The Countdown Begins
The RBI's fast track bankruptcy process across a dozen large stressed corporates will either see a resolution or liquidation in the next 180 days. Here's how things would unfold.
RBI’s bankruptcy process will either see a resolution or liquidation in the next 180 days
Top bankers went into a huddle recently to evolve a consensus on the resolution plans of a dozen large defaulting companies. The trigger : the Reserve Bank of India’s (RBI) decision to fast track bankruptcy proceedings against them under the new Insolvency and Bankruptcy Code 2016. These dozen companies have a total debt of `2 lakh crore (See The Big Picture). With the RBI cracking the whip, there is now no luxury of kicking the can down the road. A May 5 ordinance amending the Banking Regulation Act has given the central bank powers to compel banks, if needed, to invoke proceedings against defaulters. The National Company Law Tribunal (NCLT), the adjudicating authority for bankruptcy proceedings, has to approve a resolution or recommend winding up in 180 days or at best 270 days, in case of an extension. That is the way bankruptcy proceedings move in the developed world. “Once you get on to the bankruptcy treadmill, you just cannot get off,” says a consultant with a global firm.
Last heard, chairmen of public sector banks (PSBS) too are chipping in on the choice of insolvency professionals – mostly the big consulting firms like EY, Deloitte, etc. – who will manage these companies in the interim 180 days. The existing promoters will anyway have no say and the board will also get suspended. The banks have never been in a situation like this. The immediate worry for them is to cobble up the support of a minimum of 75 per cent lenders together in the committee of creditors. This committee is very crucial because it has to approve the restructuring plan, whether it is by the lenders itself or promoters or by strategic or financial investors. This 75 per cent limit by loan value is a very high threshold. In the UK, it's the majority vote.
In May, the RBI was forced to reduce this limit from 75 per cent to 60 per cent for its Joint Lenders’ Forum (JLF) after restructuring decisions were getting stalled due to differences among the lending banks on the quantum of haircuts. JLF is a forum for lenders to sit together and decide the restructuring plan of a stressed corporate client.
While bankers now have the shelter of the code – since it is being monitored by the NCLT – to take commercial decisions without any fear of being jailed in future, the entry of other financial creditors, like NBFCS and foreign lenders, in the committee of creditors is also making them jittery. “Under JLF, banks dealt with only secured creditors but now unsecured financial creditors will also be a part of the creditors committee,” says Siby Antony, CEO at Edelweiss Asset Reconstruction Company. So far they have enjoyed the privileges of the RBI driven restructuring mechanism via JLF, which was the exclusive bankers club. Clearly, the bankers are in unfamiliar terrain. Let’s look at how things would unfold in the next 180 days.
The Restructuring Plan
The banks have been ready with the prepack plan for these 12 companies under the erstwhile JLF mechanism. “It is now just a matter of formalising the plan under the new code,” says a banker. The banks do have a clear idea of the sustainable and unsustainable debt in these companies, and interested bidders. The bankers will use the RBI resolution schemes – S4A for converting the unsustainable debt into equity and other equity related instruments, a deep restructuring by taking haircuts, 5/25 by allowing refinancing every five years till 25 years and strategic debt restructuring where banks take a majority stake to sell it to a new buyer. “Essar Steel case should not take more than three months in the bankruptcy code. We are ready with a plan of deep restructuring,” says one of the lenders. “The lenders gain the maximum if the existing management stays in a restructured company,” says Antony of Edelweiss ARC. The challenge would come for companies where banks want to change the management. For example, Jaypee Infratech has a debt of
`10,000 crore plus with equity valuation of a paltry `1,600 crore. “Even if the bank converts another `1,600 crore debt into equity, the debt remains very high on the books. Doubling the equity in the books is also not advisable. The promoters equity gets wiped out and valuation takes a further hit,” says a consultant.
Of the 12 companies, four are from the embattled steel sector. Sajjan Jindal owned JSW Steel had shown some interest in acquiring Bhushan Steel and Monnet Ispat. There were bidders in the auto ancillary space for Amtek Auto. There is also a possibility of some central PSUS making a bid for power and steel assets. Recently, the market regulator Securities and Exchange Board of India (Sebi), has also exempted the new buyers acquiring 25 per cent or more from making mandatory open offer under the takeover code.
Financial consultants estimate that the banks have to take 30 -50 per cent haircuts on loans to make a company viable. “No new acquirer would come forward unless the debt is right sized,” says an insolvency professional. There will also be some requirement for fresh money. “The promoters are already a bit stretched and may not be able to invest further even for working capital needs,” says Ashish Chhawchharia, Partner (Restructuring Services) at Grant Thornton Advisory. Some blame bankers for not yet coming out of the JLF mindset of a lead bank. Corporate lawyers working in the insolvency space say that non bank financial creditors are the most unpredictable. Nobody knows how they will react to a bank led restructuring plan. That is why the bankers are working with a missionary zeal to put a united front before the NCLT. “The 100 per cent bank creditors have to vote en bloc to achieve the minimum 75 per cent cut off under the code in case there is a opposition from non bank creditors,” says an insolvency professional. But some predict there are likely to be differences among the bankers on the quantum of haircuts. Banks with good collateral or first charge on company’s assets would demand a better deal.
Legal Challenge
There will be many more surprises in store. The promoters, rival corporates, investors will also have the platform to submit their resolution plan to the insolvency professional. And if multiple resolution plans land at the door, the committee of creditors have to take a call with 75 per cent majority. “This will be tricky as we haven’t heard of such cases so far at the JLF,” admits a banker. The big change is the access to information as the insolvency professional runs the company and prepare a docket, which would be available to all. This also opens the room for challenges, questioning the very act of insolvency professionals and some may approach the Supreme Court for relief.
The defaulting promoters are also very notorious for delaying the recovery process. Many say the real test of the new bankruptcy code will be now as there are large players with a lot of influence. Recently, a defaulting borrower was issued a notice for bankruptcy proceedings under the code. This notice was initially returned, but when the lender issued a public advertisement, the defaulter came running to the NCLT where the case was to be admitted or rejected within 14 days. Even as NCLT decided to hear the case over the next two days, the borrower managed to convince the High Court for a hearing. The bankruptcy code clearly spells out that outside courts have no jurisdiction. The lender had no option but to approach the Supreme Court which provided relief by ruling that the NCLT process would not stop, while the High
There has to be significant capital infusion into PSBs. Encourage private capital into them if the government reduces its holding” Rahul Gupta, CEO, Ambit Pvt Ltd
Court can continue to hear the defaulter’s plea. The defaulting promoters, however, do have the right to challenge the verdict of the NCLT in the appellate authority and later in Supreme Court. The appellate authority orders of Sebi and other authorities are often challenged.
“It is a new code and people are trying to interpret it differently,” says Sanjeev Ahuja, an insolvency professional based in Delhi. “An insolvency professional will need the support and cooperation of existing management otherwise it’s difficult to understand, run and get the information that the committee of creditors wants for an effective resolution,” says Arinder Singh, an M&A professional. In a couple of cases, the committee of lenders have changed the insolvency professional mid way, which is a huge setback in a time bound bankruptcy code.
“In case of an eventual sale of business to outside parties, the process has to be transparent and based on competitive bidding,” says Rakesh Takyar, another insolvency professional. Lawyers wonder what would happen if the defaulters challenge the ordinance itself. “They have been picked up for fast track bankruptcy. There is the whole issue of subjectiveness in the manner in which these cases have been picked up,” says a lawyer. There are some who raise the possibility of NCLT itself not accepting a resolution plan and sending the defaulting company for bankruptcy.
The Costs
Bankers and experts agree that there is likely to be short term pain, but the longer term gains are far important for the economy as a whole. The loan haircuts or the discounts, which is a certainty, will have an immediate impact on the banks’ balance sheet as it would bring down the profitability. The PSBs, which have a lion’s share of the stressed loans, are already facing numerous challenges right from low credit off take, deterioration of asset quality, rock bottom valuation to capital shortages. The loan haircuts would bring them to their knees. “God forbid if a couple of cases reach the liquidation stage,” says a consultant. Chhawchharia says everybody agrees that liquidation is not a solution. “It is the least desirable economic outcome for stressed assets,” he says. The RBI is also likely to come out with provisioning norms for these 12 cases ,which could provide an extended period. There must be 40 per cent provisioning already in the books for these bad assets,” says a banker. In the past few months, the RBI has cracked down on half a dozen weak banks by putting them under its watch list. Rahul Gupta, CEO at Ambit Pvt. Ltd, says there has to be significant capital infusion into large public sector banks. “There has to be significant capital infusion into the large public sector banks. There is a case for encouraging private capital into public banks should the Government decide to reduce its holding,” says Gupta, who was earlier with Japan’s Shinsei Bank. In addition, liquidation, if any, will mean loss of employment, assets and the capital.
The bankruptcy code is expected to put the house in order. There are already close to 100 cases at the NCLT awaiting final decision. The RBI is gearing up to send the next batch of defaulting companies to the bankruptcy code if banks don't resolve them in the next six months. The stressed assets are to the tune of `14 lakh crore including ` 7- 8 lakh crore bad loans. There are some who point to the Chinese bankruptcy laws to understand how things would unfold in India. The Chinese rewrote their bankruptcy code just before the global financial meltdown hit the global economies. Like India, the modern Chinese bankruptcy code was appreciated for its market based rules and also the time bound manner of resolution. Of late, the Chinese Courts have been flooded with bankruptcy cases. Last year, it accepted some 5,500 plus cases, which represented a jump of 50 per cent over previous year. What is astonishing is that 85 per cent of the cases result in winding up of companies. “Can India afford such liquidation numbers? ” asked a private sector banker. Clearly, India is treading in an unfamiliar zone.~
Research inputs by Niti Kiran
The promoters are already a bit stretched and may not be able to invest further even for working capital needs” Ashish Chhawchharia, Partner (Restructuring Services), Grant Thornton Advisory