RCom creditors refuse to accept Anil Ambani's resignation
On the day Reliance Communications (RCom) announced the quarterly losses of Rs 30,163 crore, its chairman Anil Ambani resigned as the director of the insolvent telco, which effectively meant resignation from chairmanship as well. Prior to and along with Ambani, five other directors of RCom had also resigned from the telco, including Ryna Karani, Chhaya Virani, Manjari Kacker, Suresh Rangachar and Manikantan V.
The committee of creditors (CoC) has rejected the resignations saying these cannot be accepted. It asked the directors, including Ambani, to perform their duties until the insolvency proceedings are concluded. However, the resignation of the other director Manikantan V., who had put in his paper on October 4, was accepted and Viswanath Devaraja Rao replaced him as director and CFO (chief financial officer).
But why did CoC reject the resignation of Ambani and four other directors? Do they have the powers to do so and how? The company law experts say that working directors or wholetime directors can be removed or resign as per the terms of their appointment, which is subject to the approval of the board. But since RCom has been admitted for insolvency, the power of the board ceases to exist, and those powers are now vested with the (RP) resolution professional (Anish Nanavaty of Deloitte). Through RP, the CoC has the authority to accept or reject resignations of the wholetime directors.
However, that is not the case with independent directors who can resign at any time without needing a formal approval from the board or CoC.
"While the execution is done by RP, the ultimate powers are with CoC. In case of RCom, as the board has no powers, the CoC is the decision-making agency currently. The executive directors have a contractual obligation, and they simply cannot walk out of the company," says Manoj Kumar, partner and head (M&A and insolvency) at Delhi-based Corporate Professionals.
The reason why CoC rejected the resignation of RCom directors is because these directors are required to attend the meetings while insolvency proceedings are underway. While they are not allowed to vote in those meetings, they are supposed to provide clarifications when sought by the CoC. If these directors are no longer holding a title in the company, they cannot be invited in the CoC meetings. Once they demit the (director's) office, they can argue that they are no longer associated with the company. So it seems logical that CoC rejected the directors' intent to exit the telco.
"If there's a need for any clarification, the committee member may ask the directors. It's a basic understanding that they should cooperate in the process, and whenever they are called, they should come and attend the meeting. The general stand is that after the company is admitted to insolvency, none of the directors should be allowed to demit the office, otherwise the purpose of insolvency gets defeated. That is the stand which might have been taken by RCom's CoC. That is a legal position, beyond that nothing is written neither in the company law or nor in the IBC (insolvency and bankruptcy code)," says a company law consultant.
There have been similar instances in the past. In 2017, for instance, two of the insolvent Amtek Auto directors had resigned from the board, but they were brought back later to ensure that they continue to handle operations. RCom, which posted record net losses of Rs 30,163 crore in the second quarter of 2019/20 owing to provisioning for AGR (adjusted gross revenues) dues, is going through insolvency proceedings after it failed to find a buyer for its assets.
Anil Ambani's Bankrupt Reliance Naval Up 600% In Record Winning Streak
Reliance Naval and Engineering Ltd., part of the indebted Anil Ambani-led group, is enjoying a renaissance -- at least on India's stock market.
The penny stock hasn't declined for a single session since September 9 in a rally that has lifted it to Rs. 7.31 from its record-low close of 95 paise. That's the longest winning streak since the company's trading debut in 2009.
The revival of the shipyard is crucial for Anil Ambani, who is betting on cash flows from government defense contracts as Prime Minister Narendra Modi plans to spend billions of dollars on national security. Brokers say the stock's parabolic advance is likely driven by speculators, rather than by a change in the company's fortunes.
"This could be a purely speculative move by certain market operators with a vested interest as there is no change in fundamentals of the company, which is reeling under various troubles," said Arun Kejriwal, director at KRIS, an investment advisory firm in Mumbai. "It is quite easy to create such triggers on shares as prices are too low."
The company didn't immediately respond to calls and emails seeking comment.
Meanwhile, the bankruptcy tribunal is considering putting Reliance Naval in bankruptcy as lenders led by IDBI Bank Ltd. have decided not to restructure the company's debt. Even after the recent gains, the company's shares are down 50 per cent for the year.
PM Modi's Labour Reform Push May Remove Key Hurdle For Investors
Prime Minister Narendra Modi is finally attempting to overhaul India's most controversial labor laws to attract investment and make it easier to do business in a country where changing archaic rules is a challenge for any government.
After a long struggle, his government will push a crucial industrial relations bill allowing companies to hire workers on fixed-term contracts of any duration. The legislation, to be tabled in parliament's current winter session, does not seek to change stringent laws on hiring and firing, but allows the government the flexibility to relax the conditions through an executive order.
Unlike his last term in power, when PM Modi decided against bringing this labor reform bill to parliament, this time around he knows he has the numbers needed. The current changes are part of a process to streamline 44 different labor laws into four codes, another step to formalise the $2.7 trillion economy.
It comes on the back of several recent reforms announced by PM Modi's government to boost investment, including aggressive cuts in corporate taxes, relaxation of foreign investor rules and the biggest privatization drive in more than a decade.
"It's a positive signal of reforms agenda as well as a step toward making India attractive, in the context of the golden opportunity of manufacturing shift from China," said Gautam Chhaochharia, a strategist at UBS Group AG in Mumbai, adding over the medium term it might change the way companies hire and fire.
With the US-China trade dispute disrupting global supply chains, governments in the region are trying to lure investors with more business-friendly policies. In Indonesia, President Joko Widodo has promised to make changes to his country's difficult hire and fire laws by the end of the year. The amendments to the labor law would be limited to new hires in order to defuse opposition from the unions.
PM Modi's cabinet on Wednesday approved the Industrial Relations Code bill, which empowers the government to change the ceiling on employee count for a company to retrench workers without government approval. While the current upper threshold limit of 100 workers has not been changed, the bill allows the government to amend this number without seeking parliament's approval.
Even though successive governments have agreed that labor reforms are necessary to provide employment to the nearly 1 million job-seekers entering the market each month, the fears of a trade union backlash and partisan politics have been a deterrent to major reforms.
PM Modi's second term in office has been marked by an ability to push through controversial legislation, including repealing the constitutional autonomy of Kashmir through a majority in parliament. His party has been voted back to a second term in power with a bigger mandate and is closer to having a majority in the upper house of parliament.
Rigid laws on downsizing labor and cumbersome compliances currently force companies either to remain small, employ fewer workers or use capital-intensive methods of production. Restrictive labor regulation in the country is associated with a 35% increase in firms' labor costs, according to a research paper by University of Kent economists Amrit Amirapu and Michael Gechter of the Pennsylvania State University.
India ranks 103 out of 141 countries on the competitiveness of its labor market, according to the World Economic Forum.
Not everyone agrees that the proposed law will draw in investors.
There isn't much scientific evidence to show that a relaxation in labor laws will make much difference in terms of attracting foreign capital, said K.R. Shyam Sundar, a professor at the Xavier School of Management in Jamshedpur. "It will rather lead to uncertainty."
The government will also need to convince labor unions of the benefits of the proposed changes. The country's major trade unions plan to hold a general strike to protest the bill on Jan. 8.
GST notices from small-town tax officials scare financial services companies
Tax officers based in small towns have started sending notices to many financial services companies seeking information regarding these firms' organisational structures, revenues and Goods and Services Tax (GST) paid.
A spurt in such written queries has scared companies that fear an increase in their compliance burden. Businesses that have come under the radar of indirect tax offices are as distant as Kolhapur, Rajahmundry, Vijaywada, Mysore and Mangalore.
Companies under the GST structure are required to have a registration in every state. In case of any queries, the tax officials based in the city where a firm is registered send the notice.
However, small-town tax officers are hiding behind a specific section in the GST structure they have interpreted to understand that any indirect officer can send query notice to any transaction by any company from any part of the country.
"Provide brief note of organisational structure, details of turnover whether taxable, exempt, nil rated or non-GST turnover.. details of place of supply," read a written query sent to a financial services company in Mumbai.
Meanwhile, the industry trackers said that in many instances companies are complying and furnishing details to tax officials based in the capital of the same state, the report said.
"The compliance requirements in GST for service providers are significantly higher than the erstwhile service tax regime and the need to respond to inquiries from various parts of the country leads to additional pressures on businesses. A single authority should be empowered to enquire/investigate all GST issues of a service provider instead of multiple authorities, which will lead to efficiencies on both sides," MS Mani, partner, Deloitte India said.
In case of Andhra Pradesh, all companies operating in the state are registered in Hyderabad but are receiving notices from indirect tax officers from smaller towns in the state.
GDP growth rate to slowdown to 4.7% in Q2
Ratings agency ICRA expects India's growth rate to further slowdown to 4.7 per cent in second quarter ended September 30, 2019, amid subdued domestic demand and weak investment activity.
As a result, the agency forecasted that there would be a further deterioration in the growth rate of India's GDP and the gross value added (GVA) at basic prices in year-on-year terms to 4.7 per cent and 4.5 per cent, respectively, in Q2 FY20, from 5 per cent and 4.9 per cent, respectively, in Q1 FY20. This was attributed to weak momentum in industry, which dipped to 0.8 per cent from 2.7 per cent in the last quarter.
The agency, however, expects agriculture and service sector to remain steady this quarter, in line with the performance in Q1 FY20. While the agriculture sector grew at 2 per cent in June quarter this fiscal, service industry reported a robust growth of 6.9 per cent in Q1FY20.
Analysts at State Bank of India and Nomura Holdings have also lowered their growth forecasts for September quarter to between 4.2 per cent to 4.7 per cent. The government is expected to publish the GDP data for second quarter on November 29.
Aditi Nayar, Principal Economist, ICRA Ltd said: "With subdued domestic demand, investment activity, and non-oil merchandise exports weighing upon volume expansion, manufacturing growth is expected to decelerate further from the marginal 0.6 per cent in Q1 FY20."
"To some extent, lower raw material costs would bolster earnings, and may prevent manufacturing GVA from slipping into a YoY contraction in Q2 FY20," she added.
ICRA said that heavy rainfall in August-September 2019 along with a delayed withdrawal of the monsoon, constrained activities in the mining and construction sectors contributed to a lower demand for electricity from the agricultural and household sectors. In addition to the latter, muted industrial activity reduced the demand for electricity generation.
The rating firm expects yearly GVA growth of mining and quarrying, construction, and electricity, gas, water supply and other utilities to weaken in Q2 FY20 (to around -3 per cent, 3.2 per cent and 2.8 per cent, respectively), relative to Q1 FY20 (2.7 per cent, 5.7 per cent and 8.6 per cent, respectively).
"Various lead indicators of trade reveal a broad-based deterioration in Q2 FY20, which would weigh upon service sector growth in that quarter. However, a sharp pickup in spending by the Government of India (GoI) in Q2 FY20 after the presentation of the Union Budget, and the improved profitability metrics revealed by the earnings of some Banks would support service sector growth," added Nayar.
The pace of growth of commercial paper, corporate bonds and bank credit to large industries and services eased considerably to 6.7 per cent at September-end 2019 from 9.6 per cent at June-end 2019. However, the profitability metrics of the banking sector improved to an extent in Q2 FY20, led by lower provisioning and higher treasury gains, which should bolster the growth of financial, real estate and professional services. Moreover, the pace of expansion of the government's non-interest revenue expenditure increased to a considerable 25.1 per cent in Q2 FY20 from 8.7 per cent in Q1 FY20, which would support the performance of public administration, defence and other services, ICRA said.
"Based on the mixed trend in the output of kharif crops revealed by the first advance estimates of crop production, we expect the growth of agriculture, forestry and fishing to be pegged at 2 per cent for Q2 FY20, in line with the initial estimate for Q1 FY20. However, with the flooding in various parts of the country in August-September 2019, and the delayed withdrawal of the monsoon, excess moisture could lead to crop yields being lower than the initial estimates, in our view," Nayar said.