth in interest expenses, which constituted major share in the total expenditure had increased marginally in 2015-16 as compared with the previous year.10.2 Further, the return on investments (RoI) had improved in 2015-16. However, the liquidity position had deteriorated and leverage ratio and bad debts to expected receivables ratio had increased in 2015-16.10.3 On liabilities side, the shares of both short-term and long-term borrowings in the total liabilities of NGNBF&I companies increased in 2015-16 as compared with the previous year, whereas the share of shareholders’ funds in the total liabilities declined gradually over the three-year period. The share of short-term and long-term loans and advances in the total assets, on the other hand increased in 2015-16.10.4 The NGNBF&I companies continued to rely mainly on external sources for their business expansion and their share had increased in 2015-16. The share of funds raised through short-term borrowings increased in 2015-16 as compared with the previous year. These companies used their funds predominantly in expanding their non-current investments and both short-term and long-term loans and advances portfolios in 2015-16. [Source: Reserve Bank of India Bulletin, May 2017.This is abridged version]

9. Uses of Funds: Loans financing and Non-Current Investment pick-up in business activity

10. Concluding Observations

FIDC News • 5

Credit Guarantee

Scheme for NBFCsCredit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) implemented Credit Guarantee Scheme [CGS] was extended to NBFCs as announced by the Prime Minister. Salient features of CGS in nutshell are as under:

Eligibility:

Coverage of loans:

Form of Guarantee:

Process:

Guarantee fee:

Effective interest rate:

Systemically Important NBFCs registered with RBI; in profit for last three years and having credit rating for long term bank credit not lower than BBB-. Their lending to MSEs experience of minimum 5 years to establish their lending and recovery track record (could be relaxed to 3 years).They should have minimum Rs. 100 crore MSE loan portfolio and NPA level less than 5% for MSE portfolio as per the latest audited results. Average recovery ratio for the MSE portfolio for the last three years should be over 90%. It may be relaxed in deserving cases.

Loans above Rs. 10 lakh and up to Rs. 200 lakh sanctioned after signing of agreement with CGTMSE to new as well as existing Micro and Small Enterprises [MSE] in manufacturing as well as service sector carrying out activities as currently permitted for coverage by CGTMSE.

It will be a portfolio guarantee as against transaction guarantee for the present operated by CGTMSE. A typical portfolio will have a 3-4 year life, till which the guarantee liability will be alive. The portfolio will be built through quarterly submission of eligible accounts and will get frozen as a portfolio block for the particular FY at end of financial year.The First claim can be after minimum of 12 months of end of the portfolio year. NBFC will have to share recover ies made af ter c la im settlement on pro rata basis.

Eligible NBFCs to approach CGTMSE for complet ing the formalities as a Member Lending Institution, signing of agreement and submission of information. Annual guarantee limits will be sanctioned thereafter based on assessment of various factors.

For each NBFC will be determined based on the ‘Average Expected Loss’ of the NBFC based on previous loan recovery data for the asset class being covered. No-claim bonus features may be worked part of the fee package based on experience of portfolio.

Inclusive of cost of guarantee cover not to exceed 18% p.a. for all MSE loans or as may be specified by CGTMSE Board from time to time. [Please see page-6]

FIDC News • 6

FIDC ENGAGING IN 3 BIG EVENTS ON A SINGLE DAY AT MUMBAI1. With Shri K K Jalan, Secretary, Ministry of Micro, Small and Medium Enterprises, Government of India, Shri S N Tripathi, A S & D C, Ministry

of MSME, Shri Ajay Kapur, DMD, SIDBI and the top executives of CGTMSE (CREDIT GUARANTEE FUND TRUST FOR MICRO AND SMALL ENTERPRISES) on Credit Guarantee Scheme to NBFCs.*

2. With MUDRA (MICRO UNITS DEVELOPMENT & REFINANCE AGENCY LIMITED) for re-finance to NBFCs under PMMY (Pradhan Mantri Mudra Yojna).*

3. With World Bank Group on discussion on “Commercial Credit Reporting”+

*On7th April 2017 at Cricket Association (MCA) Club, Bandra-Kurla Complex, Mumbai th+At IFC Office, BKC, Mumbai on 7 April

FIDC News • 7

FIDC engaging in discussion with GST Working Group on Banking, Insurance and Financial Sector under the Chairmanship of Mr. Upendra Gupta, Commissioner, GST on 8th April 2017

at Air-India Building, Nariman Point, Mumbai.

FIDC ENGAGING IN 3 BIG EVENTS ON A SINGLE DAY AT MUMBAI

CBDT releases rules to compute fair market valuation of unlisted shares

GST rates: Financial services transactions to become marginally dearer

IT Dept notifies new rules for capital gains tax exemption

The CBDT draft methodology for arriving at the fair market valuation (FMV) of the unquoted shares (shares of unlisted entities) involved in a transaction for the purpose of taxation. This will bring the rules in line with the amendment made in the Finance Act, 2017. The amendment provides that if consideration for transfer of unquoted equity share of a company is less than the FMV, the FMV will be considered for the purposes of computing income under the head “capital gains”, the CBDT said in a statement. The amendment will come into effect from April 1, 2018.“The valuation norms for unquoted shares are proposed to be changed radically – from a book value basis to a fair value basis,” Abhishek Goenka, partner and leader of direct tax at PwC said. [Financial Express, May 6]

Tax on financial services transactions will rise from the current 15% to 18% as the goods and services tax (GST) kicks in on 1 July, making them marginally costlier. The new GST rates will apply to some banking transactions, mutual funds, insurance and stock market which were earlier taxed at 15% including Krishi Kalyan cess and Swachh Bharat cess. In banking transactions such as credit card payments, fund transfer, ATM transactions, processing fees on loans etc., where the banks are levying charges, increased tax rates would apply. This would have a slight inflationary impact, said Saloni Roy, partner at Deloitte Haskins and Sells.The CBEC, the nodal body for indirect taxes, would issue notifications clarifying exemptions from the flat 18% tax rate. Interest on fixed deposits, bank account deposits etc., which do not attract a charge will remain so even under the new regime.The government on 19 May finalized the tax rates for the services sector. Ninety percent of the services were placed in the 18% bracket, which in absolute terms is a marginal increase, but is expected to reduce complexity in transaction and improve ease in availing of input credit. Out of all services, 63 have been put in a negative list, which are exempt from tax. In 2016-17, service tax collection jumped to Rs. 2.54 trillion from Rs.2.11 trillion a year ago.[Live Mint, May 21]

The Income Tax Department has notified rules specifying equity transactions that will attract capital gains tax if securities transaction tax (STT) was not paid on them. The move comes after the Finance Act 2017 that aimed to curb the practice of declaring unaccounted income as exempt long-term capital gain by entering into sham transactions.According to the notification that follows draft rules issued in April this year, the CBDT has specified transactions where payment of STT would be mandatory to get the benefit of exemption from capital gains tax. These include acquiring existing listed equity shares through a preferential issue in a company whose shares are not frequently traded, transactions off the stock exchange, and acquisition during the delisting period of the company. “This notification shall come into force with effect from April 1, 2018, and shall accordingly apply to assessment year 2018-19 and subsequent assessment years,” said the CBDT.However, other genuine transaction, such as acquisition of equity shares by venture capital or investment funds, employee stock options, foreign direct investments by non-resident Indians and off-market transactions in schemes approved by the Supreme Court, high court, National Company Law Tribunal, SEBI and RBI, continue to be exempt. Further, acquisitions through preferential issues such as conversion of loan to equity, allotment to financial institutions pursuant to a debt restructuring scheme, acquisitions by banks and securitisation companies and also by modes such as gifts, holding subsidiaries, mergers and conversions would also be exempt from the new rules.” [Business Line, June 6]

FIDC News • 8

MovesMoves

Gradually abolishing various cesses has paved way for GST: Govt

BEPS: India signs historical multilateral instrument

Companies Will Soon Have To Provide Aadhaar Numbers in Their Filings

Govt rules out centralised registration for banks under GST

The Finance Ministry said it has gradually abolished various cesses on goods and services in the last three budgets, and 13 more through the Taxation Laws Amendment Act 2017, in the run up to the July 1 rollout of GST.However, seven cesses will continue to be levied under the Goods and Services Tax regime since they pertain to customs or goods which are not covered by it. These are Education Cess on Imported Goods, Secondary and Higher Education Cess on Imported Goods, Cess on Crude Petroleum Oil, Additional Duty of Excise on Motor Spirit and diesel oil (Road Cess), Special Additional Duty of Excise on Motor Spirit and NCCD on Tobacco and Tobacco Products and Crude Petroleum Oil. In a statement, the Finance Ministry said that by gradually abolishing various cesses on goods and services it prepared the ground for smooth roll-out of GST from July 1, 2017. [Business Line, June 7]

India has signed on June 7 the multilateral convention to implement tax treaty related measures to prevent Base Erosion and Profit Shifting (BEPS). More than 65 countries, including India, signed the convention. This convention will modify India’s treaties in order to curb revenue loss through treaty abuse and BEPS strategies by ensuring that profits are taxed where substantive economic activities generating the profits are carried out and where value is created, an official release from the Central Board of Direct Taxes (CBDT) said. [Business Line, June 8]

The government will soon make quoting the Aadhaar number compulsory for key managerial personnel and directors in

regulatory filings under the Companies Act. The move, primarily aimed at tackling the issue of bogus identities, comes at a time when authorities are bolstering measures to deal with the menace of shell companies, suspected to be used for laundering illicit funds. The Corporate Affairs Ministry has already asked individual stakeholders to obtain Aadhaar at the earliest

for “integrating their details with MCA21”. MCA21 is the portal through which filings required under the Companies

Act are submitted to the Ministry. The move also assumes significance against the backdrop of instances where authorities

have found discrepancies in personal details provided by individuals in the regulatory filings. Individual stakeholders, including “DIN (Director Identification Number) holders/ Directors/ Key Managerial Personnel” as well as certain professionals have been asked to obtain Aadhaar. [Bloomberg, April 30]

The government on June 12 ruled out centralised registration for banks under the goods and service tax (GST) and has mandated separate registration for each state they operate in. Banks have been demanding a single centralised registration system, like at present, as they feel multiple registrations would create procedural and compliance problems. “They have no choice. They have some issues relating to registration which will be resolved in due course,” said a top finance ministry official.At a meeting of finance ministry with the heads of public sector banks here earlier in the day, a separate session was held on issues related to the GST. “We have eased some of their problems. GST will be rolled out as per schedule from 1 July,” the official said. Currently, banks as well as NBFCs with pan-India operations can discharge their service tax compliances through a single ‘centralised’ registration. But under the GST, they would need to obtain a separate registration for each state where they operate. However, they have been allowed to submit a single invoice per state per month instead of multiple invoices for each transaction.The GST Council has fixed a 18% tax rate under GST for financial services. Currently, these services are taxed at 15% and the hike in the tax rate means that individuals will have to pay Rs. 3 more for every Rs. 100 paid for banking transactions.[Live Mint/PTI, June 12]

Legal

Eagle

Legal

Eagle

Cabinet approves amendments in Motor Vehicle Act

Defaulters can’t seek enforcement of fundamental rights: Supreme Court

Merger of tribunals to rationalise working

Economy Must Play Role in Verdicts, India’s Top Court Rules

The Cabinet approved the Motor Vehicle (Amendment) Bill 2016 that proposes Aadhaar-based verification for grant of online services including learner’s licence. This would ensure the integrity of the online services and also stop creation of duplicate licences. The move comes in wake of de-duplication of licences and registration of stolen vehicles. The government has decided to make an all-India register for driving licences and vehicles which would be available across the country which would help in safety and security and avoid malpractices. Nitin Gadkari said the Cabinet has approved various changes in the Motor Vehicle (Amendment) Bill 2016. These include 16 amendments and rejection of three suggestions made by the Parliament Standing Committee. The three major suggestions rejected by the government include registration of vehicles by only RTO and inspection of vehicles by RTO. Once the bill is approved vehicle dealers will be authorised to issue vehicle numbers and register them through an all-India electronic register. The important aspects of the bill are 100 per cent e-governance to be brought in transport sector, the minister said, adding identity verification using Aadhaar will be used, bad roads contractor to be liable for fine, drivers will be included in third part Insurance and Claims would be time bound. A tenfold increase has been made in the amount of compensation awarded under a simplified process of claims disbursal wherein the family of an accident victim would get compensation of Rs 5 lakh as settlement within four months of the accident. [Business Standard, March 31]

Unitech, real estate company had filed a plea in Supreme Court under Article 32 of the Constitution (for protection of fundamental rights) seeking apex court’s directive to Telangana State Industrial Infrastructure Corp. for the release of over Rs. 165 crore pending with the state government authority. “We cannot entertain a defaulter or grant him indulgence under Article 32 of the Constitution. We are not going to interfere with Article 32. You better move the High Court for the relief under Article 226 of the Constitution,” a bench headed by justice Dipak Misra said. “We cannot collect money for you (Unitech). You have to pay the flat buyers for delayed possession. It’s our order and we know how to execute our orders,” said the Supreme Court bench. The apex court, however, granted permission to withdraw the petition and clarified that it has not expressed any view on the merit of the case.[Live Mint, May 1]

In a bid to rationalise tribunals and bring in more uniformity in terms of service and efficiency, the Centre brought the axe down on eight tribunals, as part of its amendments to the Finance Bill. The Centre has decided to wind up eight tribunals and merge them with other existing tribunals. Competition Appellate Tribunal (Compat) will be merged with the National Company Law Appellate Tribunal. The Cyber Appellate Tribunal and the Airports Economic Regulatory Authority Appellate Tribunal will be merged with the Telecom Disputes Settlement and Appellate Tribunal. Employees Provident Fund will be subsumed into the Industrial Tribunal. [Business Line, March 23]

India’s judiciary must consider the interests of the economy and examine the impact of its verdicts on jobs, the country’s top court said in a judgment that could help reduce stalled projects. “The court needs to avoid that particular outcome which has a potential to create an adverse effect on employment, growth of infrastructure or economy, or the revenue of the state,” Supreme Court Justices A.K. Sikri and A.M. Sapre said in a ruling last month, overturning a high court decision that shut down a sugar factory because it was too close to another.“The judicial process has now become a huge impediment in the implementation of very many large projects,” said Mohan Guruswamy, who heads the Centre for Policy Alternatives, a New

Delhi-based research group.India is ranked 130 out of 190 in ease of doing business by the World Bank and 172 in enforcing contracts. The top court’s judgment sets a precedent as projects worth billions of rupees remain stuck for years in a judicial system that has more than 24 million pending cases, including commercial and criminal. [Bloomberg, June 6]

The Central Board of Direct Taxes (CBDT) had released its first ever Annual Report of Advance Pricing Agreement (APA) Programme. An APA is entered into between a taxpayer and a tax authority to agree, in advance, the tax treatment of transactions that the tax payer would have with its related parties. An APA in effect preempts transfer pricing disputes. When a tax payer enters into an agreement with India alone, it is called as Unilateral APA (UPA). When the agreement is signed by another country, along with the tax payer and India, it is termed as ‘Bilateral APA’ (BPA). A significant difference between India’s and China’s scorecard is the ratio of unilateral and bilateral APAs. India’s is almost entirely made of UPA, while China’s is around one BPA for every two UPA.India’s service sector dominates the economy and this shows in the APAs concluded. But the high number of Banking and Financial Sector APAs (20 percent) is an indicator of the tax uncertainty that the Indian tax regime has been inflicting on them. In contrast, there is no financial sector APAs in 113 APAs over nine years concluded by China. U.S. APAs are dominated by trading and manufacturing sectors.The average time taken to conclude APAs, 29 months in India, is better than even the 51 months taken in the U.S. This is commendable and looks much more efficient when compared with

time taken at courts and tribunals for dispute resolution. In contrast, China has taken just over a year to conclude its APAs! However, China has over the last 10 years signed 113 APAs as against 152 by India in the last 4 years. About 60 percent of the APA applications that were filed in India more than 3 years ago are still pending. There could be various reasons for this and the CBDT cannot solely be held responsible. There is significant drop in APA filing over the last two years in India - about 60 percent drop in filings in the last two years. A similar trend can be seen in

China too.Most of India’s APAs are with U.S. and UK – be it UPAs or BPAs. In contrast, Most of China’s BPAs are with Asian countries. It is hoped that the CBDT will come out with such annual reports on its other dispute resolution mechanisms, like Authority for Advance Rulings, Settlement Commission and Mutual Agreement Procedure (MAP - pertaining to international tax treaty disputes). Such disclosure mechanisms need to be institutionalized to make them regular and trustworthy. [Bloomberg, May 29]

The government is likely to introduce in the monsoon session of Parliament a separate bankruptcy law to deal with insolvency in financial sector companies that include banks and NBFCs. The draft code on resolution of financial firms also proposed to consolidate the existing laws relating to resolution of certain categories of financial institutions, including banks, insurance companies, financial market infrastructures, payment systems and other financial service providers into a single legislation, and to provide for additional tools of resolution to enable the resolution corporation to maintain the systemic stability in the country. “The proposed legislation for resolution of bankruptcy in financial firms is under works and our endeavour is to introduce in the upcoming monsoon session of Parliament,” the official said. [Live Mint, May 23]

The government is planning to bring amendment to the Negotiable Instruments Act (NIA) in the upcoming monsoon session of Parliament in a push for a less-cash economy, and a draft Bill in this regard is being readied. [Financial Express, May 9]

Advance Pricing Agreements: India’s Scorecard versus China and U.S.

Govt to table bankruptcy law for NBFCs, MFIs in monsoon session of Parliament

Negotiable Instruments Act may soon be amended

FIDC News • 9

SEBI tightens disclosure norms, dangles hefty penalty of up to Rs. 1 cr

NBFCs eligible for QIB status; unified licence for brokers

New framework to deepen corporate bond market

Promoters must disclose shares received in gift: SEBI

SEBI has tightened compliance norms by levying hefty penalty and provision to prosecute promoters of companies that do not comply with disclosure norms. SEBI has prescribed a penalty of up to Rs. 1 crore and initiating enforcement action on defaulting companies. SEBI said stock exchanges should levy the fine if companies breach certain provisions of the Issue of Capital and Disclosure Regulations. In a circular, the regulator instructed exchanges to impose a fine of Rs. 20,000 a day on companies that delay the completion of bonus issue and do not approach the bourse for listing of equity shares within 20 days from allotment of bonus shares. Similar fine w ill be applicable if companies fail to allot the shares on conversion of convertible securities within 18 months.If non-compliance of norms continues for over 15 days, an additional fine of 0.01 per cent of the paid-up capital of the company or Rs. 1 crore, whichever is less, would be imposed. Exchanges should insist on defaulting companies paying the fine within 15 days of the date of issue of notice. “If any non-compliant listed entity fails to pay the fine, the stock exchange can initiate appropriate enforcement action, including prosecution,” SEBI said. SEBI has asked exchanges to disseminate through its websites names of defaulting companies with details of the fine to be paid. [Business Line, June 15]

The SEBI on April 27 allowed systemically important non-banking financial companies (NBFCs) to be categorised as qualified institutional buyers, a unified licence for brokers in commodities and equity markets, among other things. At present, banks and insurance companies are categorised as qualified institutional buyers (QIBs) by SEBI. Finance minister Arun Jaitley in his Budget speech had proposed to allow systemically important NBFCs regulated by the RBI and above a certain net worth, to be categorised as QIBs since it would strengthen the IPO market and channelise more investments.It also approved the proposal to amend stock brokers regulation so that it can integrate stock brokers in equity and commodity derivative markets. This will allow the same entity to operate in both the markets.The regulator also made it mandatory for appointment of a monitoring agency in IPO issues of more than Rs. 100 crore. Moreover, the frequency of submission of monitoring agencies’ report has been enhanced from half-yearly to quarterly. The monitoring agencies report has to be displayed on the company’s website apart from submitting it to exchanges. [Financial Express, April 27]

Markets regulator SEBI approved a new framework for consolidation and reissuance of debt securities as part of its efforts to deepen the corporate bond market. Liquidity in the secondary market for corporate bonds will be increased by way of limiting the number of ISINs (International Securities Identification Numbers) allocated to a corporate per financial year to 12. This measure will help to increase liquidity in the secondary market, it said in a press release. ISINs are used to number specific securities. An ISINs code, which is alphanumeric and has 12 characters, is used for uniquely identifying securities such as bonds, stocks, warrants and commercial papers.“Within the bucket of these 12 ISINs, the issuer can issue both secured and unsecured Non-Convertible Debentures (NCDs)/bonds and no separate category of ISINs may be provided to them,” Sebi said. Additionally, the issuer may issue five ISINs per financial year for structured debt instruments of a particular category.The above restrictions will not be applicable on debt instruments which are used for raising regulatory capital such as Tier I, Tier II bonds, bonds for affordable housing and the capital gains tax bonds. [Financial Express, April 27]

New Delhi, May 8 () Promoters and directors of a listed company are required to disclose details about shares received by way of gift and through off-market transactions, according to regulator SEBI.The clarifications have been given as part of an informal guidance sought by Kotak Mahindra Bank regarding certain aspects of the Prohibition of Insider Trading (PIT) regulations. In case of bonus shares, or scrips received following a scheme of amalgamation or demerger, a separate disclosure is not required by promoters, directors and employees, SEBI said.According to SEBI norms, promoters, employees and directors of a firm

SEBIMOVES

is required to disclose about the number of shares acquired or disposed, in case the value of such shares aggregates to over Rs 10 lakh during a quarter, to the company and exchanges within two trading days of such transaction.The number of shares acquired or disposed beyond this threshold has to be disclosed irrespective of the mode of acquisition or disposal. [Times of India, May 8]

SEBI has finalised norms for issuance and listing of green bonds, which will help in raising funds from capital markets for investment in the renewable energy space. The rules have been finalised by the SEBI after taking into account inputs from the Finance and Environment ministries, as also from the Ministry of New and Renewable Energy, a top official said. [Business Line/PTI, April 30]

SEBI has set up a committee under the Chairmanship of Shri Uday Kotak, Executive Vice Chairman and Managing Director of Kotak Mahindra Bank to advise on issues relating to corporate governance. The other members of the committee are the representatives of Corporate India, stock exchanges, professional bodies, Investor groups, Chambers of commerce, law firms, academicians and research professionals and SEBI.[SEBI website]

At its upcoming board meeting on June 21, market regulator SEBI plans to consider cutting the listing time for initial public offerings (IPOs) and allowing alternative investment funds to deal in commodity derivatives. SEBI also plans to cut down on the bulky nature of offer documents of IPOs. As per current norms, companies list their shares on the stock exchanges within six days from the date conclusion of the IPO, which means that investors’ funds stay locked in for that duration. To bring down the duration, SEBI will consider cutting it to four days. Offer documents are generally of 400-500 pages and make it difficult for the investor to get key information.

SEBI had earlier introduced the concept of an abridged 5-page prospectus for companies to detail key information to investors. [CNBC, 12 June]

With a view to facilitate turnaround of listed companies in distress which will benefit their shareholders and lenders, the SEBI has approved relaxations to the new investors acquiring shares in distressed companies pursuant to such restructuring schemes. Presently, relaxations from preferential issue requirements under SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 and from open offer obligations under SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 are available for lenders undertaking restructuring of listed companies in distress through Strategic Debt Restructuring (SDR) scheme in terms of the guidelines of RBI. It has been represented to SEBI that where the lenders have acquired shares and propose to divest the same to a new investor, they are facing difficulties as the new investor would need to make a mandatory open offer which would reduce the funds available for investment in the company. Hence, they have requested for exemptions to these investors. Accordingly, it has been decided to extend the aforesaid relaxations to the new investors acquiring shares in distressed companies pursuant to such restructuring schemes. However, SEBI said, “Such relaxations shall be subject to certain conditions like approval by the shareholders of the companies by special resolution and lock-in of their shareholding for a minimum period of three years.” Further, it has also been decided by SEBI to extend the said relaxations to the lenders under other restructuring schemes undertaken in accordance with guidelines of RBI. [SEBI website, June 21, 2017, PR No.: 35/2017]

SEBI on 21 June approved the proposal to provide exemption from open offer obligations, under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, for acquisitions pursuant to resolution plans approved by NCLT under the Insolvency and Bankruptcy Code, 2016. [SEBI website]

SEBI finalises norms for listing of green bonds

Formation of Committee on Corporate Governance

SEBI plans to reduce IPO listing time to 4 days, trim size of share sale documents

SEBI grants relaxation for restructuring in stressed companies

Resolution plans approved under the Insolvency and Bankruptcy Code, 2016

FIDC News • 10

PE funds face tough challenge from NBFCs in realty sector

NBFCs step up hunt for top-level executives

World Bank undertaken commercial credit reporting program

NBFC are increasing their exposure to real estate and expanding the scope of investments beyond residential projects, giving tough competition to private equity (PE) funds. According to a March research report by property advisory Knight Frank, NBFCs have gained significant market share over the previous two years and currently contribute about 18% of the total institutional funding requirement of this sector. While NBFCs have gained a larger share, from 12% in 2015 to 18% in 2016, PE funding has dropped from 61% to 58% in the same period. NBFCs have become the primary source of capital for residential developers. They lend at lower rates compared to PE funds, have lower return expectations and offer more flexibility.Local non-banking finance divisions of global investment firms, like KKR India Asset Finance Pvt. Ltd and Xander Finance, have also stepped up investments despite the lull in the sector. “NBFCs are getting a lion’s share of the market because cost of capital is lower and many developers want debt over equity. We are deploying money in real estate at a steady pace but cautiously because risk is high. We are not doing luxury housing or city-centric deals,” said Amar Merani, chief executive of Xander Finance. The overall India story again looks interesting to foreign investors and we too want to invest but once there is more certainty in the real estate regulations,” S. Bedi of Rising Straits Capital said.The NBFC lending space is fairly crowded now with several institutional investors initiating the process to procure a licence to set up a new NBFC, buying out an existing NBFC or reviving an existing but dormant entity to start lending. [Live Mint, March 31]

NBFCs are learning from banks on processes, cross-selling, analytics, and investing in digital and technology to drive efficiencies. Hence, we will see more bankers moving to NBFCs and bring complementary skill sets to the existing teams at NBFCs, P. P. Singh partner-in-charge at headhunting firm Heidrick & Struggles said.Three experts Mint spoke to said NBFCs have a greater advantage to benefit from growth in the tier II-III cities due to their business model which has fewer restrictions than that of banks. “There is a growing demand for leaders who can lead strategically by integrating technology into the growth model - product development, customer experience and operations design at NBFCs,” said Preety Kumar, managing partner at executive search firm Amrop India. “Equally, there is greater demand for leaders who can build operations balancing profitability, growth and governance goals. With changing business models, the demands on top hires are also changing. New hires today are particularly focused on risk and credit strategies, and expanding into adjacent area, as well as people who have the ability to build out a digital presence.In the past four years, NBFCs have seen the highest salary increase in the Banking, Financial services and Insurance (BFSI) segment, in the 10% and above range. NBFCs offer substantial fixed pay and stock options that tempt many professionals to shift to this sector.Within multinational banks, apart from mainstay wholesale business and treasury operations, people at top management don’t have many opportunities. People are either moving into NBFCs or other BFSI sectors like insurance and asset management and MFI-turned banks. Earlier, they had the option to move to regional/ global roles. But, with the global economy slowing down and MNC banks under pressure globally, their options are limited now, Roopank Chaudhary said. [Live Mint, March 21]

The IFC/WBG team has held multiple stakeholder meetings and workshops with various stakeholders on its ‘India Credit bureaus Project.’ Based on the discussions that raised issues like poor data quality, lack of awareness in SME sector and their limited usage, the project design has been finalized and the implementation work was started from April, 2015 which is ongoing. It envisages research to find out possible sources of alternative data for micro enterprises and SME credit information which can help to create more efficient credit reporting system. On the basis of the market assessment findings, to work with credit reporting

companies to include possible alternative data points in the micro enterprises and SME credit information reporting.It also expects to take up review of existing legal and regulatory framework (CIC Act etc.) around credit information sharing and recommending changes as may be required. That also seeks to undertake knowledge sharing program with financial institutions to enhance the usage of credit information products and services as also research on assessing the performance of credit information on the level of access to finance among micro enterprises and SMEs as a part of financial institutions capacity building. Further, it seeks to organise workshops/ training programs focusing on the benefits of utilizing comprehensive credit reporting for lending decisions. That also covers working with the credit reporting companies to design a credit reporting awareness program/campaigns targeted at lenders. [Please see Page-6]

A clarification is sought by FIDC in relation to the G.S.R.

1119(E) dated 7 December 2016 issued by the Ministry of Corporate Affairs, Government of India.

FIDC has knocked on the doors of the revenue department seeking flexibility in acceptance of cash for loan repayments.

NBFCs should be allowed to accept cash even if the loan amount being repaid exceeds Rs.20, 000, the FIDC has petitioned the revenue department of GoI.FIDC move comes close on the heels of the RBI — in a March notification — mandating all NBFCs not to disburse

loans or accept repayments in cash where the aggregate loan amount is more than Rs. 20,000. “We have sought

exemption from Section 269 T only for collection/acceptance of loan repayments from borrowers. We want leeway to accept cash above Rs. 20,000,” Raman Aggarwal, Chairman, FIDC, said.The business model of NBFCs has been damaged ever since the RBI mandated that income tax restrictions around acceptance of cash would strictly apply on NBFCs too with immediate effect. Aggarwal said FIDC’s latest demand (exemption from Section 269 T) could be met through a revenue department notification and there won’t be any need to amend the income tax law. “We are just asking for a limited one-point relaxation. We also don’t see scope of any money laundering as there will be no leakage,” he said.NBFCs need to be put on a par with banks and, more importantly, with co-operative banks, as they are exempted from such restrictions under the income tax law, he added. Aggarwal said the industry was faced with certain practical and operational issues with regard to implementation of the provisions of Section 269 T, that too relating to repayment of loans only.In its submission to Revenue Secretary Hasmukh Adhia, FIDC has said that a significant part of NBFCs’ customer base is constituted by small businesses, road transport/taxi operators, agriculturists and contractors. The extent of coverage through banking channels is still not to the extent desirable and the prevalence of cash transactions cannot be denied, the FIDC said. Many NBFCs get their instalments from customers on monthly or even more frequent basis in cash through a door-to-door collection model. Practically, there is no viable alternative that exists as on date, according to FIDC.As for defaulting customers, where a cheque or an electronic banking transaction has bounced, NBFCs have no option but to insist on cash or a pay order from the defaulters, irrespective of the amount. In certain cases, the overdue amount or the loan outstanding may be more than Rs. 20,000, the FIDC said. [Business Line, April 18]

FIDC seeks clarification on Notification issued by MCA

NBFCs want loan repayments exceeding Rs. 20,000 to also be allowed in cash

Companies (Transfer of Pending Proceedings) Rules, 2016 notified vide

FIDC has pleaded that said notification should be amended to clarify that ‘all pending proceedings of winding up on the ground of inability to pay debts filed under Section 433 (e) of erstwhile Companies Act, 1956 where a liquidation order has not been passed by the Hon’ble High Court shall be transferred to the newly established National Company Law Tribunal and would be treated as applications under Sections 7, 8 or 9 the Insolvency and Bankruptcy Code, 2016, as the case may be, and the winding up petitions which are being retained by the Hon’ble High Court on account of liquidation order having passed shall be endeavored to be disposed of within a period of two (2) years from the date of this notification’.

FIDC News • 11

FIDCIn

Action

FIDCIn

Action

FIDC plea to GST Working Group on Banking, Financial and Insurance Sector

GST: NBFCs pitch for full input tax credit on lease transactions

Grant GST exemption on sale of repossessed assets

FIDC on behalf of the NBFC sector placed on April 4 certain concerns which are needed to be considered and addressed by the GST Working Group on Banking, Financial and Insurance Sector. FIDC requested that Interest on loans and advances, including the penal interest/ charges for delayed payment which are purely an income are already subject to income tax. As such, there should not be, any further tax levied on interest.FIDC further suggested that there is a crying need to promote leasing of movable assets, especially, for the development of MSMEs (including Start-Ups) and Farm Sector. For this purpose the proviso needs to be inserted in Rule 3- Claim of Credit by the Banking Company or a Financial Institution of the ITC Rule is:”The said company or institution shall avail 100% ITC on tax paid on purchase of goods given on lease/ hire purchase”.FIDC pleaded that sale of assets repossessed in case of default should be exempt from the levy of GST.FIDC chairman Raman Aggarwal added that “assignment of receivables secured by hypothecation or pledge of movable assets should be exempted from the levy of GST”.Mr. Aggarwal also emphasised that “Even if State wise/Union territory wise registration and tax computation is insisted, NBFCs must be permitted to discharge the GST liability from the head office. Electronic credit register can be maintained at HO and GST liability for all branches in India is to be computed and paid by HO. As per CGST Bill, the definition “recipient” includes agent also, for the purpose of goods and services, the definition to include head office of NBFCs for discharge of GST liability”. [Please see page-7]

The FIDC has urged the government to allow NBFCs to avail 100 per cent input tax credit on lease transactions in the upcoming GST regime. In its submission to the Working Group for GST (banking, financial and insurance sector), the FIDC said there is a “crying need to promote leasing of movable assets, especially for the development of MSMEs (including start-ups) and farm sector”.”For this, 100 per cent input tax credit should be available to the NBFCs on the tax paid on purchase of goods given on lease/hire purchase,” FIDC said in a letter. Raman Aggarwal, Chairman, FIDC, said NBFCs — going by the proposed GST framework — would be deprived of 100 per cent input tax credit that they are currently availing under the VAT regime.He pointed out that under the proposed GST regime, both financial and operating leases are to be considered as “supply of service” and that 50 per cent input tax credit is proposed to be allowed under the CGST law. FIDC said leasing as an activity has been “suffering in India” due to imprudent taxation policies, primarily on account of dual/multiple taxation.[Business Line, April 7]

FIDC has also urged the Working Group on GST to exempt the sale of repossessed assets (input tax credit not utilised cases) from levy of GST. Currently, sales of repossessed assets are not subject to the levy of value added tax (VAT).If a borrower commits default in case of asset backed financing, the asset is repossessed by the financier (bank/NBFC) and after giving sufficient opportunities, if the default continues; such financier sells

Published by :Raman Aggarwal, Chairmanfor and on behalf ofFinance Industry Development Council,

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FIDC News • 12

the asset and appropriates the sales proceeds towards the account of the borrower. As such, the asset is never reflected in the books of NBFCs and NBFCs merely facilitate sale on behalf of the defaulting borrower to recover the dues and settle his account. [Business Line, April 12]

FIDC has called for GST exemption on any receivables assigned by NBFCs to banks and financial institutions. Assignment of receivables are effectively used for securitisation and they act as a very important mode of refinancing for NBFCs, said a letter written by FIDC to the Working Group on GST (Banking, Financial and Insurance Sector). Simply put, assigning accounts receivables of NBFCs means that such companies use them as collateral for a secured loan. With the bank or financial institution directly dealing with the NBFC, the customers of such NBFCs never know that the concerned company has borrowed against the outstanding accounts.“We want the status quo (no tax on assignment of receivables) to be maintained even under GST system. There should be no new tax for such transactions under the proposed GST regime”, Raman Aggarwal, Chairman, FIDC said. He noted that bilateral assignment of receivables by NBFCs to banks, especially in retail lending not

only provides funding to NBFCs but adds tremendous value to the asset book of the banks. Both RBI and SEBI have been working

to create an enabling environment for such transactions.The CGST Bill, which has been passed by Parliament,

exempts “actionable claims” from the levy of GST. The definition of actionable claims under the CGST Bill has been derived from the Transfer of Property Act 1882. As

per this definition, assignments of receivables secured by hypothecation or pledge of movable assets are not treated as

actionable claims. As such, as per the prevailing provisions, assignment of receivables falls under the definition of “supply” and

shall be subject to the levy of GST. [Business Line, April 12]

Indian Banks Association [IBA] and FIDC had a meeting on April 8 with the Working Group on GST for Banking, Financial and Insurance Sector. Raman Aggarwal, chairman, FIDC made presentation on NBFC sector’s specific concerns regarding

stprovisions proposed for GST to be implemented with effect from 1 July. IBA also, apart from presentation regarding concerns of banking sector, had specifically covered some of the concerns for NBFC sector that were applicable to banking sector as well.IBA suggested that a notification be issued to cover Banking Industry under the sub-Rule [7] of Rule 6 of valuation Rule. The Notified service provider should include the following: “The supplies made by one registered person to another registered person have the same permanent account number which pertains to a banking company or a financial institution including a non-banking financial company.”This will result in Banks not requiring to value and levy GST on inter-branch activities and there will not be any bar in claiming the credit for eligible input credit. IBA also pleaded that Banking company should be exempted from raising a “ Tax Invoices” under the proviso to Section 31[2] of CGST Bill, 2017 which covered FIs, including NBFCs. [Source: IBA Representation titled “IBA interaction with GST Working Group: To address areas of concern”]

FIDC call for GST exemption on assignment of receivables

IBA representation to GST Working Group encompasses NBFCs and FIs

[Courtesy: ]Yahoo