Tag: HDFC

Companies Fail But Promoters Don’t: The NCLT’s Continuing Tradition

The promoters cannot and should not have a free ride or continue to master control over their company fraudulently.

The National Company Law Tribunal, which was seen as one of the major reforms to tackle bad loan recovery, has turned five amid serious concerns about the efficiency of its process and its outcomes.

The Corporate Insolvency Resolution Process determines whether a defaulter can repay or not, by evaluating assets and liabilities. If a corporate becomes insolvent, a financial creditor (bank/non-bank financial company) an operational creditor (supplier/contractor etc.), or the defaulting corporate itself may initiate CIRP by filing an application with the NCLT.

The NCLT is an adjudicating authority responsible for resolving disputes related to company law, mergers, amalgamations and the winding up of companies ― the insolvency resolution process of companies and limited liability partnerships under the Insolvency and Bankruptcy Code, 2016.

Resolution professionals submit a resolution plan as approved by the committee of creditors to the NCLT. The Committee of Creditors (CoC) may approve it with at least 66% voting for it. The plan becomes binding on the corporate debtor, its employees, members, creditors, guarantors and other stakeholders.

Recently, a LiveLaw news report was headlined: ‘NCLT Mumbai approves resolution plan for Reliance Communications Infrastructure Ltd, valued at Rs 455.9 crore as against total admitted claim of Rs 47,251 crores.’

Anil Ambani’s group company had a debt of Rs 46,000 crore, with 53 financial creditors — including local and foreign banks, NBFCs and funds — laying claims. The NCLT’s Mumbai Bench on December 19 approved a resolution plan for RCIL, a wholly owned subsidiary of Reliance Communications Limited (RCOM).

Total claims made by debtors: Rs 4,96,68,01,09,556 (Rs 49,668 crore).

Total claims admitted by NCLT: Rs 4,72,51,34,03,502 (Rs 47,251 crore).

NCLT has approved a plan by which the Anil Ambani Group has to pay just 0.92% of their debts ― only Rs 455.92 crore of the Rs 49,668 crore claimed. The remaining Rs 49,212.08 crore will not be paid back by Anil Ambani & Co.

Apart from the directly lent amount of Rs 182.20 crore that this group availed, the balance dues admitted were corporate guarantees and other or similar third-party obligations of the debtor.

A corporate guarantee is an agreement in which one party, the guarantor, takes on the payments or responsibilities of a debt if the debtor defaults. This is often used when one of the group’s sister (or brother) companies seek funds from a financial institution. Mostly, governments are customers for infrastructure projects. In the absence of performance or bank guarantees, there is no coverage of risk owing to non-performance of the developer.

The demise of IL&FS four years ago was one of the most significant financial crises caused by a major conglomerate, seizing up the financial system and exhausting liquidity. The debt involved was over Rs 1 lakh crore, of which only Rs 55,000 crore was addressed, leaving 62% unresolved. LIC, SBI, HDFC and Japan’s Orix Corp are some of the key stakeholders of this NBFC.

Let’s consider another classic example in which NCLT could not protect the creditors.

Lenders to debt-ridden Videocon Industries agreed to take a haircut of nearly 96%, the NCLT has observed while approving the Vedanta group’s Twin Star Technologies bid for it. The claims admitted were for Rs 64,838.63 crore and the resolution plan was approved for Rs 2,962.02 crore ― just 4.15% of the claim amount.

The same has happened in the case of bankrupt and grounded Jet Airways, where the resolution — in favour of new buyers, UK-headquartered Kalrock Capital and UAE-based Murari Lal Jalan — has taken over two years. The Kalrock-Jalan combine has agreed to pay financial creditors just Rs 1,183 crore (7.86%) over five years, against admitted claims of over Rs 15,000 crore.

NCLT’s performance can be measured with two different matrices:

  1. Recovery rate (what banks and other financial institutions recover as a percentage of the amounts claimed) and
  2. Average time taken by the resolution process.

A deeper look at the functioning of the NCLT reveals a range of problems. Admission of cases often takes 6-12 months and there are delays in releasing tribunal orders. Creditors file multiple applications, there’s a lack of consensus within the committee of creditors and too few NCLT judges to hear cases, which results in the pressure of multiple jurisdictions, and delay in infusion of funds by investors as envisaged by the plan.

Of the 348 cases resolved in NCLT as of March 2021, the average time for resolution, including litigation time, was 459 days. This is way beyond the revised time limit of 330 days prescribed by the government in July 2019. Prior to this, the expected timeframe for a resolution was 270 days. At the current pace of disposal of cases, the backlog is likely to be cleared in 4-5 years. Why is the discipline of the law not being adhered to in full?

As on December 31, 2022, NCLT had looked into admitted claims of Rs 7.91 lakh crore lent by banks and financial institutions to corporates. Banks have written off bad loans worth Rs 14.56 lakh crore in the last nine financial years, from 2014-15. Written off loans to industries and services stood at Rs 7.40 lakh crore. Only a minuscule amount from this is recovered by banks. The remaining default amount has to be paid off from the bank’s own capital or its profits.

The government holds more than 51% of shares in public sector banks. Market capitalisation of the top 10 banks in India is over Rs 36 lakh crore. There is still enough left there to be looted.

For too long, India has seen a corporate history where companies have failed but promoters have not. The promoters cannot and should not have a free ride or continue to master control over their company fraudulently.

Paul Koshy is a consultant in infrastructure development and engineering.

This piece was first published on The India Cable – a premium newsletter from The Wire & Galileo Ideas – and has been updated and republished here. To subscribe to The India Cable, click here.

Online Outages: RBI Stops HDFC Bank From Digital Launches, Sourcing New Credit Cards

These temporary restrictions will be lifted after the RBI is satisfied with necessary compliance on the part of the private sector lender.

New Delhi: In what is likely an unprecedented move, the Reserve Bank of India (RBI) appears to have taken HDFC Bank to task over various technical problems that its customers have faced with regard to certain Internet banking and mobile banking services over the last two years.

In an order sent to the bank, the regulator has passed a few strictures, advising it to stop all launches of digital business generating activities under its yet-to-be-launched Digital 2.0 programme and sourcing of all new credit card customers.

This temporary ban will continue until the RBI is satisfied with necessary compliance on the part of the private sector lender.

“The Reserve Bank of India  has issued an order dated December 02, 2020 to HDFC Bank Limited with regard to certain incidents of outages in the  internet banking/ mobile banking/ payment utilities of the Bank over the past 2 years, including the recent outages in  the Bank’s internet banking and payment system on November 21, 2020 due to a power failure in the primary data centre,” a stock exchange notification stated.

“The RBI vide said Order has advised the Bank to temporarily stop i) all launches of the Digital Business  generating activities planned under its program ‐ Digital 2.0 (to be launched) and other proposed business generating  IT applications and (ii) sourcing of new credit card customers. ”

The notification adds that the regulator’s order asks the lender’s board of directors to examine the lapses and “fix accountability.

“The above measures shall be considered for lifting upon satisfactory compliance with the major critical observations as identified by the RBI,” the notification adds.

In the same statement, HDFC Bank adds that it has “been taking conscious, concrete steps to remedy the recent outages on its digital banking channels”. The lender also assures its customers that it expects the current supervisory actions will have no impact on its existing credit cards, digital banking channels and existing operations.

“The Bank believes that these measures will not materially impact its overall business,” the notification added.

The most recent outages in HDFC Bank’s online services were on November 21, 2020 – due to a power failure in the company’s primary data centre.

But there have been a few incidents over the last two years that have sparked customer anger on various social media platforms.

In the first two or three working days of December 2019, customers were unable to log onto either the bank’s mobile application or its internet banking platform. The problem appears to have recurred on December 7.

“For the bank’s digital customers, it was bad enough that they were unable to transact, but it was compounded by a lack of transparency by HDFC Bank. The bank’s highly experienced public communications department took a vow of silence, and did not issue a single press release on the subject to assure customers and the public. The bank deemed it fit instead to communicate through Twitter. To date the bank has not informed depositors of the reasons for the technology breakdown, nor has it provided any assurances to compensate customers who had to make online payments such as mortgages and credit card bills falling due on those dates,” analyst Hemindra Hazari wrote at the time.

Two US-Based Law Firms File Class Action Suits Against HDFC Bank

The lawsuit accuses the bank of “improper lending practices in its vehicle-financing operations,” and thus the earnings generated from these operations were unsustainable.

Mumbai: US-based Rosen Law Firm and Schall Law Firm have filed class-action suits against HDFC Bank alleging misleading public statements and for failing to inform investors about the bank’s improper internal controls on vehicle loans.

The lawsuits, filed in the US District Court Eastern District of New York, named outgoing managing director Aditya Puri, CEO-designate Sashidhar Jagdishan, and company secretary Santosh Haldankar as ‘individual defendants’ and collectively, with the bank, as ‘defendants’.

Rosen Law filed the suit on September 14 on behalf of investors who purchased HDFC Bank equity between July 31, 2019, and July 10, 2020. Rosen had announced it would file such a lawsuit on September 4, Schall Law Firm also announced such filing on September 8, both for the same period.

The class-action filing on Rosen Law’s website says “throughout the class period, defendants made materially false and misleading statements regarding the bank’s business, operational and compliance policies.” Specifically, the bank “made false and/or misleading statements and/or failed to disclose” that it had “inadequate disclosure controls and procedures and internal control over financial reporting.”

Also read: Despite Slowdown, RBI Chooses Not to Cut Interest Rates, But Allows One-Time Restructuring of Loans

As a result, HDFC Bank maintained “improper lending practices in its vehicle-financing operations,” and thus, the earnings generated from HDFC Bank’s vehicle-financing operations were unsustainable.

“All the foregoing, once revealed, was foreseeably likely to have a material negative impact on HDFC Bank’s financial condition and reputation; and … as a result, HDFC bank’s public statements were materially false and misleading at all relevant times,” which lead to investors suffering damages.

The lawsuit pointed out that the bank’s American Depositary Share fell $1.37 per share, or 2.83%, to close at $47.02 per share on July 13 after it was reported in media that the bank was probing its lending practice in the vehicle financing operations involving the unit’s former head Ashok Khanna. Investors who had acquired the shares “at artificially inflated prices during the class period” suffered “significant losses and damages,” after the revelation.

HDFC Bank wasn’t immediately available for comment. The shares of the bank fell 0.94 per cent to close at Rs 1083.25 a piece on BSE.

By arrangement with Business Standard.

Gold Prices Jump to Rs 53,650 Per 10 gm, Silver Trending at Rs 65,400 a kg

In New Delhi, the price of 22-carat gold rose to Rs 52,450 per 10 gram, and in Chennai to Rs 51,880.

New Delhi: Gold prices jumped on Tuesday to Rs 53,650 from Rs 53,460 per 10 gram, while silver climbed to Rs 65,400 from Rs 65,120 per kilogram, according to Good Returns website.

Gold jewelry prices vary across India, the second-largest consumer of the metal, due to excise duty, state taxes, and making charges.

In New Delhi, the price of 22-carat gold rose to Rs 52,450 per 10 gram, and in Chennai to Rs 51,880. In Mumbai, the rate was Rs 52,400 according to the Good Returns website. The price of 24-carat gold prices in Chennai was at Rs 56,590.

On MCX, August gold futures jumped to 0.41% to Rs 54,050 per 10 gram. Silver September’s future was at Rs 65,790 per kilogram on Tuesday. MCX has decided to accept gold and silver bars refined at domestic refineries for deliveries, subject to final regulatory approval.

“MCX received the approval of Sebi for the launch of Gold Mini options with Gold Mini [100 grams] bar as underlying,” MCX said in a statement.

“Spot gold price for 24 carats in Delhi was trading up by Rs 185 with rupee depreciation,” HDFC Securities Senior Analyst (Commodities) Tapan Patel said.

The rupee plunged 20 paise and settled below the 75 per US dollar level on Monday, tracking negative domestic equities and strengthening American currency. In the international market, gold was trading lower at $1,973 per ounce, while silver was flat at $24.30 per ounce.

Gold prices retreated from a record high on Monday after investors booked some profits and the dollar rose, although concerns over rising coronavirus cases and its impact on the global economy limited bullion’s losses. Investors’ were also keeping a close eye on the new US stimulus plan that lawmakers are struggling to hammer out.

By arrangement with Business Standard.

Sensex Plunges Over 400 Points in Early Trade

HDFC Bank was among the top losers in the Sensex pack, cracking up to 3%.

Mumbai: Domestic equity benchmark BSE Sensex plunged over 400 points in early trade Monday amid heavy foreign fund outflow and weak domestic as well as global cues.

The 30-share index was trading 373.14 points or 0.97% lower at 37,963.87 at 0930 hours; and the broader Nifty also sank 116.80 points or 1.02% to 11,302.45.

In the previous session, the 30-share index cracked 560.45 points or 1.44% to settle at 38,337.01. Similarly, the broader NSE Nifty sank 177.65 points or 1.53% to 11,419.25. This was the second-biggest fall for the Sensex in 2019. The index had plunged 792.82 points on July 8 following the Budget.

In early trade, HDFC Bank was among the top losers in the Sensex pack, cracking up to 3%, after the lender reported a rise in non-performing assets (NPAs).

During the quarter, gross NPAs rose to Rs 11,768.95 crore which is 1.40% of the total advances, compared with Rs 9,538.62 crore which was 1.33% in the same quarter 2018-19 fiscal.

Other losers included Bajaj Finance, HDFC, IndusInd Bank, Kotak Bank, ONGC, HUL, ITC, NTPC, Bharti Airtel and ICICI Bank, falling up to 2.85%.

On the other hand, Vedanta, Tata Motors, Yes Bank, Sun Pharma, Hero MotoCorp, Asian Paints and Maruti were among the top gainers, rising up to 3.54%.

On a net basis, foreign institutional investors sold equities worth Rs 950.15 crore, while domestic institutional investors purchased shares to the tune of Rs 733.92 crore, provisional data available with stock exchanges showed Friday.

According to experts, the selloff by foreign funds was due to the government’s reluctance to tweak foreign portfolio investors (FPIs) income tax surcharge.

The deficiency in monsoon rain and weak corporate earnings have also impacted the risk sentiment, they said.

With domestic investors already battling concerns of a slowing economy, markets are witnessing broad-based selling, said Sunil Sharma, Chief Investment Officer, Sanctum Wealth Management.

“The market reaction post the BJP victory in 2019 is in stark contrast to the bullish tenor in 2014, and market participants expecting a repeat of 2014 are clearly disappointed, he added.

Meanwhile, the Indian rupee depreciated 22 paise (intra-day) to 69.02 against the US dollar.

The global oil benchmark Brent crude futures were trading 1.34% higher at 63.31 per barrel.

Elsewhere in Asia, Shanghai Composite Index, Hang Seng, Nikkei and Kospi were trading in the red in their respective early sessions.

(PTI)

Under Modi’s Crop Insurance Scheme, Companies Owe Farmers a Whopping Rs 2,800 Crore

Claims have remained unpaid even after the stipulated period of two months has long passed.

New Delhi: In January 2016, when the Narendra Modi led government announced the new crop insurance scheme – Pradhan Mantri Fasal Bima Yojana (PMFBY) – it had said that one of the key improvements over previous schemes would be that claims would be settled on time.

However, RTI data received and reviewed by The Wire has revealed that farmers’ claims worth Rs 2,829 crore remain unpaid for the two seasons that the PMFBY has been implemented.

The RTI response of the ministry of agriculture and farmers’ welfare is dated October 10.

“A majority of claims for rabi 2017-18 are yet to be estimated/approved by company,” the ministry noted in its response. Thus, for the 2017-18 season, a majority of the data pertains to Kharif 2017 and the data reflects only 1% of the claims paid for the rabi 2017-18 season.

For the 2016-17 season, claims of Rs 546 crore remain pending. Claims need to be settled within two months of harvest, according to the PMFBY guidelines. Harvest for the 2016-17 season would have ended in May 2017, at the very latest.

For the 2017-18 season, claims worth Rs 2,282 crore remain pending. The data essentially pertains to Kharif 2017-18, as pointed out by the ministry. The harvest for which would have ended in December 2017, at the very latest.

Also read: Exclusive: Under Modi’s Crop Insurance Scheme, Premiums up 350% But Farmers’ Coverage Stagnant

Thus, on the date the RTI was responded to, Rs 2,282 crore remained unpaid more than nine months after the harvest period ended, while the PMFBY guidelines require that claims be settled within two months of harvest.

For the 2016-17 and 2017-18 seasons, the estimated claims of farmers amounted to Rs 34,441 crore. Insurance companies have paid Rs 31,612 crore, and Rs 2,829 crore remains unpaid.

Major insurance companies including Reliance General Insurance, ICICI Lombard, SBI General Insurance, Agriculture Insurance Company (AIC) of India, New India Assurance company are key players in the crop insurance business.

Also read: India Needs to Make Crop Insurance Work for its Farmers

State-owned AIC accounts for a major chunk of the unpaid claims. It is yet to clear farmers’ claims worth Rs 1,061 crore. Rs 154 crore of these claims pertain to 2016-17 and Rs 907 crores pertain to 2017-18, effectively only for kharif 2017-18.

For the year ended March 2018, AIC’s operating profit from the crop insurance business was Rs 703 crore.

HDFC continues to owe farmers Rs 300 crore, while ICICI owes Rs 260 crore.

A large proportion of the claims that remain unpaid pertain to Maharashtra, Madhya Pradesh, Rajasthan, Tamil Nadu, Karnataka and Himachal Pradesh.  

In fact, of the Rs 546 crore that remain unpaid for the 2016-17 season, Rs 257 crore pertain to Karnataka. The state saw a severe drought that year, with 160 of the 176 taluks in the state being declared drought hit.

For the 2017-18 season, 91% of the estimated claims in Himachal Pradesh remain unpaid as on October 10, 2018. The corresponding figure for Tamil Nadu is 86% with Rs 124 crore of the Rs 144 crore estimated claims remaining unpaid.

Credit: Reuters

Delayed rabi claims for 2017-18

The chief complaint of farmers vis-a-vis PMFBY has been that their claims are not settled on time. They argue that they will benefit from crop insurance only if the claims for crop loss for one particular season are settled before sowing for the next season begins. For instance, if the kharif crop is damaged, the claims should be paid before sowing for the rabi season begins.

The response to our RTI query is dated October 10, 2018, over four months after rabi harvest ended in May. But, the ministry was not even aware of the estimated claims for the rabi season.

To reiterate, PMFBY guidelines require that the claims be settled within two months of harvest.

Reasons for delays

A working paper for the think tank ICRIER authored by Ashok Gulati, Prerna Terway and Siraj Hussain identified some of the key reasons for delays in settlement of claims.

They pointed out frequent extension of cut off dates; delayed submission of yield data of crop cutting experiments; delayed payment of premium subsidy to insurance companies, as some of the key reasons why claims settlement is delayed.

“The scheme with a noble intention to protect farmers can succeed only if operational guidelines are strictly followed,” they noted in the paper.

Siraj Hussain adds that the crop cutting experiments are also disputed. “The results are disputed by companies. So, that is another reason for delays,” he told The Wire.

Also read: How the PM’s Crop Insurance Scheme Turned Into a Goldmine for 10 Private Insurers

The Centre has also admitted to delays in settlement of claims. Responding to a question in the Lok Sabha in July 2018, it revealed that more than 40% of claims for the 2017 kharif were yet to be paid even when more than seven months had passed since the kharif harvest ended.

In September, the Centre attempted to address the issue. It issued fresh guidelines for the PMFBY. The key change was that insurance companies would have to pay 12% interest to farmers if the claims were delayed more than two months over the prescribed cut off dates.

The Centre also said that states will have to pay 12% interest to insurance companies if they delayed in releasing their share of the subsidised premium.

Kuldeep Tyagi, president of the Bhartiya Kisan Andolan, a farmer organisation that works in western UP, argues that the new guidelines have had little impact. “It has made no difference. Companies are continuing to work as they did before,” he said.

He points to the heavy rainfall that most of north western India saw in late September. “There was massive crop loss. Even sugarcane, which is a sturdy crop, was damaged.”

“But, no process has even been initiated to compensate farmers for that loss. We have approached district offices but nothing has happened,” Tyagi said.

How the PM’s Crop Insurance Scheme Turned Into a Goldmine for 10 Private Insurers

The only government insurer which participated exited the scheme after making large gains in the first year.

Correction: An earlier version of this article described the difference between premiums received and compensation paid in a financial year as profit. We regret the error.

New Delhi: The prime minister’s crop insurance scheme ended up being a goldmine for ten private insurance companies in just two years, with the difference between premiums received and compensation paid at nearly Rs 16,000 crore in just two years.

The scheme also failed to enthuse farmers. In just four BJP-ruled states, over 84 lakh farmers exited the scheme after just a year. This information has been obtained by an activist through Right to Information appeals.

The applications were filed by Haryana-based RTI activist P.P. Kapoor on September 12 with the ministry of agriculture. Charging that the crop insurance scheme was a major scam, Kapoor said while the scheme was meant to benefit farmers, it had ended up as a money maker for private insurance companies.

Also read: Exclusive: Under Modi’s Crop Insurance Scheme, Premiums up 350% But Farmers’ Coverage Stagnant

He said the replies received from the ministry on October 14 were proof enough that farmers have realised that the scheme is not meant for their benefit. “As many as 2.90 lakh farmers exited the scheme in Madhya Pradesh, 31.25 lakh in Rajasthan, 19.47 lakh in Maharashtra and 14.69 lakh in Uttar Pradesh,” he said.

In the year 2016-17, he said, 5,72,17,159 farmers had joined the scheme. The following year, only 487,70,515 remained in the scheme. This indicated that 84.47 lakh farmers had exited it. So over 68 lakh farmers exited the scheme in these four BJP-ruled states.

Insurance companies reduced compensation payments

In 2016-17, these companies paid a compensation of Rs 17,902.47 crore, and the difference between the premiums received and compensation paid was Rs 6459.64 crore. In 2017-18, they paid over Rs 2,000 crore less in compensation. The outgo in compensation during 2017-18 stood at just Rs 15,710.25 crore.

This meant that while the number of farmers covered under the scheme decreased, the profit of the insurance companies increased greatly, said Kapoor. He said, “The scheme was a big flop. Instead of allowing the insurance companies to make huge profits, the Centre should have devised mechanisms to compensate the farmers directly as these would have benefited them more.”

Also read: India Needs to Make Crop Insurance Work for its Farmers

The ministry, in its replies, also revealed that along with the government-owned Agriculture Insurance Company (AIC) of India, ten private insurance companies were involved with the Prime Minister’s Fasal Bima Yojana (PMFBY) scheme over a two-year period.

In its reply, the ministry had stated that the 2017-18 yearly data includes both kharif 2017 and rabi 2017-18. It added that “majority claims for Rabi 2017-18 are yet to be estimated / approved by company”. This amount, if and when released, would reduce the gains to the insurance companies.

Also, experts have pointed out that the difference between the premium received and the claims paid does not constitute a clear-cut profit for a company as a lot of operational expenses are also involved.

They also insist that farmers lost little in the bargain as they had paid only about 2% of the premium, with the Centre and the respective state government contributing the rest.

AIC made gains in first year, yet did not do business in the second

In the year 2016-17, AIC alone earned a premium of Rs 7984.56 crore by insuring the crops of 246,83,612 farmers in 21 states. Out of this, it paid a total compensation of Rs 5373.96 crore.

However, in 2017-18, the government-owned company did not remain in the crop insurance business. “At whose instance was this profit-making company asked to step aside? Was it only asked to not take any premiums so that the private players could make a killing?” Kapoor asked.

Gains of private insurers swelled in the second year

During these two years, RTI replies revealed, a total premium of Rs 49,408 crore was paid to the insurance firms for crop insurance on behalf of 10.6 lakh farmers. A sum of Rs 33612.72 crore was paid out of this to 4.27 crore farmers in compensation. The difference between the premium received and compensation paid was Rs 15,795.26 crore, and the activist alleges that most of this money was pocketed by the 10 private insurance companies.

The ten private sector companies which had been allowed to cover crops were ICICI Lombard, Reliance, Tata-AIG, Universal, Bajaj Alliance, Future, SBI, HDFC, IFFCO-TOKIO and Cholamandalam.

State-wise distinction

Among the states, the data revealed that in Uttar Pradesh, the number of farmers insured in 2016-17 was 67.69 lakh but fell the next year to 53 lakh. Surprisingly, despite the fewer insurance policies, the difference between premiums received and compensation paid rose sharply from Rs 548.94 crore in 2016-17 to Rs 1046.81 crore the following year.

In Madhya Pradesh, the insurance companies had insured over 71.81 lakh farmers in 2016-17 – and the difference between premiums received and compensation paid was Rs 1,862.32 crore. The following year, over 2.90 lakh fewer farmers insured their crops and the difference between premiums received and compensation paid for these companies plummeted to just Rs 39.21 crore.

Also read: To Benefit Farmers and Not Private Insurers, the Crop Insurance Scheme Must Be Overhauled Completely

In Maharashtra, nearly 1.20 crore farmers were insured in 2016-17 and the difference between premiums received and compensation paid was Rs 2,424.23 crore for the year. In 2017-18, only about one crore farmers were insured. The difference between premiums received and compensation paid was Rs 1617.94 crore.

Gujarat was probably the only state where the number of farmers who insured their crops increased during these two years. In 2016-17, the figure was 5.20 lakh but it grew exponentially to over 17.63 lakh the following year. Simultaneously, the difference between premiums received and compensation paid also shot up by nearly 5000% from Rs 40.07 crore in 2016-17 to Rs 2,222.58 crore in 2017-18.

The period also saw the number of farmers insuring their crops rising in Haryana. While 13.36 lakh farmers had insured their cops in 2016-17, as many as 13.51 lakh got them insured the next year. The difference between premiums received and compensation paid rose even more sharply from 71.83 crore to Rs 95 crore in these two years.

Another state which saw an increase in the gains of insurers during the period was West Bengal. Here the number of farmers who insured their crops in 2016-17 was 41.33 and this reduced by around 2.23 lakh to touch 39.09 lakh the following year. However, the difference between premiums received and compensation paid rose from Rs 321.26 crore in 2016-17 to Rs 547.87 crore in 2017-18.

Sensex Continues Nosedive as RBI Inaction on Policy Rates Disappoints Investors

Oil marketing majors also were big losers on Friday, with HPCL, BPCL and IOC having fallen between 18.24-22.44% since the Modi government’s U-turn on fuel taxes.

New Delhi: Stock markets went into free-fall on Friday as investors dumped Indian shares after the Reserve Bank of India (RBI) left the repo rate unchanged.

The market was expecting a 0.25-0.50% hike in the key policy rate and was left surprised by the RBI’s pause. Sensex plunged 792 points, losing 2.25% of its value at the close of today’s trading. Nifty closed 2.67% lower.

The rupee too breached the 74 mark against the US dollar. The domestic currency hit the all-time low of 74.22 against the greenback before ending the day at 73.85, 18 paise lower than yesterday’s closing price.

Movement in Nifty, Sensex between Sep 21 and Oct 05, 2018

Index Sep 21 October 05 %change
Nifty50 11,143.10 10,316.45 (-7.4)
Sensex 36,841.60 34,376.99 (-6.6)

Source: NSE, BSE

Since September 21, Sensex has fallen by as much as 6.6% while Nifty has lost 7.4% of its value. Stock markets suffered their biggest weekly losses in two years.

In today’s trading at the NSE, state-owned oil marketing companies were the biggest losers.

HPCL’s stock price tanked 25.18% while BPCL’s share value fell 21.11%.IOC’s share closed 16.19% lower.

HPCL, BPCL and IOC had also fallen 18.24-22.44% on Thursday after finance minister Arun Jaitley said state-owned-oil marketing companies will absorb Re 1 per litre on retail sale of petrol and diesel.

Brokerage firms have downgraded OMCs after yesterday’s announcement.

ONGC, RIL, HDFC, Bajaj Finance, ITC, ICICI Bank, SBI, Bajaj Finserv and Maruti were the other major losers of the day.

Rising crude prices have fuelled concerns about the Modi government’s ability to finance current account deficit (CAD), triggering flight of foreign capital. That has in turn put pressure on the rupee.

RBI governor Urjit Patel-led Monetary Policy Committee kept the repo rate unchanged at 6.5% but changed the policy stance from ‘neutral’ to ‘calibrated tightening’.

The MPC’s decision to stand pat is a clear signal that inflation remains the anchor of monetary policy, said global financial services firm Nomura.

Nomura added that interest rates will not be used to manage the currency, but the MPC will respond to the inflationary consequences of depreciation.

“With a  shift of stance from neutral to ‘calibrated tightening’ , we believe that RBI is likely to re-commence rate hiking from the forthcoming policy in December,” said Shubhada Rao, group president and chief economist, YES bank.

Also read: In Surprise Move, RBI Leaves Interest Rates Unchanged; Rupee Slips Below 74-Mark

India Ratings and Research, a credit rating agency, too has forecast one more hike this fiscal.

“One more rate hike this fiscal is a possibility and cannot be ruled out.  This is also reflected in the policy stance changing from the neutral to calibrated tightening,” said Sunil Sinha, principal economist, India Ratings and Research.

The MPC has hiked repo rate by 0.5% this year.

The MPC noted that global headwinds in the form of escalating trade tensions, volatile and rising oil prices, and tightening of global financial conditions pose substantial risks to the growth and inflation outlook.

“The lingering concerns seem to be around crude oil prices, global interest rates and the ongoing global developments on the trade front,” said Lakshmi Iyer, CIO (Debt) & Head of Products, Kotak Mahindra Asset Management Company.

The RBI retained growth forecast for 2018-19 at 7.4% but snipped project growth for the first quarter of the next fiscal by 0.1%.

“GDP growth for Q1FY20 is now projected marginally lower at 7.4% as against 7.5% in the August resolution, mainly due to the strong base effect, it added.

Behind IL&FS Default, A Board that Didn’t Bark When It Was Supposed To

With so many luminaries of the corporate world on the board, management oversight and accountability should have been all-pervasive.

Even in a season of corporate misgovernance, scams and lack of any CEO-level and board-level accountability, a new leviathan of misgovernance threatens to dwarf the rest.

Emerging from the murky depths – where it seems to have flourished, largely unreported on by the media, financial analysts and even the sectoral regulator – Infrastructure Leasing and Financial Services (IL&FS) reportedly defaulted on loan repayment obligations in the first week of September.

Given that IL&FS carries outstanding liabilities of slightly under Rs 1 lakh crore, the news sent tremors throughout India’s financial sector.

Established in 1987 and promoted by the Central Bank of India, Housing Development Finance Corporation (HDFC) and Unit Trust of India as a private company to develop and finance infrastructure, IL&FS quickly morphed into a labyrinth of subsidiaries, associate companies, housing special purpose vehicles for financing infrastructure projects in India and even abroad, with negligible public and regulatory scrutiny.

The shareholding also changed, with the government-owned Life Insurance Corporation emerging as the single-largest shareholder (25.34%), followed by ORIX Corp, Japan (23.54%), Abu Dhabi Investment Authority (12.56%), HDFC (9.02%), Central Bank of India (7.67%) and State Bank of India (6.42%).

While the company spread its tentacles and ownership changed, a group of individuals have ruled the roost from the firm’s inception. Ravi Parthasarathy, a former Citibanker, joined IL&FS in 1987 as president and CEO, was appointed as managing director in 1989, elevated to vice chairman and managing director in 1994, became chairman and managing director in November 2004. He became a non-executive director and chairman from October 2017 till July 20, 2018, when he finally stepped down for health reasons.

Hari Sankaran, vice chairman and managing director, has been with the company for 28 years, while Arun K. Saha, joint managing director and CEO, joined IL&FS in 1988.

Ravi Parthasarathy. Credit: PTI

Some of the company’s independent directors also have long stints on the board, R.C. Bhargava, chairman of Maruti Suzuki India, has been on the board since August 1990; Michael Pinto, a former bureaucrat, joined the board in July 2004; Sunil B. Mathur, former LIC chairman, joined the board in January 2005 and Jaithirth Rao, formerly from Citibank, was appointed as director in August 2012.

All the major shareholders have had their nominee directors on IL&FS with the exception of HDFC, whose nominee, Harish Engineer, formerly executive director, HDFC Bank, stepped down as a director on September 14, 2017, without any explanation, and was not replaced by HDFC.

With so many luminaries of the corporate world on the board, management oversight and accountability should have been all-pervasive and senior management emoluments should have tracked performance. But a look into the firm’s annual reports depicts a disturbing picture.

The risk management committee (RMC) of the board is an extremely important committee in a non-bank finance company specialising in high-risk infrastructure finance and development, where there exists an inherent asset-liability mismatch. The RMC is empowered to review the core functions of the company such as asset liability management, credit, liquidity and market risk, capital adequacy and compliance with regulatory norms. Since FY’2015, the RMC consisted of R.C. Bhargava, Michael Pinto, Arun Saha and S. Bandyopadhyay, LIC nominee and then managing director, LIC Pension Fund, who resigned from the board on April 3, 2017, and was replaced by Hemant Bhargava, managing director, LIC.

Bizarrely, as per annual report disclosures, this important and critical committee of the board has met only once since FY’2015, on July 22, 2015. In three of the last four years, the committee did not hold a single meeting (in contrast, in IDFC, another infrastructure finance company, the RMC met 14 times from FY’2015 till FY’2018).

It is shocking for IL&FS – an infrastructure finance company registered with the Reserve Bank of India as a ‘Systemically Important Non-Deposit Accepting Core Investment Company’ and endowed with nominee directors from prominent institutions which understand the importance of risk management – to allow such a situation to have continued for so long.

It is even more shocking that credit rating agencies such as ICRA and CARE should have given a ‘AAA’ rating (here and here) to IL&FS when information regarding the IL&FS board’s complete neglect of risk management was in the public domain.

Since the IL&FS group of companies consists of 24 direct and 135 indirect subsidiaries, six joint ventures and four associate companies and the bulk of the liabilities were deployed in the group companies and not the parent, the consolidated results are the most appropriate indicator to evaluate senior management.

In the last four years, although the standalone net profit of the parent company increased from Rs 2.1 billion in FY’2015 to Rs 4.5 billion in FY’2018, the consolidated performance of the IL&FS group sharply deteriorated from a net profit of Rs 800 million to a staggering loss of Rs 20.9 billion in the same period. The group has been posting losses for three consecutive years since FY’2016. As a result of its rapid expansion and its inability to monetise its infrastructure assets, the consolidated outstanding liabilities of the group rose from Rs 680 billion in FY’2015 to Rs 999.5 billion by FY’2018, and this mountain of debt is supported by only Rs 74 billion of equity.

Source: IL&FS Annual Reports

Given such a poor performance by the IL&FS group, did senior management pay the price of corporate misgovernance? Did the nominee directors of various shareholders (which included prominent foreign institutions), or the independent directors – who included stalwarts from the corporate and financial sector – force the sacking of senior management, or impose drastic cuts in their pay?

No, in fact, the reverse transpired.

The remuneration of the senior management of IL&FS, consisting of Ravi Parthasarathy (non-executive chairman from October 4, 2017), Hari Sankaran, vice-chairman and managing director and Arun Saha, joint CEO and managing director, increased significantly since FY’2015.

Hari Sankaran. Credit: ilfsindia.com

Although Parthasarathy’s total emoluments shot up by 144% in FY’2018 as compared to FY’2017, the bulk of the increase is from retiral benefits, probably as a result of him becoming a non-executive director. But interestingly, his salary component, rose from Rs 58.06 million in FY’2014 to Rs 92.12 million in FY’2018, in a period in which the group’s fortunes decisively plummeted.

Even during FY’2018, when he became a non-executive for nearly half of the year, his salary increased from Rs 90.34 million in FY’2017. Similarly, between FY’2015 and FY’2018, Sankaran’s total remuneration rose by 61% to Rs 77.6 million, while Saha’s increased by 20% to Rs 70 million.

Total Remuneration of IL&FS Chairman and Managing Directors

Rupees (million) FY’2015 FY’2016 FY’2017 FY’2018
Ravi Parthasarathy (Chairman)
Salary 58.06 90.15 90.34 92.12
Perquisites 7.64 15.89 13.77 22.38
Others (Retiral benefits) 7.10 3.84 3.89 90.05
Total 72.80 109.88 108.00 204.55
Hari Sankaran (Vice chairman and MD)
Salary 42.84 66.61 66.81 70.10
Perquisites 0.04 8.77 4.99 4.58
Others (Retiral benefits) 5.25 2.87 2.92 2.92
Total 48.13 78.25 74.72 77.60
Arun K. Saha (Joint CEO and MD)
Salary 53.17 52.80 53.59 60.75
Perquisites 1.15 3.89 7.41 6.85
Others (Retiral benefits) 4.20 2.33 2.38 2.38
Total 58.52 59.02 63.38 69.98

Source: IL&FS Annual Reports

The performance appraisal of the senior management including all the directors and the nomination of new directors is undertaken by the powerful Nomination and Remuneration Committee (NRC) of the board.

In IL&FS, the NRC, since March 9, 2015, consisted of Sunil B. Mathur, Harish Engineer (resigned September 15, 2017), Michael Pinto and Hari Sankaran (inducted in FY’2018). These are the individuals who are to be held accountable for not only the hikes provided to the senior management during a period when the performance precipitously fell (to the point at which the company defaulted on its financial obligations in FY’2019) but also failed to restructure the board for its non-performance.

Arun Saha. Credit: ilfsindia.com

It is no wonder that, with such poor board oversight, ILF&S has ventured down a path of mis-governance, resulting in the company defaulting on its financial obligations.

Andy Mukherjee, a Bloomberg columnist, called IL&FS the Indian equivalent of Lehman and said: “the rest of the board [excluding Ravi Parthasarathy] exists only for decorative purposes.”

Sucheta Dalal of MoneyLife, whose initial breaking stories cautioned the public on IL&FS, titled her latest article, ‘Sack IL&FS Board To Fix the Mess.’

While the IL&FS board needs to be completely overhauled and all the directors replaced, the mis-governance at this company shows the major shareholders in very poor light. LIC, ORIX Corporation, Abu Dhabi Investment Authority, HDFC, Central Bank of India and SBI all failed to do their fiduciary responsibility in managing their investment and turned a ‘Nelson’s eye’, despite having their nominee directors on the company.

Recent media reports indicate that LIC may now provide a Rs 4,000 crore lifeline to IL&FS. As the single largest shareholder in IL&FS, LIC failed its policyholders in its total lack of oversight of this company, and it now plans to further increase its exposure.

Post a board meeting held on September 15, 2018, it was announced that Sunil B. Mathur, a former chairman of LIC will replace Hemant Bhargava, the present managing director of LIC ,as chairman of the IL&FS board. It is more than a little ironic that an independent director, who has been on the board since January 2005 and oversaw the long reign of mismanagement, has been promoted as chairman.

The IL&FS episode shows the complete lack of corporate governance and mismanagement of a prominent company in the private sector, manned by professionals, owned by some of the blue chips of the world and having on its board supposedly eminent independent directors.

In reality, all was maya, all was an illusion.

Note: A questionnaire was emailed to the senior management of IL&FS but no reply or acknowledgement has been received.

Hemindra Hazari is an independent market analyst.

Rattled by PNB Scam, Modi Govt Orders Closure of 35 Overseas Branches of PSBs

The government will also examine and shut down all non-viable offshore operations of state banks to cut costs.

The government will also examine and shut down all non-viable offshore operations of state banks to cut costs.

The magnitude of the PNB fraud has left policymakers and industry worried about the stability of the Indian banking system. Credit: Reuters

New Delhi: Rattled by the over Rs 11,000 crore Punjab National Bank (PNB) scam, the Narendra Modi government has ordered the closing of 35 overseas branches of public sector banks (PSBs) as the latter’s role in the country’s banking fraud continues to stay under the spotlight.

Foreign branches of public sector banks like State Bank of India and Allahabad Bank provided loans to Nirav Modi-promoted companies against fraudulent Letters of Undertaking (LoUs) issued by the PNB’s Brady House branch in Mumbai.

The government has ordered the shutting down of 35 overseas branches over viability and profitability, TV channels reported citing the banking secretary.

Meanwhile, as many 69 international branches of PSU banks and their foreign offices, arms and JVs are being examined for closure, the reports added.

The government is looking to consolidated PSBs’ overseas operations in the same geography, the reports said.

The government is planning to close all the non-viable operations overseas for cost efficiency and synergy, the reports added. A committee headed by four-five bankers had recommended closing the international branches which are low on profitability.

Significantly, the magnitude of the PNB fraud has left policymakers and industry worried about the stability of the Indian banking system which is already saddled with bad loans.

The problem is more severe in PSBs which account for nearly 90% of total bad loans of the Indian banking system.

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The market value of PSBs has been falling ever since the Modi took charge in May 2014. The combined market cap of all listed PSBs is now less than that of one private lender, HDFC, despite the government unveiling reform measures like Indradhanush scheme and Insolvency and Bankruptcy Code (IBC).

The government had promised to infuse Rs 70,000 crore to help PSBs meet Basel III norms that kick in from March 2019. It also created a bank board bureau under former comptroller and auditor general (CAG) Vinod Rai to streamline appointment of top management in PSBs.

Last October, the government announced a Rs 2.11 lakh crore-recapitalisation plan for PSBs. The plan includes infusion of Rs 1.35 lakh crore through recapitalisation bonds, and the balance Rs 76,000 crore in the form of budgetary support.

The IBC’s impact is yet to be felt on the ground.

Even as reform measures are yet to show concrete results, mega PNB scam has thrown spotlight back on weaknesses in PSBs’ internal regulations.

Under the modus operandi adopted for PNB fraud, one junior level branch official unauthorisedly and fraudulently issued LoUs on behalf of some companies belonging to Nirav Modi Group for availing buyers’ credit from overseas branches of Indian Banks. Significantly, none of the transactions were routed through the Core Banking Solution system, thus avoiding early detection of fraudulent activity.

LoU is a bank guarantee and is issued for overseas import payments. while issuing LoU for a client, a bank agrees to repay the principal and interest on the client’s loan unconditionally. When an LoU is issued it involves an issuing bank, a receiving bank, an importer and a beneficiary entity overseas.