A year later, the IBC is still work-in-progress

Business Standard - - ECONOMY - NOOR MO­HAM­MAD (THE WIRE.IN) Inar­range­men­twith­TheWire.in

The In­sol­vency and Bankruptcy Code (IBC) in­tro­duced by the Naren­dra Modi gov­ern­ment in De­cem­ber 2016 to fix the bank­ing sec­tor’s bad loans prob­lem has over the last 16 months been a mixed bag, with bor­row­ers and dis­grun­tled bid­ders in­creas­ingly ex­ploit­ing vague­ness in some key pro­vi­sions of the code to stall bankruptcy pro­ceed­ings.

The fi­nan­cial bid­ding process was ex­pected to be wrapped up by the end of Jan­uary 2018 for 12 large cor­po­rate loan ac­counts re­ferred by the lenders to the Na­tional Com­pany Law Tri­bunal (NCLT) fol­low­ing the Re­serve Bank’s of In­dia’s (RBI) di­rec­tive last year. These com­pa­nies to­gether ac­count for ~1.75 tril­lion of bad loans.

How­ever, bankruptcy pro­ceed­ings con­tinue to drag on in sev­eral cases be­yond the ex­pected time­frame, with bor­row­ers and un­suc­cess­ful bid­ders chal­leng­ing the process in civil courts. While the BJP and the Modi gov­ern­ment have claimed that the IBC has re­sulted in a re­cov­ery of “~ 4 tril­lion” out of ~9 tril­lion of NPAs (non-per­form­ing as­sets) or bad loans al­legedly given to corporates under the pre­vi­ous UPA gov­ern­ment, RBI data shows that pub­lic sec­tor banks ac­tu­ally only re­cov­ered a to­tal of ~157 bil­lion in 2016-17 and 2017-18 till De­cem­ber 31, through all re­cov­ery chan­nels, in­clud­ing IBC.

What is stalling things and what is the sta­tus of the 12 ma­jor ac­counts that were re­ferred to the NCLT? The Wire breaks it down. Take the case of bid­ding held for the sale of Es­sar Steel as­sets. Bids were sub­mit­ted by Numetal, a spe­cial pur­pose ve­hi­cle floated by Rus­sian lender VTB Bank and Re­want Ruia, the youngest scion of the Ruia fam­ily, and ArcelorMit­tal for the as­sets.

How­ever, both the bids were later de­clared in­el­i­gi­ble by the com­mit­tee of cred­i­tors (CoC) on March 21 as they vi­o­lated Ar­ti­cle 29 A that was in­serted in the IBC last Novem­ber to bar wil­ful de­fault­ers from re­gain­ing con­trol of their as­sets through prox­ies. Numetal chal­lenged the dis­qual­i­fi­ca­tion of its bid in the Ahmed­abad court of the NCLT and sought a stay or an or­der to de­fer the sec­ond round of bid­ding for Es­sar Steel as­sets.

“My con­tention is only that if I am wrongly, or rightly dis­qual­i­fied, then I should be given a hear­ing and af­ter the de­ci­sion of the court, the bid­ding should be pro­ceeded,” Mukul Ro­hatgi, a for­mer at­tor­ney gen­eral who ap­peared on be­half of Numetal, told the court.

He asked why the re­bid can­not post­poned by two more days. ArcelorMit­tal failed the el­i­gi­bil­ity test as records with stock ex­changes and mar­ket watch­dog Sebi (Se­cu­ri­ties and Ex­change Board of In­dia) showed that the com­pany had a 29 per cent stake in the bankrupt com­pany, Uttam Galva.

“I, un­like him (Numetal), though I am/was rightly or wrongly dis­qual­i­fied, don’t want to spoil the process and I am ready for the re­bid,” said Abhishek Singhvi, coun­sel for ArcelorMit­tal. Its dis­qual­i­fi­ca­tion was a tech­ni­cal er­ror which has been rec­ti­fied, he said.

The bankruptcy pro­ceed­ings for Bi­nani Ce­ment took a more dra­matic turn re­cently when the un­suc­cess­ful bid­der, Ul­traTech Ce­ment, reached an out-of-court set­tle­ment with Bi­nani In­dus­tries, the pro­mot­ers of Bi­nani Ce­ment, rais­ing ques­tions about the sanc­tity of the in­sol­vency pro­ceed­ings.

Bi­nani In­dus­tries later moved the Supreme Court, seek­ing per­mis­sion for outof-court set­tle­ment with lenders. How­ever, the apex court has de­clined to in­ter­fere in the bankruptcy process and has re­ferred the case back to the NCLT for hear­ing.

Mean­while, a con­sor­tium of JSW Steel and AION Cap­i­tal has suc­cess­fully bid for as­sets of bankrupted Mon­net Is­pat and En­ergy. Sig­nif­i­cantly, JSW pro­moter Sa­j­jan Jindal is re­lated to the pro­moter of Mon­net Is­pat and En­ergy, San­deep Ja­jo­dia.

Jindal was the one who lob­bied hard to per­suade the gov­ern­ment to amend the IBC to bar wil­ful de­fault­ers from bid­ding for as­sets of their bankrupted firms.

ArcelorMit­tal, which lost the bid­ding race for as­sets of Mon­net Is­pat, found an easy tar­get in JSW.

“In­ter­est­ing what de­ci­sion is be­ing taken on Mon­net to­day given it’s clear JSW runs afoul of 29A as they are re­lated to the ex­ist­ing pro­moter….who is mak­ing the mock­ery here?” said a post by ArcelorMit­tal on Twit­ter, tak­ing a di­rect jibe at the JSW group chair­man Sa­j­jan Jindal who was also tagged in the post.

Jindal had used the word “mock­ery” while in­di­rectly re­fer­ring to ArcelorMit­tal’s exit from bankrupted Uttam Galva last month to make its bid for Es­sar Steel as­sets el­i­gi­ble. “If a de­fault­ing pro­moter tries to cure him­self by sell­ing his shares then that is a mock­ery of the law,” Jindal had said then.

Bhushan Steel, Bhushan Power and Steel, Lanco In­frat­ech, Alok In­dus­tries, Amtek Auto, Era In­fra, Jaypee In­frat­ech, ABG Ship­yard and Jy­oti Struc­tures and Elec­tros­teel are the other bor­row­ers re­ferred to by the RBI for in­sol­vency pro­ceed­ings last June.

UK-based Lib­erty House had moved the NCLT to seek re­dres­sal of its griev­ance af­ter cred­i­tors did not open its bid sub­mit­ted for Bhushan Power and Steel af­ter the ex­piry of bid­ding dead­line on Fe­bru­ary 20.

Lib­erty House claimed that its bid was valid as it was sub­mit­ted within the 270-day time-frame stip­u­lated by the IBC. And what of the bankruptcy pro­ceed­ings against re­main­ing of 12 com­pa­nies iden­ti­fied by the RBI?

Jy­oti Struc­ture

Jy­oti Struc­ture, an en­gi­neer­ing, pro­cure­ment and con­struc­tion com­pany (EPC), was the first among 12 firms iden­ti­fied by the RBI to face in­sol­vency pro­ceed­ings. But the dead­line of 180 days and the 90-day ex­ten­sion granted sub­se­quently by the NCLT ex­pired on April 2.

Nearly 81 per cent of the lenders in terms of value of the loan have given con­sent to award the com­pany to a clutch of high net worth in­di­vid­u­als ( HNIs) led by Sharad Sanghi, the chief of Net­magic So­lu­tions. The HNIs were the sole bid­ders for the com­pany.

Van­dana Garg, the res­o­lu­tion pro­fes­sional in­formed the NCLT that the to­tal votes in favour have risen to 81 per cent. Under the IBC, at least 75 per cent of the lenders (in terms of value of the loan) have to give pos­i­tive con­sent for a res­o­lu­tion plan to be ac­cepted for the com­pany.

Amtek Auto

Cred­i­tors have ap­proved the res­o­lu­tion plan sub­mit­ted by Lib­erty House. This was an­nounced by ALL to the stock ex­changes on April 5.

Alok In­dus­tries

A joint res­o­lu­tion plan sub­mit­ted by JM Fi­nan­cial As­set Re­con­struc­tion Com­pany and RIL for Alok In­dus­tries has been re­jected by cred­i­tors. The 270-day dead­line for the cor­po­rate in­sol­vency res­o­lu­tion pro­gramme ended on April 14, for Alok In­dus­tries. Now the com­pany could face liq­ui­da­tion if NCLT does not al­low fur­ther ex­ten­sion.

Bhushan Steel

Tata Steel has emerged as the high­est bid­der for Bhushan Steel. It has of­fered to pay ~352 bil­lion in cash and con­vert bal­ance debt of ~270 bil­lion to take over Bhushan Steel.

But, mean­while, Larsen & Toubro Ltd (L&T), an op­er­a­tional cred­i­tor to Bhushan Steel Ltd, has chal­lenged the res­o­lu­tion plan for Bhushan Steel in the NCLT, terming it as “dis­crim­i­na­tory” and “ar­bi­trary”. L&T has ar­gued that its out­stand­ing due of ~9 bil­lion has not been given due pri­or­ity by the cred­i­tors.

ABG Ship­yard

The res­o­lu­tion of ABG Ship­yard has to be com­pleted by April 30, ac­cord­ing to the time­line set by the NCLT. Cred­i­tors have sought more in­for­ma­tion, clar­i­fi­ca­tion on the busi­ness plan sub­mit­ted by Lib­erty House.

Lib­erty House, led by In­dian-born busi­ness­man Sanjeev Gupta, has of­fered ~52 bil­lion on a de­ferred pay­ment ba­sis, stretch­ing over 5 to 10 years, for the yard. The bid also in­cludes an up­front amount of ~4 bil­lion and is­sue of deben­tures. The lenders have set a liq­ui­da­tion value of ~22 bil­lion for the yard, which owes some ~182 bil­lion to a clutch of banks led by ICICI Bank.

Era In­fra En­gi­neer­ing

The prin­ci­pal bench of NCLT in New Delhi has re­served its or­der in the in­sol­vency pro­ceed­ings against Era In­fra En­gi­neer­ing filed by Union Bank of In­dia in the lat­est hear­ing. The bench said it will de­cide on“ju­ris­dic­tion al is­sues” of the case given sev­eral wind­ing-up pe­ti­tions against Era were pend­ing be­fore the Delhi High Court. Union Bank of In­dia for re­cov­ery of ~6.8 bil­lion, along with an over­due ex­ter­nal com­mer­cial bor­row­ing of $11.97 mil­lion, as at the end of May last year.

Jaypee In­frat­ech

Lak­shad­weep Pvt Ltd, a joint ven­ture be­tween Surak­sha As­set Re­con­struc­tion Com­pany and Mum­bai-based Dosti Re­al­ity, is all set to take over the in­sol­vency-hit de­vel­oper that has to de­liver about 25,000 apart­ments in Noida and is the op­er­a­tor of the Taj Ex­press­way.

Elec­tros­teel Steels

Bil­lion­aire Anil Agar­wal-pro­moted Vedanta has won the bid to ac­quire debt-laden Elec­tros­teel Steels. Vedanta was de­clared as the suc­cess­ful res­o­lu­tion ap­pli­cant by the lenders. The com­pany was is­sued a let­ter of in­tent by the Elec­tros­teel cred­i­tors which it ac­cepted.

Lanco In­frat­ech

Four lit­tle-known com­pa­nies— OPG Group, Prem En­ergy, Goyal Group and Diva Group— have shown in­ter­est in ac­quir­ing Lanco In­frat­ech, fu­elling con­cerns among lenders that they might have to ac­cept a steep hair­cut to re­solve their loans of more than ~450 bil­lion to the Hy­der­abad­based com­pany.

Fre­quent changes to the IBC

The IBC man­dates con­clu­sion of bankruptcy pro­ceed­ings within 180 days. An­other 90 days’ time may be given by the NCLT, de­pend­ing upon the merit of the case. Fail­ing that, the bankrupt com­pany will have to go into liq­ui­da­tion. There have been sev­eral rounds of amend­ments in the IBC. Mean­while, a high-level panel has rec­om­mended more changes to the bankruptcy law, in­clud­ing those de­signed to make it flex­i­ble for res­o­lu­tion pro­fes­sion­als to raise in­terim fi­nance.

As part of the rec­om­men­da­tion, the panel has said that in­ter­est should be cal­cu­lated till one year af­ter the liq­ui­da­tion date or re­pay­ment whichever is ear­lier. Cur­rently, the in­ter­est is cal­cu­lated only till the liq­ui­da­tion date. Ex­perts said rec­om­mended changes will help banks, as­set re­con­struc­tion com­pa­nies (ARCs) to ex­tend in­terim fi­nance to com­pa­nies un­der­go­ing bankruptcy process with­out the fear of los­ing out on in­ter­est.

The panel also sug­gested re­duc­ing the thresh­old for CoC vote to 66% from the cur­rent 75% for ex­tend­ing there so­lu­tion pe­riod. Au­tho­rised rep­re­sen­ta­tives of fi­nan­cial cred­i­tors have been al­lowed to join the CoC for vot­ing and at­tend­ing meet­ings.

The panel has also rec­om­mended 90% thresh­old for CoC to de­cide on with­drawal of IBC process af­ter ad­mis­sion by the NCLT.

The panel has sug­gested that in case of listed com­pa­nies, trad­ing of shares dur­ing in­sol­vency pro­ceed­ings should not be sus­pended as it leads to bet­ter price dis­cov­ery. The com­mit­tee also sug­gested that time­bound ap­proval from reg­u­la­tory bodies should be put in place af­ter the ap­proval from NCLT in case of suc­cess­ful bids. For the Com­pe­ti­tion Com­mis­sion of In­dia (CCI) ap­proval, spe­cific guide­lines should be put in place.

The com­mit­tee has also rec­om­mended that the NCLT should have the power to di­rect In­sol­vency and Bankruptcy Board of In­dia (IBBI) to re­place the res­o­lu­tion pro­fes­sional, the panel has rec­om­mended.

How­ever, ex­perts cau­tioned against en­ter­tain­ing hope that le­gal loop­holes in the IBC would be plugged af­ter the rec­om­mended changes are in­cor­po­rated.

BJP’s in flated claims on re­cov­ery of bad loans

The BJP claimed on its Twit­ter ac­count on Satur­day that the IBC has re­sulted in re­cov­ery of ~4 tril­lion out of stag­ger­ing ~9 tril­lion of NPAs. How­ever, RBI data show that the pub­lic sec­tor banks re­cov­ered just ~157 bil­lion in 2016-17 and 2017-18 till De­cem­ber 31, through all re­cov­ery chan­nels, in­clud­ing IBC. Banks started re­fer­ring bad loans cases for res­o­lu­tion under the IBC in Jan­uary 2017.

In fact, in the last four fis­cal years — 2014-15, 2015-16, 2016-17 and 201718 till De­cem­ber 31 — all 21 pub­lic sec­tor banks to­gether re­cov­ered only ~293.4 bil­lion out of ~2.72 tril­lion of bad loans that were writ­ten off by the PSBs, as per the RBI data. Dur­ing this four year pe­riod, pub­lic sec­tor banks recorded a re­cov­ery rate of 10.77 per cent. More than 89 per cent of NPAs writ­ten off by state-owned banks could not be re­cov­ered dur­ing the pe­riod, as per RBI data pre­sented by Min­is­ter of State for Fi­nance Shiv Pratap Shukla in re­sponse to a query in Ra­jya Sabha on March 27.

IL­LUS­TRA­TION: AJAY MO­HANTY

The fi­nan­cial bid­ding was ex­pected to be wrapped up by the end of Jan 2018 for 12 large cor­po­rate loan ac­counts re­ferred by the lenders to the NCLT fol­low­ing the RBI’s di­rec­tive last year

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