POLICY POINTERS

ARCs get cabinet approval to deal with NPAs of banks and FIs

The Cabinet on May 07, 2002 approved a legislation to set up asset reconstruction companies (ARCs) to deal with non performing assets of banks and financial institutions which amount to Rs.1,00,000 crore.

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Bill, 2002 was approved by the Cabinet and is likely to be introduced during the current session. The Bill aims at making financial assets including loans, advances and other receivables of banks and FIs easily marketable.

Wilful defaulters cannot get bank loans for 5 yrs

The RBI has said that promoters of companies identified as "wilful defaulters" cannot get funds for five years from banks, financial institutions and state-owned finance companies for any new venture. 

With this the central bank has widened the definition of wilful defaulters to include those who have deployed loan funds in avenues other than the stated end use of the loans.

Notably, financial institutions while entering into loan agreements with companies, in which they have significant stake, have to incorporate a clause barring the companies from appointing a wilful defaulter on their board. Under the revised definition, a wilful defaulter is one :

where either the unit has defaulted in meeting its loan obligations despite having the capacity to honour the obligations or;

the unit has defaulted in its obligation and has not used funds for the purpose for which finance was availed but diverted it, or;

the unit has defaulted in obligations and has siphoned off funds and the money is not available in the form of other assets.

All wilful defaulters with outstanding of over Rs. 25 lakh as on May 30, 2002 will attract penal actions. But in future the penalties will apply to all wilful defaulters, irrespective of the outstanding amount. 

The definition of "diversion of funds" has also been expanded to include instance where short-term funds have been used for long-term purposes, or funds have been used to create assets other than those for which loan was sanctioned. The term diversion would also apply to those companies which have transferred funds to subsidiaries or group companies. 

Besides transferring funds and acquiring assets, even investment in other companies by way of acquiring equities and debt investment in other companies, without permission from lenders, would also be considered as diversion of funds. And finally, if there is a shortfall in deployment of funds in relation to the amounts disbursed, and the difference is not accounted for, the defaulting borrower would be construed as a wilful defaulter.

The circular is based on the recommendations of a group headed by Shri S.S. Kohli, Chairman, Punjab National Bank. The committee was constituted by RBI following concerns expressed over the persistence of wilful defaults in the 8th Report of the Parliament's Standing Committee on Finance on FIs. The group submitted its report in November 2001. 

RBI has urged banks to initiate legal action against wilful defaulters for recovery of loans and foreclosure of security. In addition, they have also been asked to file criminal complaints against wilful defaulters. 

Cos to get depreciation benefits on townships

In a judgement that will have a bearing on all corporates with townships around industrial complexes, the Income-Tax Appellate Tribunal (ITAT), Mumbai has held that the Jamshedpur township was eligible for all tax reliefs under the Income-Tax Act available to manufacturing processes. The township could not be considered to be an entity separate from the industrial complex. 

The ruling says the township is entitled to investment allowance, depreciation allowance and additional depreciation allowance. The order removes a tax burden of nearly Rs.100 crore for TISCO, "Steel works and the township formed an integral part of the whole industrial complex, one of which cannot exist without the other." 

The ITAT ruling has far reaching implications not only for TISCO, but also for a large number of corporates which have giant industrial complexes which include not just the factory but also office premises and residential complexes of the persons who work in the mills and factories. 

In the case of TISCO, assessing officer of IT department declined to allow depreciation claims on plant and machinery installed in the township on the ground that such plant and machinery was not being used for manufacturing purposes. According to the officer, depreciation allowance and double shift allowances could only be claimed on plant and machinery and not for expenses incurred on township.

Cos asked to give details of Loan to SSIs

The Department of Company Affairs (DCA) has issued a notification amending a section of the Companies Act which would mandate companies to provide additional disclosures in regard to loans and interest amount to be paid to small scale industrial (SSI) undertakings. 

The notification will make suitable alternation in Schedule-VI of the Act to provide for additional disclosures in Part-I form of balance sheets with immediate effect. Accordingly, companies are required to include in their balance sheets a paragraph underlining names of SSI undertakings to whom the company owes any sum together with interest outstanding for more than 30 days. 

"The notification is intended to protect the interests of the small investors by mandating the companies to disclose minute details of its liabilities and assets in its balance sheet to help investors take correct decisions".

The notification also amends the Companies (Fees on Applications) Rules 1999 requiring hotel companies to pay fees based on its authorised share capital for seeking exemption. For application made by a hotel company to the central government under sub section (4) of Section 211 of the Companies Act, 1956, amounts of fees to be paid by hotel companies having an authorised share capital of less than Rs.25 lakh has been fixed at Rs.2,500 for hotel companies with authorised share capital of Rs.25 lakh or more but less than Rs.5 crore at Rs.5,000 and for those hotel companies with paid up share capital of Rs.5 crore or more at Rs.10,000.