Banks to work on Koutons' debt recast proposal

BS Reporters / Mumbai March 26, 2011, 1:00 IST Apparel maker and retailer Koutons Retail’s proposal to recast its debt had been admitted by the corporate debt restructuring (CDR) cell, said banking officials in the know. SBI Capital Markets (SBI Caps) has been given the mandate to draft the recast scheme. Koutons is the second such financially-troubled major retailer to have done so, after Vishal Retail, which was admitted for CDR this year.  According to television reports, the company has nearly Rs 660 crore debt on its books, of which Rs 460 crore will go for CDR and Rs 200 crore will be non-CDR. The company is believed to have taken debt at 13-13.5 per cent interest rate. The banks with loan exposure to the Delhi-based retailer include Indian Overseas Bank, Allahabad Bank, IDBI Bank, ICICI Bank and Axis Bank. Its shares on Friday hit the upper circuit of 10 per cent following the reports. They closed at Rs 33.15 on the Bombay Stock Exchange.  Last year, there were reports of default on loan repayment, increase in pledging of promoters’ shares and suspension of the company’s fund-based facilities by rating company Icra. Following the reports, the company’s share price took a hit. Since September, its share price has fallen 87.7 per cent to Rs 33.15 from Rs 269. However, banking executives said Koutons’ account had not slipped to the sub-standard category. Details of the CDR package will be worked out over the next few days. SBI Caps has already prepared a rough package for the company, which includes debt repayment over nine years, including a two-year moratorium, according to the television reports. Executives at Koutons could not be contacted for comments. Koutons’ admission for CDR follows the company’s 18-month efforts to improve declining cash flows and stem losses, which arose due to inventory pile-ups and aggressive expansion. The company’s financial woes came to the fore when it posted a net loss of Rs 317.1 crore and total revenue of Rs 109.8 crore in third quarter of 201-11. Promoters, which own 32 per cent in the company, have pledged 97.99 per cent with the lenders. The company had closed more than 200 stores over the past 18 months and was in the process of closing 50-60 more to improve cash flows, Koutons Chief Financial Officer Ajay Mahajan had said last year.  “We are profitable enough to take care of our interest burden. Yet, there is some scope for efficiencies and savings in interest costs, as rates are relatively high at 14 per cent. We will work towards that,’’ Mahajan had said.

Forcible recovery of vehicles illegal

Source ;TNN, Mar 27, 2011, 04.57am IST

The National Commission and the Supreme Court have repeatedly held that the rule of law must prevail and it is illegal to use musclemen to forcibly take repossession of a vehicle when the borrower or the hire purchaser fails to pay the installments. 

Yet banks and finance companies continue to adopt strong-arm tactics to forcibly seize vehicles from borrowers who default in making payment. 

In order to try and circumvent the law, they have introduced a clause in the agreement that the vehicle can be repossessed for default in repayment of the loan amount. 

What is the validity of this clause? 

This interesting issue was decided on February 11 by the bench of Justice Batta and Vinay Kumar of the National Commission in the case of IndusInd Bank v/s Birendra Kumar Sinha.

Case Study: Sinha had taken a loan from IndusInd Bank for purchase of a Tata truck. The loan was required to be repaid in 48 installments of Rs 27,500 each. In July 2007 the vehicle was forcibly repossessed by the bank. When Sinha asked for its release, he was asked to pay the entire outstanding loan.

Sinha filed a complaint before the Dhanbad district forum. During the pendency of the proceedings under the Consumer Protection Act, the bank initiated arbitration proceedings without the permission of the consumer forum, despite Sinha protesting against it. The bank also sold the vehicle in auction.

The district forum upheld the complaint, observing that repossession of the vehicle was illegal as Sinha had already paid Rs 1,23,000 and a balance of merely Rs 43,495 was outstanding. The bank's appeal to the Jharkhand State Commission was dismissed, upholding the order of the district forum.

Defaulters dodge loan recovery law summons with High Court stay

Source : B L :S. Bridget Leena :Chennai, Jan. 3


 Has the SARFAESI Act, arguably the most important means of recovery of bad loans, been losing its teeth in recent times?


The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002, acted as a powerful weapon for bankers to recover loans by auctioning the bad assets of the borrower in three months' time.


In comparison, the Debt Recovery Tribunal (DRT) and Lok Adalats take years to recover these loans.


According to Reserve Bank of India data, there has been a steady fall in the amount of bad loans recovered under SARFAESI Act, as a per cent of the total amount of bad loans involved under this channel — a trend seen between 2008-09 and 2009-10.



Stay from High Court


Mr A.K. Bansal, Executive Director, Indian Overseas Bank, said that big borrowers with outstandings of over Rs 10 crore, stall the bank's efforts in taking possession of assets under SARFAESI Act, by getting a stay from the High Court or the Debt Recovery Tribunal.

A senior General Manager of a public sector bank said that nine out of 10 borrowers, who have been issued notices under SARFAESI, take banks to DRT to buy time.



No civil court (with the exception of the High Court) has judiciary powers when it comes to SARFAESI Act (Section 34).



Under the Securitisation Act, banks should be able to recover their bad debt in three months' time (with a notice period of 60 days). However, due to a large number of cases pending with the judiciary, it takes close to a year or more before banks can take possession of the property for auction, said the General Manager.



Currently, Indian Bank has issued SARFAESI notices to about 10,000 bad loans amounting to Rs 1,000 crore.



Sluggish property market


Adding to the banks' woes is the sluggish nature of the property market in the last two years, due to which banks were unable to recover the loan amount from such auctions.


One and half years ago, a major bank could not find bidders at an auction for a property in Thyagaraja Nagar (T.Nagar), in the heart of Chennai, for Rs 1.5 crore. Today, the same property has been sold for over Rs 4 crore.

R B I bars ARCs from converting debt into equity

Source :live mint : Aveek Datta, aveek.d@livemint.com: Mar 28 2011. 1:00 AM IST



The regulator has told Arcil, India’s largest ARC, to
 refrain from such conversion till further notice.





India’s banking regulator has prohibited asset reconstruction companies (ARCs) from converting part of the stressed loans they buy from banks into equity, three people with direct knowledge of the development said.





It is common practice for some ARCs to convert a small portion of so-called non-performing assets (NPAs) acquired from banks into equity. This equity can be sold in the market when the affected company turns around.


A few months ago, the Reserve Bank of India (RBI) had written to the Asset Reconstruction Co. of India Ltd (Arcil), India’s largest ARC, asking it to furnish details of such conversions of debt into equity. 


The regulator has told Arcil to refrain from such conversions till further notice, a person familiar with the matter said. He did not want to be identified since the regulator’s note is not in the public domain.


S. Khasnobis, Arcil’s managing director and chief executive officer, confirmed that Arcil was not currently in a position to convert any debt into equity in assets it was trying to revive.
“The assets that we acquire from banks suffer from very high debt levels. We write off this debt to improve the valuation of the company. A portion of the debt is converted into equity, which can be sold in the market to recover a part of the debt forgone,” Khasnobis said explaining the need for ARCs to take equity participation in distressed assets.


Khasnobis termed conversion of debt into equity as a financial restructuring mechanism that could improve recovery from assets gone bad.


Arcil holds stakes in the range of 8.5-10% in several companies whose debt it has bought from banks. Though the letter was addressed to Arcil, the directive is applicable to other companies as well.


An email sent to RBI on Friday did not elicit any response.


There are 13 ARCs operational in India. The oldest among them, Arcil, began operations in 2003 and continues to be the market leader.


ARCs buy stressed assets from banks that want to get them off their balance sheets at a discount and make money by turning them around.


Till March 2010, ARCs had made investments of around Rs.2,000 crore in buying stressed assets. Typically, they buy stressed loans at 15-20% of their face value.


The heads of two other ARCs also confirmed that RBI has asked them not to take stakes in assets they are reviving.


Birendra Kumar, managing director and chief executive officer ofInternational Asset Reconstruction Co. Pvt. Ltd, said though the new contracts his company is signing to acquire assets include a provision for converting a portion of the debt into equity at a later stage, the provision would be subject to RBI’s approval.


“We are discussing the matter with them (RBI),” Kumar said.


Another person familiar with the development said in the absence of the possibility of such a conversion, some ARCs may prefer stripping assets and selling them or negotiating directly with the borrowers for a settlement. He, too, did not want to be named.


P.H. Ravikumar, managing director and chief executive of Invent Assets Securitisation and Reconstruction Pvt. Ltd, agreed that the bar on converting debt into equity could make it difficult for ARCs to revive distressed assets by infusing more capital.


Though ARCs could not pinpoint the exact reason behind RBI’s move, they said it might be to address concerns of the promoters of such distressed companies losing ownership to them.
Khasnobis stated Arcil’s intention wasn’t to take ownership of the company and conversion of debt to equity would just help them recover a part of the debt that they were forgoing.
“Otherwise, the benefit of the debt restructuring is captured only in the hands of the owners of the company, without any benefit to the debt holders who have taken losses,” Khasnobis said.


According to some other companies in the sector, however, prohibition on conversion of debt into equity would not have much impact on the way ARCs go about their business.


Ramesh Venkat, director of Reliance Asset Reconstruction Co. Ltd, a part of Anil Ambani-owned Reliance Capital Ltd, said there weren’t too many instances where an ARC would need to convert debt into equity.


Unless a distressed asset is being liquidated, an ARC could participate in the upside of a potential revival through other means, Venkat said.


“Infusion of capital by way of debt can sometimes serve as a motivation for a company to return to financial health quickly, as debt extended by ARCs is more expensive than bank debt,” Venkat said. “As for the ARC, they can charge a performance-linked success fee to participate in the upside.”


He added that in many cases, there was often a need for equity infusion into a company being rehabilitated, but that mostly came from sources such as private equity funds focused on distressed assets.

Giving up bank licence doesn't end creditor's liability: HC

Source:HT Correspondent, Hindustan Times:Mumbai, March 28, 2011


Surrendering licence by a bank does not end the creditor’s liability,
 ruled the Bombay high court last week while dismissing a petition filed 
by a borrower of Commerzbank AG.


 The borrower, Isibars Ltd, a Navi Mumbai-based 
company, had availed some credit facilities from the German bank. The bank had 
moved the Debt Recovery Tribunal for recovery of about Rs14.35 crore.

In January 2002, the bank surrendered its banking licence and stopped banking operations in India. Taking advantage of this development, Isibars Ltd had moved an application seeking dismissal of the proceeding pending against it contending Commerzbank AG was no more a bank as defined in the Debts Due to Banks and Financial Institution Act, 1993.

 The tribunal, however, dismissed the plea in March 2003 after which Isibars Ltd had moved the high court. The high court, too, dismissed the plea stating the litigant can certainly take advantage of a new cause of action.

“No doubt, the court can take into account subsequent events,” the division bench of justice Ranjana Desai and justice RG Ketkar said, adding, “but…that has to be done on equitable considerations with a view to promoting substantial justice.”

There is no dispute that when Commerzbank AG filed the original application, the Debt Recovery Tribunal had jurisdiction to entertain it and the bank had substantive right to claim the amount. “It cannot be denied to it (the bank) because it has surrendered its licence during the pendency of the original plea,” the bench said. “Surrender of the licence does not end the company’s liability.”