‘The IB Law Ap­plies to All Stake­hold­ers’

MINTSTREETMasala

The Economic Times - - Money & Banking -

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.

ON PRO­MOT­ERS

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.

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