POST-AWARD INTERIM RELIEF U/S 9 OF ARBITRATION & CONCILIATION ACT, 1996

There are many aspects associated with the right to interim relief under section 9 of the Arbitration and Conciliation Act, 1996 have been the subject of diverse interpretations by the courts in India. This has created uncertainty about the meaning and scope of section 9 proceedings. One such aspect has been the availability of the right to interim relief to an award debtor (i.e. the losing party in the arbitration proceedings) post the award.

The Bombay High Court has held that such a right is available only to the award-creditor; the Delhi High Court has recently held that such a right is equally available to an award-debtor as well. The author through the present article tries to make a case for the availability of section 9 relief to the award-debtor by critically analyzing the judgments of the Bombay and the Delhi High Courts. In the process the author would try to highlight the possible options available to a party until there is a final determination of the issue by the Supreme Court.

In order to make India an arbitration friendly jurisdiction, it is essential to have clarity with respect to one of the most crucial sections of the arbitration proceedings – the right to interim relief under section 9 of the Arbitration and Conciliation Act, 1996 (hereinafter ‘Act’). The author by way of the present article tries to highlight one aspect of proceedings under section 9 where there is a need for final word from the Supreme Court due to inconsistent judgments of the Delhi High Court and the Bombay High Court. This section pertains to the availability of interim measures to the party who loses in the arbitration Proceedings, i.e. the award-debtor. This protection becomes important, as highlighted in the following parts, to ensure that the award debtor has a suitable security to protect his interests, in the event the arbitral award, after being set-aside, ultimately results in a favorable outcome for him.

The inconsistent judgments, which have been rendered with respect to post-award interim orders, are that of the division bench of The Bombay High Court in Maharashtra State Electricity Generation Company Ltd. v. Dirk India Pvt. Ltd. and that of The single judge bench of the Delhi High Court in Organising Committee Commonwealth Games v. M/s Nussli (Switzerland) Ltd.

BACKGROUND OF SECTION 9 OF THE ACT

Among various dispute resolution mechanisms, arbitration has emerged as the preferred mechanism for the resolution of commercial disputes. One of the reasons for the proliferation of arbitration has been the flexibility provided to parties to conduct arbitral proceedings as per the law selected by them, arbitrators of their choice and at a venue and place convenient to parties, as opposed to a proceeding before a court. Moreover, party autonomy being the thumb rule in arbitral proceedings, parties are also generally permitted to agree upon the procedure governing the resolution of disputes.

The arbitral process is normally accompanied by certain procedural safeguards such as interlocutory or interim measures that safeguard parties during the pendency of proceedings. It has been observed that parties engage in dilatory tactics to delay proceedings or prejudice rights of opposite parties by inter alia dissipating assets or interfering with the functioning of bodies (In case of a company where both parties are stakeholders). In such a situation, the final relief granted by a tribunal may be rendered nugatory or meaningless unless the arbitral tribunal or court is able to safeguard the rights of parties during the pendency of the arbitral proceedings. Therefore, in the intervening period between juncture at which the ‘dispute’ arose (in certain circumstances even before the commencement of arbitration) and till the execution of the award, certain interim measures may be necessary to protect a party’s rights and ensure that justice is done before court or arbitral tribunal.

The nature of interim relief sought by the parties may vary based on the facts and circumstances of the dispute. In certain situations the effective provision of interim reliefs may involve directions to third parties also. With the recent changes in the Arbitration and Conciliation Amendment Act, 2015 (“Amendment Act”) and wider powers vested with arbitral tribunals, interim reliefs should be made easy and accessible to parties to secure the ultimate arbitral award. In this backdrop, it is of paramount importance to understand the nature of interim reliefs which can be granted by courts and arbitral tribunals and their respective limitations.

DIRK INDIA – POST AWARD INTERIM RELIEF ONLY FOR AWARD CREDITORS

FACTS: An agreement containing an arbitration clause was entered into between Maharashtra State Electricity Board [hereinafter as “MSEB”] and Dirk India Private Limited [hereinafter as “DIPL”]. The agreement envisaged that Pulverized Fly Ash [hereinafter as “PFA]” that was generated from MSEB’s Thermal Power Station at Nasik would be transported to four hoppers, which were to be constructed by DIPL at site. DIPL was to utilize PFA in its PFA handling plant for the manufacture of concrete. Subsequently, a dispute arose between the parties that was referred to arbitration and the arbitral tribunal by its award came to the conclusion that DIPL had failed to discharge its contractual obligation of erecting the requisite hoppers and of transporting the agreed quantity of PFA to its PFA plant. The Tribunal came to the conclusion that the termination of the contract by MSEB was valid and lawful.

After the award, DIPL filed an application for interim protection under Section 9 of the Act. The learned Single Judge hearing the application gave limited interim protection, leaving the question of maintainability of the Section 9 application open. The matter came before the Division Bench through cross-appeals against this order.

JUDGMENT OF THE BOMBAY HIGH COURT

The Bombay High Court proceeded to discuss the scheme of Section 9 before disposing off the appeal. The Court noted that there are primarily two facets that are envisioned under the scheme of Section 9.

First, the Bombay High Court rightly observed that there exists an immediate and proximate nexus between the interim measure of protection under Section 9 and securing the subject matter of dispute in the arbitral proceedings. In other words, the orders envisaged are intended to preclude the claim in the arbitration from being frustrated. Secondly, the Bombay High Court held that there is proximate nexus between the interim order sought and the arbitration proceeding itself. As per the Court, when an interim measure of protection is sought before or during the arbitration proceedings, such a measure is a step in aid to the fruition of the arbitral proceedings. When sought after an arbitral award is made but before it is enforced, the measure of protection is intended to safeguard the fruit of the proceedings until the eventual enforcement of the award. The interim order post the award as per the Bombay High Court is intended to ensure that enforcement of the award results in a realizable claim and that the award is not rendered illusory.

The Bombay High Court in order to give support to its above reasoning, gave purposive interpretation to the words, “at any time after the making of the arbitral award but before it is enforced in accordance with section 36 occurring in Section 9 of the Act. Under Section 36 of the Act, an arbitral award can be enforced under the Code of Civil Procedure, 1908 [hereinafter as “CPC]” in the same manner as if it were a decree of the court. As per Section 36, the arbitral award can be enforced where the time for making an application to set aside the arbitral award under Section 34 has expired or in the event of such an application having been made, it has been refused. As per the Court, the enforcement of an award accrues to the benefit of the party who has secured an award in the arbitral proceedings and that is why the enforce ability of an award under Section 36 is juxtaposed in the context of above two time frames.

The Bombay High Court, therefore held that, “contextually the scheme of Section 9 postulates an application for the grant of an interim measure of protection after the making of an arbitral award and before it is enforced for the benefit of the party which seeks enforcement of the award”. Thus, as is evident from the above italicized words, the Bombay High Court came to the conclusion that the object and purpose of an interim measure after the passing of the arbitral award but before it is enforced is to secure the property, goods or amount for the benefit of the party which seeks enforcement, i.e., the award creditor and is not available to an award-debtor.

SECTION 9 IS NOT AVAILABLE TO A THIRD PARTY

On a plain reading of the judgment in Dirk, it is evident that the Bombay High Court did not consider a situation where an arbitral award affects the rights of the third party. Consider a situation where an arbitration agreement is between three parties and dispute arises between two parties, which ultimately results in an arbitral award affecting the rights and interests of the third party. As per Section 9 of the Act, the third party has the right to file an application under Section 9 to safeguard his right and interest after the award has been passed. Whereas, applying the interpretation given by the Bombay High Court, only a party in whose favor the award has been passed can approach the court for interim relief, which basically means that such third party would not be entitled to any protection under Section 9 of the Act. This will make it plainly inequitable for the third party to be not provided with a right to protect its interests under Section 9 of the Act even when it was not a party to the arbitration proceedings.

Thus, it is respectfully submitted that the interpretation by the Bombay High Court is not only against the spirit of Section 9 and the legislative intention behind it, but is also highly inequitable and impractical with respect to third parties.

ORGANISING COMMITTEE – RELIEF FOR AWARD-DEBTORS

FACTS: The Delhi High Court has elucidated the rationale behind allowing Section 9 for Award-Debtors in the Organising Committee case. In 2010, the Respondent was awarded a turnkey contract by the Petitioner for providing overlays on rental basis for the Commonwealth Games, 2010 (“Games”). In order to secure the contract’s performance, the Respondent was required to furnish a ‘performance bank guarantee’ (“PBG”) equivalent to the 10% of the contract value (which Respondent furnished). Following the conclusion of the Games, disputes arose between the parties and the matter was referred to arbitration. From time to time, the Respondent was restrained to encase PBG; first, as a result of a Section 9 petition filed by the Petitioner and then because of a direction issued by the Arbitral Tribunal. The Petitioner’s claims in the arbitration were rejected by the tribunal and thus, the Petitioner was the losing party in the arbitration proceedings. The Petitioner in the Organising Committee had not yet filed its objections to the award under Section 34 of the Act and had petitioned the court under Section 9 to stay the discharge issued by a bank at the behest of the respondent, and to seek a direction to the respondent to keep the bank guarantee alive till the conclusion of proceedings under Section 34 of the Act. Interestingly, the respondent placed reliance on the judgment of the Bombay High Court in Dirk to negate the stance of the petitioner. Thus, the respondent contended that since Section 9(ii) of the Act is intended to protect the fruits of successful arbitration proceedings, a party whose claim has been rejected during the course of the arbitration cannot have the arbitral award enforced in accordance with Section 36 and can, therefore, not seek any interim relief under Section 9 of the Act.

JUDGMENT OF DELHI HIGH COURT

Justice Sanghi in Organising Committee held that the case of Dirk cannot be relied upon by the Respondent as it was rendered in an entirely different factual context. In Dirk case, DIPL was seeking an interim measure for continuing to perform the contract even after the termination of the agreement had been held to be valid by the arbitral Tribunal. The Division Bench of the Bombay High Court, in that context, held that DIPL could not maintain a petition under Section 9 of the Act as the Award was not in its favour, and could not seek enforcement of the Award. The Delhi High Court rightly pointed out that the Bombay High Court was not concerned with a situation like the one present before it, wherein the Respondent was a foreign corporation having no assets or presence in India. The Respondent being a foreign corporation, was a significant factor in this case, as, if the PGB of the foreign corporation would not have been kept alive, then the Petitioner would not have had any possible remedy to secure his future claims in case of successful pursuit of setting-aside proceedings under Section 34 of the Act.

The Delhi High Court also took liberal assistance from the provision of Order XXV, Rule 1 of the CPC although clarifying that the said provision is not squarely applicable to the facts present before it. Order XXV, Rule 1 of CPC provides that where the plaintiff is a foreign party, i.e. residing outside India, and does not possess sufficient immovable property within India, he would be required to furnish security for costs. Another important principle which found reason with the Delhi High Court was that the counter claim of the petitioner had been partially allowed, leaving the scope for the Petitioner to assail the arbitral award within the statutory period of limitation. In case the Petitioner succeeded in its objections that may be preferred by it, it would be entitled to re-pursue its counter claim in appropriate proceedings. As per Justice Sanghi, the said right of the petitioner would be defeated by permitting the respondent to allow the PBG to lapse in the meantime. Thus, it appears that the Delhi High Court took equitable considerations into account while delivering its judgment in the case of Organising Committee.

CONCLUSION

The Delhi High Court seems to have come to the right conclusion that Section 9 is not only available to an Award-Creditor but also to an Award-Debtor. The Delhi High rightly relied on the principle that the factual situation before it was different from that before the Bombay High Court and that Dirk’s ratio is pertinent with respect to its own peculiar facts. This is because it is an established principle in Indian jurisprudence that a decision is a precedent with respect to its own facts and the words used by the judges in their judgments are not to be interpreted like the words of an act of the Parliament. Although, the Delhi High Court also relied on the fact that the counter-claim of the petitioner was partially allowed in the facts before it, it fell short of distinguishing the Dirk case on the tenable legal principles like that of literal construction, intention of the legislature, instances of remitting back the award under section 34(4) of the Act or of non-filing of challenge under section 34 by the Award debtor.

Thus, even though the Organising Committee case is still subject to the possibility of two rounds of appeal before the Delhi High Court and Supreme Court respectively, and the Dirk case is sub-judice in Supreme Court, it seems plausible that the Section 9 interim relief is available even to Award-Debtors in certain situations which are considered equitable. The author believes that such relief being available to the Award-Debtors is in line with the intention of the legislature and also with the scheme of the Act which specifically deviated from the Model Law while providing for post-award reliefs. So the circumstances by which such a relief should not be provided to an Award-Debtor before filing the challenge to award under Section 34 should be only limited to those circumstances which a court may consider inequitable. An authoritative pronouncement by the Supreme Court is certainly required as the final word on this issue to elaborate on the circumstances wherein a post-award interim order is available or is not available to an Award-Debtor.

However, it must be emphasized that the Award-Debtor should try and immediately file its objections to the award under Section 34 of the Act at the first instance as such filing of objections would operate as immediate stay on the award and would obviate the need for filing an additional application by way of Section 9.

Article 14 of Constitution of India and Test of reasonable classification.

Article 14 of Constitution of India states as under:

“The State shall not deny to any person equality before the law and equal protection of laws within the territory of India.”

Equality before law as provided in the Article 14 of our constitution provides that no one is above the law of the land. Rule of the Law is an inference derived from Article 14 of the constitution. This right is reserved not just for Indian fundamental rights and in a way, forms the foundation of the other fundamental rights.

The words “equality before the law” and “equal protection of laws” may mean the same thing. However, in law they are distinct. Do remember that in the field of law, each and every word carries a very specific meaning and is chosen for a particular purpose. Just like the word ‘record’ which can simply mean ‘information put into a physical medium’ but in other context, ‘record’ means ‘to make recording of something’.

Thus, equality before law is a negative demand from the State i.e. not to discriminate while equal protection of laws demands a more positive action from the State i.e. to bring all citizens on an equal footing. It requires that the Government should make special provisions for the protection and advancements of disadvantaged/ discriminated/ vulnerable sections of society.

It is in the light of Article 14 read along with other articles of the Constitution that the Government has made and continues to make special provisions for women, children, senior citizens, handicapped people, juvenile delinquents etc.

Following are some interesting examples

1.    Section 497 of the Indian Penal Code which deals with ‘adultery”. Under this Section, though a man is punishable for adultery, a woman is not! Is this unconstitutional? No. The woman is immune because, in the context of Indian society as on date, it is presumed that women cannot commit adulatory as easily and rampantly as men. Any right thinking person will agree that such presumption is necessary to protect women adverse charges against them. 

2. Most countries, especially modern democracies mandate the State to not just ‘not discriminate’ but also to make special provisions for their disadvantaged people. It can take various forms such as affirmative action, special provisions for minorities etc.

3. The criminal law for minors (below 18 years of age). Here, the law treats ‘adults’ and ‘minor’ differently. It does not have the same yardstick to measure the crime and punishment of minors and adults.

Thus, our Constitution is very progressive and strongly prescribes measures for a more just and equal society.

However, some argue that the extensive use of device of “Reasonable Classification” by State and its approval by the Supreme Court has rendered the guarantee of ‘fair and equitable” treatment under Article 14 illusory.

Here comes the role of “Test of reasonable classification”. The Test of Reasonable Classification says that the classification must be based upon intelligible differentiation that distinguishes persons or things that are grouped from others that are left out of the group. This differentiation must have a rational relation to the object of classification. There should be a relation between the differentiation to the object of the classification. If there are no such relations, the reasonable classification would fail.

For example denial of grant to a private college teaching law while giving grant to other private colleges teaching other subjects is not permissible. However, reduction of age from 58 years to 55 years is permissible.

In conclusion, Article 14 strikes a fine balance between Equity and Equality.

CREDIT RATINGS IN CAPITAL MARKET

What is a credit rating?

In its simplest form, a credit rating is a formal, independent opinion of a borrower’s ability to service its debt obligations (i.e. that interest and principal will be repaid in full and on time). The majority of ratings are publicly disclosed (though not always, as we will come on to later) and are provided for the benefit of debt investors in their investment appraisal process (where the rating is applied to a specific debt instrument), although they are also used by creditors and other parties for understanding a group’s or an entity’s credit profile (where a Corporate Family rating or an Issuer credit rating may be assigned). Despite this, the cost for obtaining a credit rating is borne by the company or issuer.

From a borrower’s perspective, a credit rating is generally a requirement of public bond issuance (some issuers are able to issue unrated bonds e.g. Christian Dior; however, this tends to be relatively infrequent) and certain loan structures (particularly those which are distributed to institutional lenders, such as CLO funds) and thus provides access to a wider range of lenders and debt products. The European debt markets have seen a significant shift in recent years as European corporate have sought to re-balance their funding sources away from traditional bank financing and towards bond finance. As a result, the importance of achieving a strong credit rating is relevant for a wider audience than ever before.

The rating agencies distinguish between rating short-term (<365 days) and long-term (1+ year) obligations, owing to the different investment dynamics of the different investor bases. In general, there is little value in having a short-term rating unless issuing commercial paper and such rating is in the top two categories, as it is only really used in the (short-term) commercial paper market, which requires minimum P2/A-1/F1 ratings. Investors, creditors and other interested parties tend to look to a borrower’s long-term credit rating as a general measure of creditworthiness.

An alternative category of credit references are those provided by Dunn & Bradstreet, Experian and others. In addition to being used by trade creditors and other supply chain counter parties, D&B scores are used in calculating the UK pension regulator’s PPF levy. However, such scores tend not to be used by debt investors to examine debt instruments and so are not considered further in this guide.

The rating agencies and the types of credit rating

Credit ratings are predominantly provided by three main independent rating agencies, namely Moody’s Investors Service (Moody’s), Standard & Poor’s Ratings Services (S&P) and Fitch Ratings (Fitch), although there are others such as Dominion Bond Rating Service (DBRS). Ratings themselves can be provided to cover individual issuers, such as corporations or sovereign governments, or specific, individual debt instruments and encompass both long-term ratings and short-term ratings.

Although the agencies adopt different rating scales, there is equivalence across the scales, which facilitates comparison between ratings provided by each rating agency. For example a Baa1 rating provided from Moody’s is equivalent to a BBB+ rating from S&P and BBB+ from Fitch. The full rating scales for each rating agency are shown in more detail as follows.

Ratings are typically separated into one of two broad classifications: 1) “Investment Grade”, comprising all ratings from AAA at the top, down to Baa3/BBB-/BBB- at the bottom; and 2) “Non-Investment Grade” (aka speculative grade, junk, high yield, etc.), comprising all ratings from Ba1/BB+/BB+ through to D (where default has occurred). An investment grade rating is important for certain borrowers to ensure full market access (as some investors face limits on the proportion of sub-investment grade debt they are allowed to hold in a portfolio), achieving flexible documentation and attractive terms on debt issues, and in some cases for the prestige value in front of competitors, customers and suppliers. Sub-investment grade debt issues often require a greater degree of operating and financial restrictions and inevitably attract higher pricing commensurate with a higher level of credit default risk.

The degree of market access is a key benefit of investment grade borrowers. In times of financial turmoil, primary debt markets have historically shown themselves to be relatively volatile with investor funds flowing into and out of the bond markets at short notice. Over the past 4 to 5 years this volatility has manifested itself with the debt capital markets ‘closing’ during periods of uncertainty, often triggered by macro-economic shocks such as the banking crisis across Western Europe and later the Eurozone crisis. When market sentiment subsequently improves, investors invariably look most favourably upon the highest rated issuers which typically reopen the debt markets and provide windows of opportunities for companies to tap often short-lived investor confidence.

An important extension to the concept of a borrower’s or an issue’s credit rating is the rating outlook (positive, stable, negative or Credit Watch developing), which is a function of the ongoing surveillance provided by a rating agency on an issuer or issue and provides a directional evaluation of where the rating is likely to move over time. In addition, certain entities or issues subject to announced or expected major corporate events (typically around M&A) can be placed on credit-watch pending outcome of the event, and in some circumstances the agency will give a view about what would happen to the rating under different outcomes.

Rating agency methodology

Each of the main agencies provide an overview of their detailed rating methodologies on their websites, however, in terms of a broad fundamental approach they all examine a combination of financial risk and business risk in arriving at a credit opinion. The interplay between business risk and financial risk is an important consideration in the rating process. The degree of financial risk which a company is able to tolerate at a specific level of credit quality is heavily influenced by its business risk profile and the dynamics of the industry in which it operates. A company operating in an industry typified by low levels of relative business risk (i.e. those which demonstrate low levels of volatility, or which are supported by high degrees of governmental regulation) may be able to tolerate a higher degree of financial risk than an equivalent company which operates in a more risky business environment at an equivalent level of credit quality. Put another way, two companies with identical financial risk profiles will be rated differently, according to each company’s business risk profile and industry prospects. Understanding these dynamics can be an important advantage for companies looking to go through a credit rating or debt issuance process. In terms of how these two risk categories are typically examined:

• Business risk: Evaluation of strengths/weaknesses of the operations of the entity, including: market position, geographic diversification, sector strengths or weaknesses, market cyclicality, and competitive dynamics. This approach allows businesses to be compared and relative strengths/weaknesses to be identified. As highlighted previously, business risk can be significantly impacted by the nature of the industry in which a company operates.

• Financial risk: Evaluation of the financial flexibility of the entity, including: total sales and profitability measures, margins, growth expectations, liquidity, funding diversity and financial forecasts. At the heart of this analysis is credit ratio analysis, which is used to quantitatively position companies of similar business risk against each other. The level of financial risk tolerance that companies can sustain at a particular rating grade will be significantly impacted by its financial risk profile.

Financial risk analysis

Whilst the examination of business risk can vary from case to case and is often very specific to the particular company and industry under examination, the examination of financial risk tends to be more standardized across different industry sectors. The area of Financial Risk analysis is often distilled (especially for a well known company in a widely rated sector) down to the analysis of a certain number of key credit ratios. Typically this might include the following elements:

• Liquidity – short-term ability to service debt obligations and in particular, measures of cash flow adequacy (typically this is the single most important consideration for rating analysis).

• Long-term capital structure and asset cover measures.

• Accounting and financial policies.

Typical adjustments

Although there are numerous adjustments that can be made to a company’s financial statements as part of a credit rating process, there are a handful of main adjustment rules when it comes to credit ratio analysis. The purpose of these adjustments is to help ensure that key ratios or metrics are presented on a consistent basis across companies which may have differing approaches with respect to certain asset or liability items which in turn can have a significant impact on some of the key metrics examined as part of the credit rating process:

• Pension adjustments: The purpose of this adjustment is to ensure that the full economic obligations with respect to a company’s defined benefit pension scheme are captured on its balance sheet. The full set of adjustments are relatively complex, but the core element involves classifying any defined pension deficit as a liability or debt-like item when calculating Adjusted Net / Total Debt.
• Operating leases: The purpose of this adjustment is to eliminate often notional differences between companies which choose to account for potentially similar assets in very different ways. Specifically, companies may either purchase key assets (through a finance lease or similar) and depreciate them on-balance sheet, or alternatively may instead choose to account for similar assets using operating leases, with no direct balance sheet impact. The analytical approach of the rating agencies is to capitalise operating leases, to bring them on-balance sheet by adjusting reported debt and assets by the present value of lease commitments (with a number of follow-on adjustments to the P&L and calculation of EBITDA).
• Hybrid bonds: Given the different nature of hybrid capital, partial or full equity treatment is typically applied to certain qualifying debt instruments by the rating agencies, with levels (25%/50%/75%/100%) depending on level of subordination, maturity, replacement language and coupon deferral. Borrowers issue hybrids (straight or convertible) to support (or even reach) a desired credit rating or credit profile, reducing (or even eliminating) the need for equity.

Although the above can get you much of the way towards replicating the published credit ratios, it is often difficult to replicate the analysis exactly without explicit guidance from the rating agencies. Each of the main agencies provide publicly available guidance on the typical approach to rating certain sectors, as well as the standard adjustments utilised with respect to off-balance sheet liabilities and other standardised adjustments. However, a clear, transparent relationship with a rating agency is key to ensure that treasurers have a strong understanding of the approach being taken and the potential outcome.

Dealing with the rating agencies

Responsibility for dealing with the rating agencies will usually lie with the corporate treasurer (or occasionally the finance director).

In order to deal effectively with the rating agencies, it is important to understand clearly both how the rating is determined, and also its positioning relative to its peers. An open and regular dialogue with the agencies, together with a clear understanding of the financial adjustments they employ to arrive at the credit ratios, will therefore greatly facilitate a company’s understanding of its own rating headroom, risks and mitigants.

A treasurer with a good grasp of how the rating agencies analyse both the business risk and financial risk of his or her company will be better positioned to understand the likely reaction of the agencies to changes in operating performance (market weakness, increased competition) or corporate events (acquisitions, divestitures and dividends). One particular area to focus on is credit ratio analysis, as an accurate replication of the precise adjustments the agencies use will make the quantitative aspect of the analysis as transparent as possible. When combined with guidance on ratio expectations, the ability to accurately replicate the rating agency adjustments will give the treasurer a useful tool to anticipate the agencies’ likely reaction to various scenarios (such as determining the maximum special dividend that can be made without jeopardizing a certain rating).

Understanding the approach that rating agencies adopt is of critical importance to ensure that a company is positioned in the best possible light with respect to its potential credit rating. It is helpful when dealing with the agencies to present in a manner that is immediately comparable with their own analysis, while the provision of consistent reliable information – and the development of a professional relationship with analysts – will significantly support credibility of projections, forecasts and corporate actions.

Information requirements

Although the agencies can have access to a company’s own financial forecasts and other non-public information, what they publish tends to be restricted to historical (public) information only, although there can be statements of expectations or assumptions such as “we expect company X to maintain a ratio of Y in the medium-term”.

The information requirements of the agencies will vary depending on the nature of the corporate and what is available. For larger corporate who already make extensive disclosure, the determination will often be based solely on publicly available information. However, in most cases there will be a higher level of interaction between the company and the agency, and the agency would review both public and non-public information. As a general guide, a corporate should expect to have a transparent relationship with its credit agencies in the same way it would have with a close relationship bank, and consider making available items such as annual budgets, periodic reporting and management meetings.

Alternatives to a public credit rating

As companies find it challenging to raise capital from relationship banks and seek to limit refinancing risk, they are increasingly turning to the debt capital markets (where investor demand is currently strong but ratings are recommended/required) to refinance upcoming maturities. Many unrated companies are therefore considering obtaining a credit rating to ensure smooth capital markets access and as a first step to obtaining a public rating are increasingly using the different services offered by the rating agencies to assess their credit rating. Two of the options companies may consider instead of a public credit rating are:

Rating evaluation/assessment services

Private rating evaluation/assessments services are typically used for internal purposes to help a company better understand what a full rating outcome might be, or what the potential impact of a key financing transaction might be on its credit profile. It is essentially a point-in-time desktop exercise and not a firm Credit Rating, nor is it monitored on an ongoing basis.

The two to three page report typically takes 8 to 10 business days to produce and contains an analysis of public information, but does not include any management meetings and is not sanctioned by a Ratings Committee (and thus is not a formal rating opinion or even a rating indication). It is reviewed by the sector rating analysts for policy consistency, but is little more than a point in time view with no ongoing obligation on either side. This compares with a full (private or public) internal credit rating process which takes four to eight weeks and involves more in-depth analytics, a Management Meeting and a formal Ratings Committee.

Private credit rating

When a company obtains a full corporate credit rating, it can choose to publish the rating or maintain the rating on a private/confidential basis. Both Moody’s and S&P offer a confidential monitored rating service whereby they maintain the confidential credit rating periodically similar to a public rating and the rating can be published on request. Public dissemination of a private credit rating is not permitted.

TAX GROUNDWORK FOR SALARIED EMPLOYEES.

              At the end of every financial year, many tax payers frantically make investments to minimize taxes, without adequate knowledge of the various available options. The Income Tax Act offers many more incentives and allowances, apart from the popular 80C, which could reduce tax liability substantially for the salaried individuals. Here are seven smart tips to help you save more and reduce taxes.

            


Salary Restructuring

Restructuring your salary may not always be possible. But if your company permits, or if you are on good terms with your HR department, restructuring a few components could reduce your tax liability.

• Opt for food coupons instead of lunch allowances, as they are exempt from tax up to Rs. 60,000 per year
• Include medical allowance, transport allowance, education allowance, uniform expenses (if any), and telephone expenses as part of salary. Produce bills of actual expenses incurred for these allowances to reduce tax
• Opt for the company car instead of using your own car, to reduce high prerequisite taxation.

   
2. Utilizing Section 80C
Section 80C offers a maximum deduction of up to Rs. 1,00,000. Utilize this section to the fullest by investing in any of the available investment options. A few of the options are as follows:

•     Public Provident Fund
•     Life Insurance Premium
•     National Savings Certificate
•     Equity Linked Savings Scheme
•     5 year fixed deposits with banks and post office
•     Tuition fees paid for children's education, up to a maximum of 2 children

3. Options beyond 80C
If you have exhausted your limit of Rs. 1,00,000 under section 80C, here are a few more options:

• Section 80D - Deduction of Rs. 15,000 for medical insurance of self, spouse and dependent children and Rs. 20,000 for medical insurance of parents above 65 years
• Section 80CCF- Deduction of Rs. 20,000, in addition to the Rs.1,00,000 under 80C, for investments in notified infrastructure bonds
• Section 80G- Donations to specified funds or charitable institutions.

   
4. House Rent Allowance
Are you paying rent, yet not receiving any HRA from your company? The least of the following could be claimed under Section 80GG:

•  25 per cent of the total income or
• Rs. 2,000 per month or
• Excess of rent paid over 10 per cent of total income

This deduction will however not be allowed, if you, your spouse or minor child owns a residential accommodation in the location where you reside or perform office duties.
    

If HRA forms part of your salary, then the minimum of the following three is available as exemption:

•     The actual HRA received from your employer
• The actual rent paid by you for the house, minus 10 per cent of your salary (this includes basic  dearness allowance, if any)
• 50 per cent of your basic salary (for a metro) or 40 per cent of your basic salary (for non-metro).

5. Tax Saving from Home Loans
Use your home loan efficiently to save more tax. The principal component of your loan, is included under Section 80C, offering a deduction up to Rs. 1,00,000. The interest portion offers a deduction up to Rs. 1,50,000 separately under Section 24.

6. Leave Travel Allowance
Use your Leave Travel Allowance for your holidays, which is available twice in a block of four years. In case you have been unable to claim the benefit in a particular four- year block, you could now carry forward one journey to the succeeding block and claim it in the first calendar year of that block. Thus, you may be eligible for three exemptions in that block.

7. Tax on Bonus
A bonus from your employer is fully taxable in the year in which you receive it. However request your employer for the following:

•  If you anticipate tax rates to be reduced or slabs to be modified in the subsequent year, see if you could push the bonus payment to the subsequent year
• Produce your tax investment details well before, to prevent your employer from deducting tax on bonus before handing it over

A Final Word
Keep in mind the below points, to avoid the hassles of last minute tax planning.

• Give your employer details of loans and tax saving investments beforehand, to prevent any excess deduction
• Check the Form 16 received at the end of each year from your employer thoroughly
• It is important to start your tax planning well before 31st March, and to file your returns before the 31st of July each year