Money & Banking

‘Remove MAT for troubled firms under resolution’

K Ram Kumar | | Updated on: Jan 27, 2022

Edelweiss ARC seeks level playing field vis-a-vis other stressed asset investors

A company admitted by the National Company Law Tribunal (NCLT) for resolution should be exempt from Minimum Alternate Tax untill it sees a turnaround. This, and Goods and Services Tax (GST) concessions are among the expectations of asset reconstruction companies (ARCs) from the upcoming Union Budget, according to Raj Kumar Bansal, MD and CEO, Edelweiss ARC.

In an interaction with BusinessLine, Bansal, who oversees assets under management aggregating about ₹43,000 crore, also wanted the Reserve Bank of India (RBI) to allow banks to provide credit lines to ARCs and expand the definition of qualified buyers — those who can invest in security receipts — to include high-networth individuals (HNIs), corporates and non-banking financial companies (NBFCs).

Excerpts from the interview:

What are your expectations from the Union Budget for ARCs? 

In terms of tax concessions, we would look forward to a change in the Minimum Alternate Tax (MAT) - Section 115JB of the Income Tax Act. We recommend discontinuation of MAT for a company whose application under the Insolvency and Bankruptcy Code (IBC) has been admitted by the National Company Law Tribunal (NCLT), until its prospects turn around… This would carry forward the entire brought-forward book losses and unabsorbed depreciation for setoff in future years, thereby making the acquisition of distressed companies more lucrative.

Secondly, GST (18 per cent) should not be imposed on fees and incentives paid by trusts to ARC for reconstruction and resolution, as it reduces the amount available for redemption of security receipts (SRs), thereby reducing the overall recovery for banks.

Also, GST on sale of plant and machinery and/or scrap under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI) should not apply to trusts as they are not traders by design.

Additionally, uniform stamp duty should be applicable on assignment agreements. Though there are guidelines, some states are yet to implement them. Further, the registration of charges needs simplification.

Given that banks seem inclined to recover via alternative (non-ARC) channels, how can the Government or RBI keep the ARC channel attractive? 

The Government or RBI should bring in measures that ensure the smooth functioning of ARCs, based on the recommendations of the RBI’s ARC committee. This could later translate into effective working of ARCs and make them an attractive channel for resolution of stressed assets. Firstly, our recommendation would be to reduce the 15 per cent upfront payment to 2.5 per cent to acquire stressed assets. This would be along the lines of the norms provided for Alternative Investment Funds (AIFs) to raise funds against bad loans.

Secondly, the definition of qualified buyers (QB) under SARFAESI can be extended to include more potential investors such as HNIs, corporates and NBFCs. 

Thirdly, the RBI may consider allowing or clarifying to banks to provide credit lines or funding to ARCs, like NBFCs. This will enable ARCs to overcome the problem of lumpy or uncertain cash flows. Changes in provisioning under ‘income recognition, asset classification and provisioning’ norms for valuation of security receipts would motivate banks to sell more assets to ARCs. 

Also, ARCs should have a level playing field in terms of allocating funds vis-a-vis other stressed asset investors like AIFs, when it comes to minimum investment, the universe of qualified investors, taxation, etc. 

What other fiscal and regulatory changes are needed to ensure that stressed asset sale and purchase is a win-win for the seller (lenders) and buyers (ARCs)? 

The exemption of assignment agreement from registration is the first thing to be done to make the exchange beneficial for both seller and buyer, which are the banks and ARCs. The costs outside the process such as GST and state governments levying stamp duty and registration fee, despite the Central government amending the Indian Stamp Act to waive it, work as an obstacle to a seamless exchange between the seller and buyer. 

Listing of security receipts and broadening the space to bring in more potential investors will help both parties… The list of qualified buyers ) mostly includes banks, which are generally the sellers of NPA. So, it is really difficult to see them investing in SRs, and that is why the expansion of the definition of QBs is important. ARCs should also have a level playing field with NARCL [National ARC Ltd].

How do you view the establishment of the NARCL and India Debt Resolution Company Ltd (IDRCL)?

IDRCL, along with NARCL, is similar to an ARC and AMC. The benefit, compared to ARCs, would be that NARCL can hold large aggregated debt. As IDRCL or NARCL needs to set up the entire infrastructure to carry out the resolution of assets, it can choose to either offer the assets for sale to other ARCs or give them for management on an agency basis. Such a move would make it attractive for ARCs at an appropriate price level.

Will Edelweiss raise funds to buy assets from IDRCL?

The operational approach of IDRCL is still not very clear. If IDRCL offers the assets for sale, Edelweiss ARC would evaluate and look to acquire the assets, either partnering with other qualified buyers or, if the environment is conducive, can raise funds through an AIF structure.

Published on January 27, 2022
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