RBI’s initiatives, favourable tax framework to benefit Covid-hit borrowers

The Covid-19 decision framework offers nice flexibility concerning the formulation of the Resolution Plan.

Mehul Bheda, Partner and Kushal Parikh, Principal, at Dhruva Advisors LLP

While the nation is seeing no reduction within the surge of COVID-19 circumstances and the accompanying financial slowdown, the Reserve Bank of India (‘RBI’) has endeavoured to consolation the distressed borrowers with a collection of measures. The most up-to-date measure permits lending establishments to restructure their mortgage exposures to borrowers who’re experiencing monetary misery ensuing from the pandemic by implementing a Resolution Plan (‘RP’) for such borrowers.

The acceptance of the suggestions that had been made by the Okay V Kamath Committee has proved as a welcome step in direction of this. The committee beneficial introducing sector-specific thresholds for numerous monetary ratios (resembling whole debt to EBITDA, present ratio, debt service protection ratio, and so on.) in 26 totally different sectors, with the thresholds appearing as flooring or ceilings, as mandatory. Lending establishments at the moment are required to issue these thresholds into the preparation of the RP, bearing in mind the borrower’s pre-COVID-19 working and monetary efficiency.

The Covid-19 decision framework offers nice flexibility concerning the formulation of the RP. The RP might contain the restructuring of a debt, in a wide range of methods, resembling by (i) extending the residual tenors of loans, (ii) introducing cost moratoriums, (iii) changing parts of the debt into fairness or different marketable securities (resembling non-convertible debt securities), (iv) promoting exposures to different entities/traders, and so on. However, compromise settlements are usually not permitted underneath this framework, and compromise settlements will proceed to be ruled by the prevailing tips. It can also be anticipated that borrower accounts can be labeled into delicate, average, and extreme stress classes. Although the delicate and average classes might solely require simplified restructuring, circumstances involving extreme stress might require extra complete restructuring.

From an accounting perspective, underneath Ind-AS, any substantial adjustments to the phrases of a mortgage or curiosity rate (resembling an extension of the tenure or a discount within the rate of curiosity) requires the borrower to first derecognise the carrying quantity of the mortgage after which acknowledge the restructured debt at its honest worth. Such an accounting therapy might give rise to the popularity of a revenue within the revenue and loss account. Under the Income-Tax Act, 1961 (‘the IT Act’), such a acquire shouldn’t lead to any tax implications for the conventional computation of income-tax, however it might lead to a Minimum Alternate Tax (‘MAT’) outflow for corporations. This could also be particularly related for corporations that haven’t opted for the concessional company tax regime of 25.17 per cent, and which might be liable to MAT.

Furthermore, the conversion of debt into fairness/different securities might equally set off a MAT legal responsibility, within the occasion that the carrying worth of the debt is bigger than the honest worth of the fairness shares or different securities which might be issued. Therefore, any corporations endeavor debt restructuring should rigorously consider the tax implications of their restructuring earlier than deciding one of the best plan of action, together with the potential for opting into the concessional company tax regime.

In circumstances involving extreme stress, borrowers might also want to increase fairness funding from promoters/ traders as a part of the RP. In the occasion that any shares are issued by an unlisted firm at a worth exceeding the honest market worth decided for tax functions (‘Tax FMV’) or shares are issued by an organization (no matter whether or not listed or unlisted) at a big low cost to the Tax FMV some tax challenges might come up. Any corporations conducting fundraising could be effectively suggested to be certain that such tax valuation parameters are usually not breached.

The framework additionally permits lenders to promote their exposures to different entities/traders. It can be attention-grabbing to see if and the way lenders make the most of this feature with regard to pressured accounts ensuing from COVID-19. From the draft tips on sale of mortgage exposures (commonplace in addition to non-performing) and securitisation of ordinary property that the RBI printed earlier this yr, it’s clear that the RBI needs to promote the secondary market. Given the wants of the hour, it’s crucial that the RBI implements these reforms as quickly as doable.

From an income-tax perspective, a really strong and a pleasant regime to facilitate this already exists, since sure securitisation autos take pleasure in a pass-through standing underneath the IT Act, eliminating a number of layers of taxation by levying taxes instantly within the fingers of traders.

On the entire, the steps which have been taken by the RBI are each well timed and really welcome, and, along with the favourable tax regime that exists, they need to facilitate the decision of the monetary stresses which might be being suffered by borrowers.

(The authors had been assisted by Radhika Bihani, Senior Associate, Dhruva Advisors LLP. Their views are their very own.)

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