‘The IB Law Applies to All Stakeholders’
If one takes a conventional measure where debt to EBIDTA ratio of more than 4 times represents a stressed company, total loan assets of such firms in India are closer to ₹ 30,000 crore, which is 30% of all advances. Nikhil Shah, managing director, India, Alvarez & Marsal, a specialist firm in resolution, discusses with journalists the future of banking in relation to bankruptcy. Edited excerpts:
MC Govardhana Rangan: Can the new bankruptcy system change life materially? There are a few key things in the law that should yield a better outcome than we have had earlier. The law applies to all stakeholders and acts as a forcing mechanism. Once the process is triggered, there is a moratorium for all obligations. All stakeholders come together through insolvency professional to figure out what is the best solution for those companies. Earlier, there were different laws governing different parts of it, so recovery would be a very scattered approach. The secured creditors would go to a DRT (debt recovery tribunal), the unsecured guys would go to a high court to file a winding-up petition, the equity holders would go to the Company Law Board. This law brings all of that together.
MC Govardhana Rangan: What are the obstacles? When you have a new law, it is not prescriptive. So, there has to be an evolution of case law that becomes prescriptive for the next generation of cases. This process actually takes two years and this is not unique to India. In the UK, when they enacted their insolvency law in 1986, for the first couple of years it was very rocky. Sugata Ghosh: Is there any risk or liability for insolvency professionals? There is a large risk that is there in terms of personal liability for the insolvency professional, who has got two roles, one, to drive the resolution plan acceptance by 75% of the financial creditors by value, and two, to manage the operations and cash flow and compliance of the company with the objective that there is no deterioration in value in the underlying asset through the resolution process. Most companies that have gone to NCLT (National Company Law Tribunal) in the recent past are fairly large operating companies. There is a risk of going in and there could be some deterioration that takes place.
Saikat Das: Do you think majority of the cases will end up liquidating the company? It is hard to give a generalisation on that. It is very case-specific. What you will find is whether it is a viable company, sustainable company from cash flow point of view. Has the company a viable business model? If you had to remove debt obligations, if you find it is a viable option generating positive cash flow, there will be some debt sustainability in that company.
Sangita Mehta: Legally, is there any restriction on who you can hire as an IP? Like the auditors of past years? Under the new set of regulations, if the company has taken fees upwards of Rs 50 lakh in previous two-three years, he will not be considered independent under the Companies Act. There is some thought and we don’t know where IBBI (Insolvency & Bankruptcy Board of India) is with that.
Saloni Shukla: Is there a conflict of interest? We have seen some agencies carving out restructuring plans and these agencies are working as an IP? It is a very serious issue. You can’t start a case unless you have not taken any fee from the debtor in the previous two-five years. If you have, you have to disclose that in court. IBBI or the court will decide on whether the person is in conflict. Legal definition is if any advisory firm has provided advisory services, taken fees from the creditors, the question that you have to ask is whether he is working in the interest of the company.
Satish John: One thing that Amtek Auto did was that the MD resigned and joined as a president in the company. Is it ok? Our strategy is to work with the promoters and the management team because in a short time frame you have a lot of things to do as an IP. Most of the knowledge and relationships reside with the management and the promoters. One of the objectives is to make sure that there is no deterioration in value of the underlying asset. If you throw out the promoter or the management team on day one of the exercise, you will lose value and that’s contrary to what you are trying to do. If they are not co-operating, of course, we will replace them. As long as they are co-operating, I have no problem.
Saloni Shukla: Can NCLT take the load? We have highlighted the issue. We do not want NCLT going the DRT way. We can see for a prolonged period of time judges are not equipped enough on what they are supposed to do. There are infrastructure problems in courts. We have actually suggested a way where the government can actually take charge for the administration cost. That money can actually be used to create adequate infrastructure.
Nishant Vasudevan: With rising NCLT cases, are foreign distressed assets funds coming to India? Two years ago, there would be four or five funds. The number of such distressed assets or special situation funds is around 15. In addition, there are 10 funds hovering around and looking to set up shop in India right now. There is tremendous interest.
Vatsala Gaur: How do you do due diligenceon the new investors coming in? I think it comes down to the eligibility criteria. I don’t think there is enough time for you to do an extensive due diligence on all the buyers that show up at the table. We are active in distressed debt everywhere in the world. So, if you have not heard of who they are, that would mean less credibility of their bid. So, even if they offered 100 cents, you may not be willing to accept that because you are worried about the feasibility of the bid.