Bankruptcy Code
The IBC gets a facelift, but will it defeat the entire process?
The President of India gave his assent to an Ordinance to make amendments to the Insolvency & Bankruptcy Code (IBC). While the bill could have been passed in the Winter Session starting on December 15th, the banking resolution is obviously a race against time. What are the reasons for this amendment and how will it make the process better? Above all, will it amount to throwing the baby with the bathwater?
Good in intent…
The principal amendment proposed in the ordinance is to prevent defaulting promoters from bidding for the assets of their own company. The move is truly justified. The government feared that the same promoters who had defaulted on the loans would bid for their own assets at a much lower rate. Effectively, the promoter gets back control of the company without really getting the stamp of a defaulter and also gets the benefit of a big haircut. There were some instances where there was an obvious anattempt by the promoters to buy back their own company at lower prices. As one government official put it, this amounts to a double whammy. On the one hand, these promotershave taken no risk in the project by overstating the cost of the project. Secondly, they will get back their own assets at a much larger haircut. That would be unfair to banks. From that perspective, this is justified on the part of the government and the banks…
But, a tad too stringent
The big worry is that the actual provisions off the IBCamendment area lot more stringent. For example, willful defaulters are straightaway barred from bidding, which is good. But even non-willful defaulters who are guilty of overstating project costs or of misallocating funds are going to be barred. The problem is that this will make the banks once again too cautious about whom to sell these assets to. Banks are quite certain that any lapse from their side will mean that the ED and theVigilance Department will be hot on their heels. This is likely to make bankers err on the side of caution, which is not a great situation to have especially when you are attempting something of such large proportions.
Throwing the baby with the…
Our only worry is that these stringent regulations will almost amount to throwing the baby with the bathwater. As it is, most of these assets are not going to be easily liquidated at short notice. The banks will be depending on the support of these promoters and their close groups to take over these assets. In fact, the new IBC will keep defaulters even from bidding for other business assets in the same industry. That shuts a major market for banks to find buyers. IBC is a brave experiment. It will be a shame if it gets lost in a maze of regulations!
Infosys Buyback
What you need to know about the November 30th buyback
The stock price of Infosys has been on an uptrend in the month of November and is up by nearly 10%. The immediate trigger appears to be the buyback of shares which opens on 30th November. Here is what you need to know about the Infosys buyback and how it impacts your holdings of Infosys, if any.
All about the buyback…
The actual record date for the buyback was November 01st. Therefore, any shares of Infosys bought after October 30th will not be eligible for the buyback offer. Only shares that were held by shareholders on the record date will be eligible for the buyback. The company is planning a total buyback off Rs.13,000 crore. But what matters for retail investors is that there is a 15% special quota for retail investors in the buyback offer. Retail investors have been defined as those investors holding less than shares worth Rs.200,000 on the record date. At the current price of Infosys, all shareholders holding up to 200 shares on the record date will be classified as retail investors. Here you need to grasp the concept of entitlement ratio and the acceptance ratio. With 15% reservation the retail investors will be assured of an entitlement ratio of approximately 59% that is 118 shares out of 200 shares tendered. The actual acceptance ratio will depend on the actual tendering. The more the shares are tendered in the buyback, the lesser the acceptance ratio is likely to be and vice versa.
The price impact…
There are a few basic things you need to understand. Firstly, those holding more than 200 shares will have to sell off the remaining shares to qualify for the retail quota. These shares that you sell may result in short term capital losses or even short-term capital gains where the tax at 15% will have to be paid. All these factors need to be considered before taking the decision. For those who are holding greater number of shares, the performance of the stock price post the buyback will have a major bearing on their effective returns on the Infosys stock.
What should retail investors do?
As we have seen in previous cases of buybacks like Mphasis, the Acceptance ratio was as high as 100% as less people tendered these shares. That is likely to be the case with Infosys also. So, if you are a retail investor and tender yourqualifying shares in the buyback offer, then you are very likely to get a 100% acceptance at the price of Rs.1150/-. That is a great price point and the stock may have a real effort to give that kind of returns in the normal course. The outlook for the large Indian IT companies is not exactly very flattering and you will get better opportunities in IT in the coming months. You must make the best of the buyback and use the proceeds in a more plausible story going ahead!
Trade Deficit
The deficit number could be getting out of control…
The total trade deficit for the first 7 months of the current fiscal year came in at a whopping $88 billion. What is worrying for the Indian economy is that this is a full 60% higher than the trade deficit reported for the corresponding period last year. There are 3 key implications of this sharply higher trade deficit. Here is how…
Pressure on ratings…
If India is currently celebrating the upgrade by Moody’s it also needs to be cautious about letting its trade deficit slip beyond a point. We have seen a sharp 60% rises in trade deficit and that has been largely accounted for by oil and gold imports. Oil bill is likely to keep rising as the global price of Brent Crude will be kept at an elevated level at least till the Aramco IPO is through. At $60/bbl, the Indian economy is already under stress and any level above $65/bbl will make the trade deficit to rise more rapidly. Interestingly, despite the rising trade deficit the INR continues to be strong on the back of positive FDI flows. Also, domestic investors are compensating for any selling by FIIs. The strong rupee, in turn, is having a negative impact on the exports and in the month of October, the exports have actually fallen by -1.2%. Remember, while Moody’s has upgraded, S&P has chosen to maintain status quo on deficit concerns. That is something that the Indian policy makers will have to be cautious about in the future.
Service sector slippages…
For a very long time, the weakness in the trade account was compensated for by the strength on the services account. Around 2 years back the surplus in India’s services account almost compensated for the deficit in the trade account. That was a comfortable neutral situation to have. In recent months the trade deficit has almost risen to 4 times the service surplus. That is leaving a huge net deficit to be negotiated. Service sectorexports inIndia was largely accounted for by software exports. With the growth in software exports almost stagnant and lower tech spending globally, the services surplus is narrowing. That is a major concern!
Eye on the forex reserves…
The one thing to keep in mind is the level of the forex reserves. Through most of last year, the forex chest was good to cover 13 months trade imports. That comfort level has now come down to just about 9-10 months. India’s forex reserves are not exactly growing as the RBI is using a chunk of the reserves to defend the currency from bouts of volatility. If the current trade in the imports continues then India’s forex cover may fall to less than 9 months which may make the Indian economy vulnerable in comparison with other BRICS economies, which are mainly exporters of commodities. That is something to really watch out for!
