Both a stock split and bonus are tax-neutral but have different capital gains tax implications on sale.
Generally, investments in equities are made for the potential capital gain. Despite this investment in equities is being considered risker than fixed income instruments. However, apart from capital gains, equity instruments can confer other benefits to investors such as bonuses, stock splits and share buybacks. Let us examine the significance of these for investors and the tax consequences of each such corporate action.
Bonus shares are nothing but shares issued free of cost to the shareholders of a company, by capitalising a part of its reserves. Following a bonus issue, though the number of total shares increase, the proportional ownership of shareholders does not change.
Also, the share price should fall in proportion to the bonus issue, thereby making no difference to the personal wealth of the holder. However, more often than not, handing out of bonus is perceived to be a positive sign. It means the company is able to service its larger equity. Considering the strong signal given out by the company, a consequent demand push for the shares causes the price to move up.
Since no money is paid to acquire bonus shares, these have to be valued at nil cost while making calculations for capital gains. The originally acquired shares will continue to be valued at the price paid at the time of acquisition. Since the market price of the original shares fall on account of the bonus, there may arise an opportunity to book a notional loss on the original shares.
STOCK SPLITS
Stock splits are a relatively new phenomenon in the Indian context. Recently, companies such as ONGC, Infosys, and HDFC, among others, have announced a stock split. It is important that investors understand why companies may split their shares and how this is different from a bonus issue. In a stock split, the capital of the company remains the same, whereas in a bonus issue the capital increases and the reserves decrease. However, in both actions, the net worth of the company remains unaffected.
A typical example is a two-for-one stock split. Say, a company announces a two-for-one stock split in a month. That means a month from that date, the company’s shares will start trading at half the price from the previous day. Consequently, you will own twice the number of shares that you originally owned and the company, in turn, will have twice the number of shares outstanding. Consider the adjoining table where the price of 100 shares costs Rs 3000. After the stock split, while the number of shares increases to 200, the price also comes down to Rs 1500 .
The question that arises is if there is no difference to the wealth of the investor, then why does a company announce a stock split? Well, the primary reason is to infuse additional liquidity into the shares, by making these more affordable. The shares only appear to be cheaper; it makes no difference whether you buy one share for Rs 3,000 or two for Rs 1,500 each.
As far as the tax implications for stock splits are concerned, there aren’t any. A stock split, like a bonus issue, is tax-neutral. However, when the shares are sold, the capital gains tax implications are different that what is applicable for bonus issues. Here, the original cost of the shares also has to be reduced. For instance, in the above example, if the cost of 100 shares at Rs 150 per share was Rs 1,50,000, the cost of 200 shares after the split would be reduced to Rs 75 per share, thereby keeping the total cost constant at Rs 1,50,000.
SHARE BUYBACKS
These are a comparatively new phenomenon. Reliance, Siemens and Infosys are some examples of companies which have done so. A buyback is essentially a financial tool in the hands of the company, that affords flexibility in the capital structure. A buyback allows the company to sustain a higher debt-equity ratio. It is also a tool to defend against possible takeovers. Generally, companies do this when they perceive their own shares to be undervalued or when they have surplus cash for which there is no ready capital investment need.
Stock buybacks also prevent dilution of earnings.
In other words, a buyback program enhances the earnings per share. Conversely, it can prevent an earnings per share (EPS) dilution that may be caused by exercises of stock option grants and so on.
A buyback also serves as a substitute for dividend payments. This brings us to the issue of tax implications of a buyback. An important consideration is whether the amount paid on buyback is dividend or consideration for transfer of shares. If considered a dividend, the same will not be taxable in the hands of the investors. Also, to what extent, if at all, can the amount paid on buyback be taken as dividend? Is the entire amount paid dividend or is it only the premium paid over the face value?
According to a Supreme Court judgement, (Anarkali Sarabhai v CIT, 1997, 90Taxman509 ), the principle that redemption of shares by the company which issued the shares (in this case, preference shares) is tantamount to sale of shares by the shareholders to the company.
The Finance Act, 1999, reiterated this stand. Now, if a company purchases its own shares, the difference between the money received by the shareholder and the cost of acquisition will be deemed as capital gains.
Further, this will not be treated as dividend, since the definition of dividend does not include payments made by the company on purchase of its own shares.
Saturday, June 4, 2011
Correction in markets is an opportunity for investors
The annual results season of the financial year 2011 has come to an end, and the markets are weak due to profit booking by domestic as well as foreign investors . The correction in the markets is an opportunity for investors to take fresh positions. On the other hand, you should analyse your portfolio and make the necessary adjustments based on the results.
Here are some strategies you can adopt in the current market conditions:
For short-term investors
The objective of a shortterm investor is to take advantage of market volatility and make money through trading. Since the markets are quite volatile, there are ample opportunities for short-term investors.
However, it is important to stay cautious and make a thorough analysis before taking positions. You should also maintain a tight stoploss level to cut losses in case a position turns negative .
For medium-term investors
The objective of mediumterm investors is to make money in the equity markets over a period of around 12 months. Usually, mediumterm investors base their decisions on positive developments in a particular stock or sector.
Mediumterm investors do not get too many rallies or correction phases during their investment tenure. Therefore, it is important for them to identify the right entry and exit levels.
These investors should also maintain a tight stoploss level for their positions in order to cut down losses if an investment does not fructify.
For long-term investors
Long-term investors look at taking advantage of capital gains as a result of business growth. The usual strategy of long-term investors is 'buy and forget' their investments. In fact, some investors do not even track their stocks for long. It is important for long-term investors to do a through analysis about the company before making an investment and keep track of the performances of their stocks.
Long-term investors have sufficient time to accumulate stocks at regular intervals during market correction phases. You should take the necessary steps to make the required adjustments to your portfolio based on the macroeconomic conditions and annual results. Longterm investors who cannot track the markets and related developments regularly would be better off investing in equity-based mutual funds.
Here are some tips for investors:
Invest risk capital only: Investments in the stock markets are risky by nature. Therefore, it is important for investors to invest their risk capital only in the markets .
Realistic expectations:
It is important to have a realistic returns expectation from investments in equity or equity-based instruments. Investors looking for very high returns often invest in high-risk options and often end up losing their hard-earned money.
Analysis:
It's always advisable to spend some time on understanding the markets and on making an analysis of the stocks you plan to buy. Reading reviews increases your understanding of the overall situation and helps in taking the right decisions.
Diversify:
You should diversify your equity portfolio by investing in stocks of different sectors with a good outlook. Investors should always evaluate the investments at regular intervals and keep shuffling the portfolio based on market conditions.
Balance portfolio:
You should balance your overall portfolio carefully based on your risk appetite. It is important to strike a balance between various classes of investments such as insurance, debt instruments and equity instruments. Investors should never get carried away by market waves and allocate a higher percentage of their total portfolio to equitybased instruments. Any decision to change the allocation should be taken after weighing the pros and cons carefully.
Here are some strategies you can adopt in the current market conditions:
For short-term investors
The objective of a shortterm investor is to take advantage of market volatility and make money through trading. Since the markets are quite volatile, there are ample opportunities for short-term investors.
However, it is important to stay cautious and make a thorough analysis before taking positions. You should also maintain a tight stoploss level to cut losses in case a position turns negative .
For medium-term investors
The objective of mediumterm investors is to make money in the equity markets over a period of around 12 months. Usually, mediumterm investors base their decisions on positive developments in a particular stock or sector.
Mediumterm investors do not get too many rallies or correction phases during their investment tenure. Therefore, it is important for them to identify the right entry and exit levels.
These investors should also maintain a tight stoploss level for their positions in order to cut down losses if an investment does not fructify.
For long-term investors
Long-term investors look at taking advantage of capital gains as a result of business growth. The usual strategy of long-term investors is 'buy and forget' their investments. In fact, some investors do not even track their stocks for long. It is important for long-term investors to do a through analysis about the company before making an investment and keep track of the performances of their stocks.
Long-term investors have sufficient time to accumulate stocks at regular intervals during market correction phases. You should take the necessary steps to make the required adjustments to your portfolio based on the macroeconomic conditions and annual results. Longterm investors who cannot track the markets and related developments regularly would be better off investing in equity-based mutual funds.
Here are some tips for investors:
Invest risk capital only: Investments in the stock markets are risky by nature. Therefore, it is important for investors to invest their risk capital only in the markets .
Realistic expectations:
It is important to have a realistic returns expectation from investments in equity or equity-based instruments. Investors looking for very high returns often invest in high-risk options and often end up losing their hard-earned money.
Analysis:
It's always advisable to spend some time on understanding the markets and on making an analysis of the stocks you plan to buy. Reading reviews increases your understanding of the overall situation and helps in taking the right decisions.
Diversify:
You should diversify your equity portfolio by investing in stocks of different sectors with a good outlook. Investors should always evaluate the investments at regular intervals and keep shuffling the portfolio based on market conditions.
Balance portfolio:
You should balance your overall portfolio carefully based on your risk appetite. It is important to strike a balance between various classes of investments such as insurance, debt instruments and equity instruments. Investors should never get carried away by market waves and allocate a higher percentage of their total portfolio to equitybased instruments. Any decision to change the allocation should be taken after weighing the pros and cons carefully.
Stock valuations look attractive to long-term investors who can bear volatility
As the annual results of most of the companies have already been announced and factored in, the markets will look at the onset of the monsoons and global economic factors for directions. The Met Department has predicted a normal monsoon, but on the global economic front there are indeed many minefields . How well the global central banks navigate through these minefields will determine the direction of the domestic stocks markets in the near future.
Negative news all around
Apart from South America, no other continent seems to be free from critical macroeconomic imbalances. The global factors clouding over the stock markets are the US economy's grow derailing, political crisis in the MENA region, calibrated slowdown in India and China, decline in GDP in flood-hit Australia, and the crisis of defaults in the Euro region.
The Euro zone is facing rating downgrades for its member countries. The one that is occupying the maximum mind-space of analysts is Greece. There is intense debate among analysts on Greece defaulting on its debts. The question that is now asked around is not 'if ' Greece will default on its debt but 'when' it will default. Credit rating agencies have downgraded Greece's bond ratings deeper last Wednesday. With Greece's debt outstanding touching USD 450 billion, it brought back memories of Lehman Brothers' collapse. Lehman Brothers' outstanding when they went bankrupt was to the tune of USD 600 billion.
European central bankers have a very difficult job on their hands. It they let Greece default it could trigger a chain reaction. All European banks that have lent to Greece will start defaulting, and this could end in another 2008-like situation . On the other hand, if they continue to bail out Greece, it could trigger protests in richer Euro nations due to wrongful use of taxpayers' money.
Domestic issues
The domestic markets also have to face a wall of worries . Inflation is showing no signs of decline. Rate hikes have impacted growth but not inflation. Corporate results show that growth is going to slowdown in the current year and earnings would be not matching up to last year's which were pretty good.
Companies are struggling with high input costs and rising interest rates. The investment sentiment had been severely dampened with the Reserve Bank of India (RBI) hiking interest rates by almost 400 basis percentage points. This has pulled down economic growth to the slowest pace in the last five quarters at 7.8 percent in the fourth quarter of the financial year 2011.
However, investors must understand that the decline in GDP numbers is actually a good thing. It's RBI's aim to cool the economy down to bring down inflation. So, a positive way of looking at these numbers would be to say the RBI's monetary policy measures are taking effect. Consequently, India along with other emerging economies, is somewhere in the middle or racing towards the end of the monetary tightening cycle.
On the other hand, if you look at the US, it will only begin to 'tighten' by letting the second phase of the quantitative easing (QE2) end in June, and then slowly start the rate hike cycle.
So, there is some glimmer of hope that economic macros could limp back to normal in a year's time for economies such as India. Further, the stock valuations here look very attractive to long-term investors who can bear some volatility along the way. These factors contribute to emerging markets outperforming other markets relatively in the near to intermediate terms. However, till the macroeconomic factors in other parts of the globe play out, it will still be uncertain times for the stock markets here.
Negative news all around
Apart from South America, no other continent seems to be free from critical macroeconomic imbalances. The global factors clouding over the stock markets are the US economy's grow derailing, political crisis in the MENA region, calibrated slowdown in India and China, decline in GDP in flood-hit Australia, and the crisis of defaults in the Euro region.
The Euro zone is facing rating downgrades for its member countries. The one that is occupying the maximum mind-space of analysts is Greece. There is intense debate among analysts on Greece defaulting on its debts. The question that is now asked around is not 'if ' Greece will default on its debt but 'when' it will default. Credit rating agencies have downgraded Greece's bond ratings deeper last Wednesday. With Greece's debt outstanding touching USD 450 billion, it brought back memories of Lehman Brothers' collapse. Lehman Brothers' outstanding when they went bankrupt was to the tune of USD 600 billion.
European central bankers have a very difficult job on their hands. It they let Greece default it could trigger a chain reaction. All European banks that have lent to Greece will start defaulting, and this could end in another 2008-like situation . On the other hand, if they continue to bail out Greece, it could trigger protests in richer Euro nations due to wrongful use of taxpayers' money.
Domestic issues
The domestic markets also have to face a wall of worries . Inflation is showing no signs of decline. Rate hikes have impacted growth but not inflation. Corporate results show that growth is going to slowdown in the current year and earnings would be not matching up to last year's which were pretty good.
Companies are struggling with high input costs and rising interest rates. The investment sentiment had been severely dampened with the Reserve Bank of India (RBI) hiking interest rates by almost 400 basis percentage points. This has pulled down economic growth to the slowest pace in the last five quarters at 7.8 percent in the fourth quarter of the financial year 2011.
However, investors must understand that the decline in GDP numbers is actually a good thing. It's RBI's aim to cool the economy down to bring down inflation. So, a positive way of looking at these numbers would be to say the RBI's monetary policy measures are taking effect. Consequently, India along with other emerging economies, is somewhere in the middle or racing towards the end of the monetary tightening cycle.
On the other hand, if you look at the US, it will only begin to 'tighten' by letting the second phase of the quantitative easing (QE2) end in June, and then slowly start the rate hike cycle.
So, there is some glimmer of hope that economic macros could limp back to normal in a year's time for economies such as India. Further, the stock valuations here look very attractive to long-term investors who can bear some volatility along the way. These factors contribute to emerging markets outperforming other markets relatively in the near to intermediate terms. However, till the macroeconomic factors in other parts of the globe play out, it will still be uncertain times for the stock markets here.
Friday, June 3, 2011
IDR redemption allowed only if liquidity is low: SEBI
SEBI has introduced a new condition for redeeming Indian Depository Receipt (IDR) into underlying equity shares.
The only IDR listed on NSE and BSE is that of Standard Chartered Bank. For every equity share of StanChart, 10 IDRs were issued. Standard Chartered red herring prospectus has stated that IDRs could not be redeemed into underlying shares before the expiry of one-year period from the date of issue of the IDRs.
Fungibility issues
The SEBI regulations and the RBI circular state that automatic fungibility of IDRs is not permitted. Therefore, fungibility of IDRs into the underlying shares would be permitted only after the expiry of one year period from the date of issue of IDRs and subsequent to obtaining RBI approval on a case-by-case basis.
Further, two-way fungibility, i.e., the ability to purchase existing shares on the London Stock Exchange and/or the Hong Kong Stock Exchange and deposit them into the IDR programme is not currently permitted. The RBI circular, also said that Indian residents were required to comply with FEMA at the time of redemption/ conversion of IDRs into underlying shares.
In the absence of two-way fungibility, SEBI said that allowing redemption freely could result in reduction of number of IDRs listed, thereby impacting its liquidity in the domestic market. Hence in consultation with RBI, SEBI decided that after the completion of one year from the date of issuance of IDRs, redemption of the IDRs shall be permitted only if the IDRs are infrequently traded on the stock exchange(s) in India.
Change in terms
“The arbitrage opportunity of converting the IDR into underlying and selling the same is effectively debarred,” said Mr Arun Kejriwal Founder, KRIS Research. “This amounts to a change in the terms of the issue of the IDR at the eleventh hour and coming from the regulator, this is a body blow to investors and not in the interest of future IDR offerings in this country. Probably Standard Chartered IDR would remain the one and the only IDR ever listed on Indian bourses,” he added.
Interestingly, the FII holding in Standard Chartered IDR has nearly doubled from 38 per cent on the day of listing to nearly 70 per cent in March. Retail participation has been flat through the last one year close to eight per cent.
IDRs shall be deemed to be “infrequently traded” if the annualised trading turnover in IDRs during the six calendar months immediately preceding the month of redemption is less than five percent of the listed IDRs, said SEBI.
On Trigger
SEBI further said that the issuer company shall test the frequency of trading of IDRs on a half yearly basis ending on June and December of every year. When the IDRs are considered “infrequently traded” on the above basis, it shall be the trigger event for redemption, said SEBI
The issuer company is expected to make an announcement in an English and Hindi language newspapers with wide circulation about the trigger of the redemption event, time period for submission of application and the approach for processing the applications as well as notify the stock exchanges. Such announcement shall be made within seven days of closure of the half year ending on which the liquidity criteria is tested.
IDR holders may then submit their application to the domestic depository for redemption of IDRs within a period of 30 days from the date of public announcement and redemption of IDRs shall be completed within a period of thirty days from the date of receipt of application for redemption.
After redemption, the domestic depository shall notify the revised shareholding pattern of the issuer company to the concerned stock exchanges within seven days of completion of redemption.
SEBI has directed all stock exchanges, depositories, merchant bankers, registrar to issues and custodians to comply with the circular with immediate effect.
The only IDR listed on NSE and BSE is that of Standard Chartered Bank. For every equity share of StanChart, 10 IDRs were issued. Standard Chartered red herring prospectus has stated that IDRs could not be redeemed into underlying shares before the expiry of one-year period from the date of issue of the IDRs.
Fungibility issues
The SEBI regulations and the RBI circular state that automatic fungibility of IDRs is not permitted. Therefore, fungibility of IDRs into the underlying shares would be permitted only after the expiry of one year period from the date of issue of IDRs and subsequent to obtaining RBI approval on a case-by-case basis.
Further, two-way fungibility, i.e., the ability to purchase existing shares on the London Stock Exchange and/or the Hong Kong Stock Exchange and deposit them into the IDR programme is not currently permitted. The RBI circular, also said that Indian residents were required to comply with FEMA at the time of redemption/ conversion of IDRs into underlying shares.
In the absence of two-way fungibility, SEBI said that allowing redemption freely could result in reduction of number of IDRs listed, thereby impacting its liquidity in the domestic market. Hence in consultation with RBI, SEBI decided that after the completion of one year from the date of issuance of IDRs, redemption of the IDRs shall be permitted only if the IDRs are infrequently traded on the stock exchange(s) in India.
Change in terms
“The arbitrage opportunity of converting the IDR into underlying and selling the same is effectively debarred,” said Mr Arun Kejriwal Founder, KRIS Research. “This amounts to a change in the terms of the issue of the IDR at the eleventh hour and coming from the regulator, this is a body blow to investors and not in the interest of future IDR offerings in this country. Probably Standard Chartered IDR would remain the one and the only IDR ever listed on Indian bourses,” he added.
Interestingly, the FII holding in Standard Chartered IDR has nearly doubled from 38 per cent on the day of listing to nearly 70 per cent in March. Retail participation has been flat through the last one year close to eight per cent.
IDRs shall be deemed to be “infrequently traded” if the annualised trading turnover in IDRs during the six calendar months immediately preceding the month of redemption is less than five percent of the listed IDRs, said SEBI.
On Trigger
SEBI further said that the issuer company shall test the frequency of trading of IDRs on a half yearly basis ending on June and December of every year. When the IDRs are considered “infrequently traded” on the above basis, it shall be the trigger event for redemption, said SEBI
The issuer company is expected to make an announcement in an English and Hindi language newspapers with wide circulation about the trigger of the redemption event, time period for submission of application and the approach for processing the applications as well as notify the stock exchanges. Such announcement shall be made within seven days of closure of the half year ending on which the liquidity criteria is tested.
IDR holders may then submit their application to the domestic depository for redemption of IDRs within a period of 30 days from the date of public announcement and redemption of IDRs shall be completed within a period of thirty days from the date of receipt of application for redemption.
After redemption, the domestic depository shall notify the revised shareholding pattern of the issuer company to the concerned stock exchanges within seven days of completion of redemption.
SEBI has directed all stock exchanges, depositories, merchant bankers, registrar to issues and custodians to comply with the circular with immediate effect.
Sebi road map for illiquid IDR redemption
In its attempts to make Indian Depository Receipts (IDRs) more investor- friendly, the Securities and Exchange Board of India (Sebi) has put in place a framework that will allow such investors to redeem the instrument if it becomes illiquid. Till now, the norms were silent on the recourse available to investors if there was no trading in IDRs of any particular entity.
IDRs are shares issued by foreign companies and are listed on the Indian exchanges. It basically gives Indian investors an opportunity to own a share of a foreign company. Currently, Standard Chartered Plc, which is listed on London Stock Exchange and Hong Kong Stock Exchange, is the only entity that listed its IDR in India. The global banking major came out with its IDR issue in May 2010 and was listed on the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) in June 2010.
Investors, however, can redeem IDRs only after one year of its issuance and if it is not frequently traded on the stock exchanges. “After the completion of one year from the date of issuance of IDRs, redemption of IDRs shall be permitted only if IDRs are infrequently traded on the stock exchange(s) in India,” said the Sebi circular.
According to Sebi norms, IDRs will be termed “infrequently traded” if the annualised trading turnover during the six calendar months immediately preceding the month of redemption is less than five per cent of the listed IDRs. The issuer company will have to check the frequency of trading on a half yearly basis ending on June and December of every year.
The circular further explains that the IDR holder can ask the domestic depository to redeem shares and transfer the money to his account. Since the underlying shares of an IDR are listed on overseas exchanges, the transaction will be subject to the laws related to foreign exchange.
“A holder of IDRs may transfer IDRs or may ask the Domestic Depository to redeem these IDRs, subject to the provisions of the Foreign Exchange Management Act, 1999 and other laws for the time being in force,” it says.
The recourse assumes significance also because of the fact that the IDRs are not fungible into the underlying equity shares of the issuing company. A circular dated July 22, 2009, issued by the Reserve Bank of India (RBI) clearly says that “automatic fungibility of IDRs is not permitted”.
If IDRs are found to be “infrequently traded”, then the issuer company will have to make a public announcement and investors will have to submit their application within 30 days. The redemption process will have to be completed within 30 days of the receipt of the application.
IDRs are shares issued by foreign companies and are listed on the Indian exchanges. It basically gives Indian investors an opportunity to own a share of a foreign company. Currently, Standard Chartered Plc, which is listed on London Stock Exchange and Hong Kong Stock Exchange, is the only entity that listed its IDR in India. The global banking major came out with its IDR issue in May 2010 and was listed on the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) in June 2010.
Investors, however, can redeem IDRs only after one year of its issuance and if it is not frequently traded on the stock exchanges. “After the completion of one year from the date of issuance of IDRs, redemption of IDRs shall be permitted only if IDRs are infrequently traded on the stock exchange(s) in India,” said the Sebi circular.
According to Sebi norms, IDRs will be termed “infrequently traded” if the annualised trading turnover during the six calendar months immediately preceding the month of redemption is less than five per cent of the listed IDRs. The issuer company will have to check the frequency of trading on a half yearly basis ending on June and December of every year.
The circular further explains that the IDR holder can ask the domestic depository to redeem shares and transfer the money to his account. Since the underlying shares of an IDR are listed on overseas exchanges, the transaction will be subject to the laws related to foreign exchange.
“A holder of IDRs may transfer IDRs or may ask the Domestic Depository to redeem these IDRs, subject to the provisions of the Foreign Exchange Management Act, 1999 and other laws for the time being in force,” it says.
The recourse assumes significance also because of the fact that the IDRs are not fungible into the underlying equity shares of the issuing company. A circular dated July 22, 2009, issued by the Reserve Bank of India (RBI) clearly says that “automatic fungibility of IDRs is not permitted”.
If IDRs are found to be “infrequently traded”, then the issuer company will have to make a public announcement and investors will have to submit their application within 30 days. The redemption process will have to be completed within 30 days of the receipt of the application.
Banks, MFIs reach debt recast deal
MFI promoters agree to pledge 100% shareholding; banks refuse to give fresh loans to the sector.
The promoters of microfinance institutions (MFIs) have agreed to pledge their entire shareholding with banks that have given them loans. This will be done as part of a debt restructuring programme.
The banks were earlier demanding personal guarantees, to which the promoters objected. The impasse was broken at a recent meeting between banks and MFIs.
Since the debt restructuring will now go through, about Rs 6,400 crore loans have been prevented from becoming non-performing assets (NPAs).
The Reserve Bank of India (RBI), which had allowed banks to recast loans of the troubled MFI sector without classifying them as NPAs, had given June 6 as the deadline for finalising the debt restructuring package.
“We have decided to waive the personal guarantee clause. MFIs now have to pledge 100 per cent promoters’ shares to banks,” a senior official of the Corporate Debt Restructuring (CDR) cell told Business Standard.
Banks, however, refused to give fresh loans to MFIs which the latter had sought for working capital needs.
The CDR cell admitted loans worth Rs 6,473 crore involving five microfinance institutions. A repayment period of six years is proposed, excluding a one-year moratorium. The rate of interest on restructured loans is 12 per cent.
Five MFIs — Asmitha Microfin, Future Financial Services, Share Microfin, Spandana Sphoorty Financial and Trident Microfin — which opted for the restructuring, had agreed, said senior bankers and top officials of these companies.
“We have agreed to pledge our shareholding. I’m more or less certain that the debt restructuring will happen now. It is a positive thing because if we are able to run our businesses profitably, we have the option of pre-paying the debt and getting our shares released. Our personal wealth is not at risk,” said a top official of a Hyderabad-based MFI.
Analysts say the deal suits MFIs because if their business is not running profitably, it will not be easy for banks to sell their shares.
“If personal guarantee was given, banks could have sold properties and assets of the promoters to recover their dues,” said an analyst with a domestic brokerage.
“There will be no fresh lending as of now. Bankers told us that it was difficult to convince their credit committees at this point in time to increase exposure to the sector,” said a top official of Spandana Sphoorty Financial.
But MFI officials are hopeful that bank loans will be available for business outside Andhra Pradesh. The Andhra Pradesh government recently banned weekly collections, which hit collection of dues by MFIs.
With MFIs agreeing to the new terms, the CDR cell is expected to send a letter of approval to the microfinance companies by Monday.
“We have not got the letter of approval yet. We are hoping to get it by Monday as that is the last day for approving the package. Once the letter of approval comes, it will take 90-120 days to implement the programme,” said an official of a microfinance company.
The promoters of microfinance institutions (MFIs) have agreed to pledge their entire shareholding with banks that have given them loans. This will be done as part of a debt restructuring programme.
The banks were earlier demanding personal guarantees, to which the promoters objected. The impasse was broken at a recent meeting between banks and MFIs.
Since the debt restructuring will now go through, about Rs 6,400 crore loans have been prevented from becoming non-performing assets (NPAs).
The Reserve Bank of India (RBI), which had allowed banks to recast loans of the troubled MFI sector without classifying them as NPAs, had given June 6 as the deadline for finalising the debt restructuring package.
“We have decided to waive the personal guarantee clause. MFIs now have to pledge 100 per cent promoters’ shares to banks,” a senior official of the Corporate Debt Restructuring (CDR) cell told Business Standard.
Banks, however, refused to give fresh loans to MFIs which the latter had sought for working capital needs.
The CDR cell admitted loans worth Rs 6,473 crore involving five microfinance institutions. A repayment period of six years is proposed, excluding a one-year moratorium. The rate of interest on restructured loans is 12 per cent.
Five MFIs — Asmitha Microfin, Future Financial Services, Share Microfin, Spandana Sphoorty Financial and Trident Microfin — which opted for the restructuring, had agreed, said senior bankers and top officials of these companies.
“We have agreed to pledge our shareholding. I’m more or less certain that the debt restructuring will happen now. It is a positive thing because if we are able to run our businesses profitably, we have the option of pre-paying the debt and getting our shares released. Our personal wealth is not at risk,” said a top official of a Hyderabad-based MFI.
Analysts say the deal suits MFIs because if their business is not running profitably, it will not be easy for banks to sell their shares.
“If personal guarantee was given, banks could have sold properties and assets of the promoters to recover their dues,” said an analyst with a domestic brokerage.
“There will be no fresh lending as of now. Bankers told us that it was difficult to convince their credit committees at this point in time to increase exposure to the sector,” said a top official of Spandana Sphoorty Financial.
But MFI officials are hopeful that bank loans will be available for business outside Andhra Pradesh. The Andhra Pradesh government recently banned weekly collections, which hit collection of dues by MFIs.
With MFIs agreeing to the new terms, the CDR cell is expected to send a letter of approval to the microfinance companies by Monday.
“We have not got the letter of approval yet. We are hoping to get it by Monday as that is the last day for approving the package. Once the letter of approval comes, it will take 90-120 days to implement the programme,” said an official of a microfinance company.
Bearish sensex closes at 18,376 as Reliance Industries disappoints
BANGALORE: The BSE Sensex fell for the second day on Friday amid muted world markets, weighed down by energy major Reliance Industries, which disappointed investors at its shareholders' meeting by not giving enough information on key issues.
The benchmark 30-share BSE index closed down 0.6%, or 117.7 points, at 18,376.48, with 22 components in the red. The index rose nearly 1% earlier. It is up 0.6% for the week. The outlook for the market next week is cautious as a government panel may decide on raising fuel prices on June 9, traders said. "The market will continue to trade in a narrow range in the next week," Mital said. "Fuel price decision will be one of the hindrances next week."
A panel of Indian ministers may meet on June 9 to discuss raising prices of diesel, kerosene and cooking gas, an oil ministry source said last week. The benchmark BSE index is down 10.4% so far this year on foreign fund outflows, with $1.16 billion being pulled out in May alone, as investors worried rising inflation and high interest rates would hamper growth in Asia's third-largest economy.
Reliance Communications rebounded 3.8% to close at Rs 93.35, after falling 4.3% in the previous session. A unit of Reliance Comm and three group officials are among those charged by the CBI in a huge telecoms licensing probe, but a local court after market hours on Thursday rejected a plea by an individual petitioner to include the company's chairman, Anil Ambani, as an accused in the case. India's top lender State Bank of India ended 0.9% lower at Rs 2,312.50. Citigroup cut its target price on the stock and lowered its fiscal 2012 earnings estimates, citing moderation in loan growth and margins. Smaller rival ICICI dipped 0.1%, after losing 3.3% in the previous session.
The benchmark 30-share BSE index closed down 0.6%, or 117.7 points, at 18,376.48, with 22 components in the red. The index rose nearly 1% earlier. It is up 0.6% for the week. The outlook for the market next week is cautious as a government panel may decide on raising fuel prices on June 9, traders said. "The market will continue to trade in a narrow range in the next week," Mital said. "Fuel price decision will be one of the hindrances next week."
A panel of Indian ministers may meet on June 9 to discuss raising prices of diesel, kerosene and cooking gas, an oil ministry source said last week. The benchmark BSE index is down 10.4% so far this year on foreign fund outflows, with $1.16 billion being pulled out in May alone, as investors worried rising inflation and high interest rates would hamper growth in Asia's third-largest economy.
Reliance Communications rebounded 3.8% to close at Rs 93.35, after falling 4.3% in the previous session. A unit of Reliance Comm and three group officials are among those charged by the CBI in a huge telecoms licensing probe, but a local court after market hours on Thursday rejected a plea by an individual petitioner to include the company's chairman, Anil Ambani, as an accused in the case. India's top lender State Bank of India ended 0.9% lower at Rs 2,312.50. Citigroup cut its target price on the stock and lowered its fiscal 2012 earnings estimates, citing moderation in loan growth and margins. Smaller rival ICICI dipped 0.1%, after losing 3.3% in the previous session.
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