Kalorck Capital raises concerns over transparency of Jet resolution process

 Kalrock Capital, one of the two bidders participating in the revival of Jet Airways, has raised questions over the transparency of the process following lenders' decision to seek revised bids.

Kalrock has written to the lenders saying that the bid process should be completed transparently and quickly, pointing to the successful resolution of bankrupt Virgin Australia. A source familiar with resolution process said Kalrock's business plan had been ranked higher than Imperial Capital's plan and another extension in bid submission may have made it jittery.

On Monday, the committee of creditors (CoC) decided to give two bidders - Kalrock Capital and a consortium of Imperial Capital, FSTC and Big Charters a few additional days to revise plans and submit their final offers.

Earlier, lenders had asked the two parties to give their final offers in the previous week. While the two parties submitted their respective bids in July itself, the lenders sought revisions in the bids, after reviewing them, leading to a delay in the revival process. The bids have been evaluated by lenders and the consultancy, Alvarez & Marsal, is assisting lenders in the process.

According to a report on Moneycontrol website, Kalrock Capital, in its letter, has asked the lenders to consider its last offer as final and vote on the plan before end of this month, "failing which we will struggle to continue engaging meaningfully with the Hon'ble CoC in what is fast becoming an exercise being run on the terms that FSTC Consortium sets out – rather than the Hon'ble CoC."

Kalrock Capital did not respond to an emailed query. An e-mail sent to the resolution professional of Jet Airways seeking comments on the subject did not elicit any response. The State Bank of India, the lead lender, also did not respond to queries.

Time is running out for the beleaguered airline company as the corporate insolvency resolution process (CIRP) is supposed to end on October 21. Hence, the Resolution Professional (RP) has to present a revival plan to the National Company Law Tribunal (NCLT) for approval before the CIRP deadline ends, provided the plan first gets approved by the committee of creditors (CoC).

Sources said the bidders were seeking clarity from the Indian government on airport slots and traffic rights of Jet Airways. The airport slots and traffic rights of the airline company have been temporarily given to other airline companies. The resolution applicants have also raised concerns over the legal issues faced by the company.

The airline operated its last flight between Amritsar and Mumbai on April 17, 2019, after lenders turned down its demand for emergency funding. It has been under insolvency since June last with admitted claims of Rs 1,572.30 crore. The amount of claims received is to the tune of Rs 37,543 crore, of which financial creditors have claimed Rs 11,290 crore.

With record capital raising, 2018 was year of transformation for start-ups

If it were not for notices to pay angel tax and a less-than-favourable e-commerce policy, 2018 would have been a perfect year for Indian start-ups. “There has been record capital raising, bumper exits, and positive investor sentiment,” said Ashish Sharma, chief executive officer at venture debt provider Innoven Capital. Funding has been good, especially for late-stage category leaders such as Swiggy, OYO, Byju's, Paytm, and PolicyBazaar. Early-stage funding, however, has been tough, as is Series-B funding. Exits have also been good. "The Flipkart-Walmart deal showed that Indian start-ups can attract billions," said K Ganesh, serial entrepreneur and start-up investor. Digital products and services have been popular, not only in urban areas but also in rural markets, thanks to low bandwidth rates. There has been better distribution of funding as well, and more companies are looking for global expansion. "This reflects increasing ambition," said Sharma. Start-ups are also attracting more private equity and pension funds, besides big investors such as SoftBank, Alibaba and Tencent.
With record capital raising, 2018 was year of transformation for start-ups
With record capital raising, 2018 was year of transformation for start-upsWith record capital raising, 2018 was year of transformation for start-ups

Insolvency crisis: 2500 bankruptcy cases, but where are the judges?

India’s revamped bankruptcy process is in full swing and investors from Blackstone Group LP to Oaktree Capital Group LLC are salivating over an estimated $210 billion of stressed assets that are up for grabs. But the courtrooms handling the thousands of bankruptcies are lacking a key component: Judges.
Ten benches with a combined 26 judges and technical staff are hearing more than 2,500 insolvency cases, the latest official data show. Based on the workload a year ago, researchers estimated India needs about 80 benches over five years. That estimate is starting to look conservative, as tighter rules introduced by the banking regulator in February are poised to tip hordes of additional deadbeat borrowers into bankruptcy.

A streamlined bankruptcy process is crucial for Prime Minister Narendra Modi’s attempts to come to grips with a simmering banking crisis that’s sucking the energy out of India’s economy. Any failure to resolve the shortage of judges also has implications for large global investors who are lining up to chase bargains across industries ranging from steel to cement.
“The National Company Law Tribunal appears to be understaffed and ill-equipped to deal with the increasing volume,” said Punit Dutt Tyagi, Delhi-based executive partner at Lakshmikumaran & Sridharan Attorneys, referring to the court system set up to handle bankruptcies. “This situation is unlikely to get better with time.”
Oaktree is following India’s insolvency process and says may open a local office “under the right circumstances”
The NCLT was set up in June 2016 and gained full powers in January 2017, when India’s new bankruptcy laws took effect. Electrosteel Steels Ltd. last week became the first large defaulter to complete the revamped bankruptcy process, missing the initial 180-day deadline for resolution but just about meeting the 270-day outer limit.
On Feb. 12, the banking regulator ordered banks to take defaulters straight to the NCLT if they can’t come up with a repayment plan within six months. That will likely accelerate the buildup of cases in court, which stood at 9,073 on Jan. 31, including 2,511 instances of insolvency, 1,630 cases of merger and amalgamation, and 4,932 cases under other sections of the Companies Act, lawmakers were told last month.
Moreover, the bankruptcy process risks getting complicated by challenges to the court’s orders. Renaissance Steel, one of the companies that bid to buy Electrosteel under the bankruptcy process, plans to appeal the decision to award Electrosteel to Vedanta Ltd., the Economic Times reported this week, citing an official it didn’t identify.
The accumulation of bankruptcy cases means that it sometimes takes about six months just to get a new insolvency case admitted to court, said Shardul S. Shroff, executive chairman of Delhi-based law firm Shardul Amarchand Mangaldas & Co.
“These courts don’t have time to hear company law related matters as they say the insolvency cases are taking up all their time,” Shroff added. “In the absence of more judges it will be difficult for them to deal with the workload.”

Netherlands becoming FDI 'round tripping' haven like Mauritius, Singapore?

With capital becoming globalised, international investors look for the minutest of opportunities across the world to improve return on their funds. Such endeavours, many a time, fall into the grey zone where the difference between legal and illegal becomes very thin. Two such grey zone cases refer to ‘treaty shopping’ and ‘round tripping’.
To simplify, suppose there is an investor in country A, who wants to invest in country B. Instead of investing directly from country A to B, the investor tries to look for a country C which has a tax treaty with B.

The objective is to find a tax treaty that can be used to lower the tax payable on the income arising from that investment. Then the investor would route the investment to B through this third country C. This process of routing investment/capital flows through a third country only to take the benefits of tax treaties of that country is called treaty shopping.
An extreme case of treaty shopping arises when it is used by domestic investors. In these cases, which are referred to as round tripping, a domestic investor of country B would first take his/her funds to country C and establish a shell company there so as to acquire the legal identity as a resident of country C. Then the investor would bring the money back to country B disguised as foreign investment and thus be able to take advantage of the benefits available to investors from country C. By engaging in practices such as treaty shopping and round tripping, many investors and firms are able to escape paying their fair share of taxes, which results in loss of valuable tax revenue for governments.
The Centre for Budget and Governance Accountability (CBGA), a New Delhi-based think tank, recently did a study focusing on FDI inflows to India between 2004 and 2014. The study makes use of a dataset which identifies the real home country of investors for the investment inflows coming to India on the basis of where their headquarters are based. By comparing where the investor is actually based versus where the investment is reported to come from in the official data, this report identifies if a particular investment flow is coming directly from the investor’s home country or is being routed through a third country in order to exploit the tax benefits.
The following chart highlights that for the top ten countries reported in the official data as the largest source of FDI in India, how much of the investment is actually by the investors from that country, and how much is merely being routed through that country by investors based in some other country
The study shows that many countries like Mauritius, Singapore and Cyprus were being used to route capital flows from other countries.
In fact, Mauritius and Singapore, reported in the official statistics as the two largest source of FDI in India, along with Cyprus, have long been suspected to aid treaty shopping and round tripping. The above chart confirms this suspicion to a certain extent by providing a quantitative estimate of the extent of routed capital flows. In the case of Mauritius and Cyprus, almost all of the identified flows are in fact routed, while in the case of Singapore this touches 90%.
To understand the motivations behind an investor’s decision to route his/her investment through a particular country, the study analyses India’s double taxation avoidance agreements (DTAAs) with the above countries. DTAAs are essentially the regulations which determine that in case of a cross-border investment, which of the two countries will have taxing rights on the investment and at what rate.
The rationale behind this analysis of DTAAs was to find if investments coming to India from one country have favourable tax benefits compared to investments from other countries. The study found that investments coming from Mauritius, Singapore and Cyprus enjoyed ‘effective zero tax rate on capital gains’, which was not available to investments from other countries.
For example – according to the India-Mauritius DTAA signed in 1983, capital gains tax rights on the investments in India by Mauritius residents were granted to Mauritius. However, there are no capital gains taxes in Mauritius, effectively meaning a Mauritian investor didn’t have to pay any capital gains taxes on the investments made in India, leading to a zero effective capital gains tax. This ‘zero capital gains tax rate’ made Mauritius a popular choice for investors worldwide to route their investments into India. Investors from other countries would first send funds to Mauritius, take the identity as a Mauritian resident and then invest from Mauritius to India.
This process of routing investment made Mauritius, a country with a population of 13 lakh and annual GDP of $12 billion, the largest source of FDI in India with close to 35% share in the last 15 years, much ahead of other heavyweights like the US, UK and Japan.
The method became so popular that it earned its own nomenclature as ‘Mauritius route’, encompassing other jurisdictions like Singapore and Cyprus. Both these countries too had zero effective capital gains taxes and were also used to facilitate routed funds to India. The DTAAs with above countries made it beneficial not only for foreign investors to route funds through them; they even made it beneficial for the domestic investors to engage in round tripping.
Since this process of routing investment also had negative implications for the government tax revenue, the Indian government has been trying to amend the DTAAs with the above three countries. After years of negotiation, in 2016 India finally managed to amend the DTAAs with Mauritius, Singapore and Cyprus, and removed the zero effective tax rates for capital gains.
According to the amended treaty, the preferential tax benefits will be partially removed from FY’2017, and will be removed completely from FY’2019.
These amendments were widely reported in the media and many commentators described it as the end of treaty shopping and round tripping.
The rise of Netherlands
However, the CBGA study finds that apart from the above three countries, there are DTAAs with other countries which still offer a beneficial tax regime to its investors investing in India, such as Netherlands, Spain and France.
The DTAA with Netherlands has benefits similar to the earlier Mauritius treaty in relation to capital gains tax, after fulfilling certain conditions. The existence and continuation of these DTAAs opens up the possibility that these countries may turn out to be the new Mauritius route.
In fact, the latest official statistics for FDI inflows to India show that during the period January-December 2017, Netherlands has already reached number three in the list of largest FDI contributors to India, just behind Mauritius and Singapore. Industry reports are also indicating that international investors are looking at these countries to route future investments to India.
It took more than a decade and multiple rounds of negotiations with the above three countries to amend the DTAAs. It is hoped that the government of India will do well by proactively looking to plug loopholes in the other existing DTAAs, and avoid the creation of new Mauritius routes.
Suraj Jaiswal works at the Centre for Budget and Governance Accountability (CBGA), New Delhi. He can be reached at suraj@cbgaindia.org. Views expressed here are personal.