Linking strategy

PSU bad bank, reforms for asset rejig cos hang fire

Mumbai: Banks have emerged from the mess of bad debts with provisions made from profits and new capital. However, the dead weight of these old accounts continues to be on their books, as the National Asset Reconstruction Company (NARC) or “bad bank” announced in last year’s budget has yet to take off and some proposed reforms for Private Asset Reconstruction Companies (ARC) are still pending.
New buyers of bad debts are also needed as the collection rate decreases and more bad debts may appear in the future. The recovery rate of bad debts, which has increased from 26% before the bankruptcy to approximately 39% from FY21, is declining again thanks to delays in the resolution of bad debts. In addition, by reducing the initial cash requirement from 15% to 2.5%, an RBI panel had proposed major reforms for ARCs. In particular, they allow CRAs to submit resolution plans for bankrupt companies.
“The next wave of NPAs will come from the struggling MSME and retail sectors after the available restructuring windows close. For the transfer of these small loans to ARCs, there is an urgent need to broaden the investor base with the inclusion of high net worth individuals, businesses, family offices, trusts to subscribe to ARC security receipts, as recommended by the committee appointed by the RBI recently,” said Hari Hara Mishra, Director, UV ARC.
According to Edelweiss ARC MD RK Bansal, it is necessary to remove the Alternative Minimum Tax (Section 115JB) which is currently levied on a company whose application under the provisions of the IBC has been admitted by NCLT, until such time as the company’s outlook will improve. taking into account the resolution plan submitted to the NCLT. “This would allow the full carrying forward of book losses and unabsorbed depreciation to be carried forward for years to come, making the acquisition of distressed businesses more lucrative,” Bansal said. Buyers of insolvent businesses face tax requirements if the price they pay is less than fair market value or list price. Since speculators can raise the prices of even insolvent companies with zero net worth, the market price does not reflect the underlying value.
“Authorities also need to focus on additional challenges that affect the majority of corporate insolvency resolution processes (CIRPs), such as lack of liquidity leading to undue delays. There is also a lack of clarity on the position of the interim financier on the information available to him and on the clear guidelines for lending institutions in this space.In addition, a framework for the expedited elimination of disputes for the timely completion of the CIRP process is also the need of the hour,” said Kundan Shahi, Founder and CEO of LegalPay.
Another hurdle for a resolution CRA is the 1% withholding tax (TDS) on the sale of real estate under Section 194-IA. “The CRA is exercising its rights under the Sarfaesi Act as a secured lender and is only appropriating the proceeds to the extent of its rights. Any excess amount realized beyond the contribution is returned to the borrower. Therefore, TDS on the sale of goods under Sarfaesi can be excluded from the scope of Article 194-IA,” Bansal said.