mARCH 2012 58 Legal Focus www.lawyer-monthly.com

Banking and Finance India

All eyes are on India at the moment, as the country is experiencing rapid economic growth and increased investment. To find out how this is affecting the banking and finance industry in India, Lawyer Monthly speaks to Shishir Mehta, partner and co-head of the Banking and Finance practice group at Khaitan & Co, one of the country’s oldest law firms.

Q

Since the economic crisis, there has been a wave of stricter regulation around the globe, due to come into effect in the coming months. which regulations will affect your jurisdiction and what are opinions on it?

On 30 December 2011, the RBI released a set of proposed guidelines based on BASEL III, the latest global regulatory standard of capital adequacy, stress testing and market liquidity risk decided upon by the Basel Committee on Banking Supervision (the “BCBS”, of which India is a member) in the wake of the global economic meltdown, with the intention of preventing it from recurring. The draft regulations relate to raising minimum capital adequacy ratios and capital conservation buffers, enhancing risk coverage and propose a mandatory leverage ratio. The optimism and progressiveness of the Indian banking sector may be gauged from the fact that the RBI’s draft regulations, if implemented, will impose even more

stringent requirements for Indian banks than the actual BASEL III guidelines. The RBI regulations prescribe minimum common equity capitals that are at least 1 percent higher than the BASEL III requirements; and the implementation period for the new regime is by 2017 for Indian banks, as opposed to 2019 worldwide under the BASEL III. However, it is still expected that the Indian banks will have a smooth transition to the new framework by the shorter time frame, given that they are already operating comfortably above minimal statutory requirements. The draft guidelines have also been highly commended by reputed global analytical companies, such as CRISIL.

Q

what have been the key areas of litigation in the banking regulation sector in your experience?

In our experience, one of the key areas of litigation in the banking sector is that of foreign currency derivatives. The economic

crisis hit the derivatives market hard, resulting in several companies which had suffered losses opting to sue banks over the derivative products sold to them. This resulted in a considerable amount of bad blood on each side. On one hand, various probes were conducted into the workings of several banks in connection with their internal policies relating to derivative products, eventually resulting in some banks being penalised. On the other, borrowers blatantly took advantage of the lack of systemic depth in the derivatives market in India resulting in cases such as Finolex Industries vs RBI and Emcure Pharmaceuticals vs ICICI where the Bombay High Court allowed the borrowers to be classified as wilful defaulters.

Another significant area of dispute is

that of corporate debt restructuring (“CDR”). CDR is a non-statutory mechanism for allowing creditors to reach a mutual compromise in settling a company’s debts, but it is all too common for the minority creditor and / or the debtor to be dissatisfied by the scheme, or simply fail to implement it, necessitating court