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A Power Packed Punch

Move over, Avengers. India’s very own superhero is here. With the new and powerful IBC, bankers and lenders are beginning to show a new-found belief in the bankruptcy norms

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Marking a paradigm shift in india’s bankruptcy laws  was Tata Steel, when the company took over the non-performing assets (NPAs) of Bhushan Steel for Rs 32,500 crore – a controlling stake of 72.65 per cent – mid May. In the annals of corporate India, a speedy resolution to a huge debt problem was handed over in record time by the National Company Law Tribunal or NCLT. Not only were the consortium of bankers delighted about the deal, it also meant that they would write back nearly 70 per cent of their long-outstanding dues.

India has zoomed up in bankruptcy law and practice globally. The Indian Banking Code – passed by both Houses of Parliament in May 2016 and cited as one of the best reform programmes of the Narendra Modi government – has constituted the NCLT as the adjudicating authority for all corporate default cases.

With this, more than 25,000 pending bankruptcy cases will be transferred to the NCLT, seeking a speedier resolution. However, this does not include hundreds of cases with the debt recovery tribunal.

Bankers and lenders are beginning to sport a new-found belief in the bankruptcy norms and at having a shot at recovering at least part of their dues, which otherwise was taking ages to recover. But, experts reckon that the biggest turnaround probably, post-NCLT, is that promoters are now for the first time beginning to fear the law. Earlier, they tended to seek ever-greening of their loan books by taking additional loans from banks. Now that promoters stand to lose their companies, they can no longer afford to milk the system, citing bad performance on the corporate side.

“Promoters are now beginning to worry that they will lose their companies. Now they are themselves coming forward to resolve the issues before shifting to the NCLT process. It’s a win-win for Indian lending firms,” says Siby Anthony, executive chairman, Edelweiss ARC.

Promoters are increasingly looking at out-of-court settlements for outstanding dues and are readily paying up disputable amounts for the fear of losing their firms if they go under the NCLT hammer.

In the first few marquee cases dealt under the IBC, the NCLT has already pronounced judgement regarding three cases: Bhushan Steel, Alok Industries and Lanco Infratech, where the promoters have lost the companies.

Lanco Infractech, where creditors were to receive Rs 44,000 crore, has been pushed into liquidation. Alok Industries, where outstanding debt ran into Rs 220 crore, has been ordered to be taken over by Reliance Industries, and creditors will recover nearly Rs 50.5 crore. In Electrosteel Casting, Vedanta has come out as a top bidder, with creditors expected to recover nearly Rs 53 crore of the Rs 102.7 cr outstanding.  

If these judgements are anything to go by, banks are expected to recover at least about 52 per cent of the outstanding dues from the first classic cases referred to the NCLT by the RBI, figuratively known as the first IBC list. Total recoverables in the first list amount to Rs 2,34,000 crore. The Street estimates recoveries from the first 12 cases – referred by the RBI to the banks – to be around 45-55 per cent.

A second list too has been drawn up, which has been made public, with loans under question amounting to Rs 1.28 lakh crore comprising nearly 58 companies. “By our estimates, banks will recover about 52 percent in the first list, but this could take some time as some companies have moved into the liquidation process. The first cases are setting up a precedent for the problem of bad loans, and the issues will resolve and banks will get a good deal,” said Nitin Aggarwal, banking analyst, Motilal Oswal Securities.

To be sure, this was not the case a few years ago, when, despite myriad laws that were enacted to help lenders to recover dues, there was nothing on the wall to show for the banks. NPAs, in fact, ballooned significantly, by 11 per cent last year, to Rs 14 lakh crore, because of a series of scams, frauds and in many cases, purely bad lending practices.


Now things may have turned for the better. Lenders have now had the stick to drive out errant promoters from their companies. “It’s a mindset shift. For the first time ever, lenders have got a real recovery mechanism. Earlier, promoters were all over the line. They would not allow to take over companies. Multiple laws were helping them. Winding up would take a few years. Now there is a real worry that they will lose their companies. That’s where the IBC is very effective,” says Abizer Diwanji, partner and national leader, financial services, EY.

The background 
If you look at India’s bankruptcy history, recovery and restructuring of debt is nothing new in India. Several laws aimed at reducing the bad loan problem including The Companies’ Act to recover loans from companies that defaulted were enacted.

Back in the early 1980s, The Sick Industrial Companies’ Act, too, came into force, with a thrust primarily on restructuring companies and salvaging what could be recovered. In fact, companies in the BIFR (Board for Industrial and Financial Resolution) also had a similar priority (of resolution of bad loans), as opposed to liquidating companies with bad loans. In 2002, the SARFESI Act, too, was introduced to aid the recovery process but it fell short of addressing the problems of banking bad loans.
 
That’s why the government, for the first time, formulated the Insolvency and Bankruptcy Code (IBC) with powers given to the NCLT to adjudicate on these matters.

From the perspective of corporates, besides setting out the overall framework of bankruptcy proceedings in India, the IBC introduced major provisions and new concepts to speed up and improve the effectiveness of the recovery process.

 Having seen the inordinate delays in earlier laws, the government set a strict timeline of 180 days, extendable to 270, to resolve IBC issues under the NCLT once introduced to the court. Some cases, however, are taking a bit longer to resolve, and as they have posed further challenges. The case of Essar Steel, for example, has crossed the 270-day mark. “As with any new law, there will be some delays because one has to understand the law and its processes,” says Anthony. “But the heartening issue is that the bankruptcy proceedings are happening under a stronger and better framework marking a new beginning for Indian companies and banks.”

The new rules of the game
In fact, the Code has gone a step further from the earlier laws. It has introduced the concept of ‘committee of creditors’. This includes financial creditors, but excludes operational creditors, to oversee the regulation proceedings and accept the resolution proposals.

Back in the days, a loose collection of creditors would come together under the RBI schemes floated for restructuring. But the committee under the IBC has more say in the bankruptcy process.

Liquidation officers in the days of the BIFR are now replaced by resolution professionals – largely professional individuals with a deep understanding of complex financial issues, or institutions that have the capabilities of understanding the finer nuances of bankruptcy and liquidation. In India, resolution professionals have been given powers to resolve bankruptcy proceedings.

The IBC actually received a big boost when the RBI nudged banks to take a few landmark cases to the NCLT. The RBI’s largely supervisory role of banks got a huge lift when it directed banks to refer 12 important cases (then reduced to 10) to the NCLT. This marked the first time when the RBI picked assets for resolution.

These cases were important for the RBI and the whole bankruptcy code as they comprised nearly 25 per cent of banks’ bad loans. ABG Shipyard, Amtek Auto, Bhushan Power and Steel, Bhushan Steel, ElectroSteel, Essar Steel, Jyoti Structure, Alok Industries, Monnet Ispat and Lanco Infratech were in the first list, heavy with metals companies.

India Inc. has evinced keen interest in these assets. In the last few months, we have seen groups such as the Tatas, Birlas, Vedantas and Arcelor Mittals bid for companies in the resolution process.

Only clean bidders wanted
While the Code is a being seen as a step in the right direction, some finer interpretations are still being drawn out. One of the big issues that have been addressed is who can bid for such assets?

In November last year, through an amendment done through an ordinance, Section 29A was enacted, which actually brought in a series of provisions setting out who were ineligible. Wilful defaulters are among those that have been excluded from bidding, whereas promoters with loan defaults have been kept out of the bidding process. Existing promoters also were not allowed to rebid for their companies.
 
It also included promoters and persons acting in the interest of the promoters, and excluded bidders with outstanding loans in other companies.


The controversial cases 
For Essar Steel, hit with financial claims of over Rs 74,285 crore, the resolution process is taking much longer as a clutch of companies such as Vedanta, Tata Steel, Arcelor Mittal and Numetal showed interest in bidding for its assets.

Later, the Arcelor Mittal and Numetal bids were declared ineligible. Arcelor Mittal had investments in Uttam Galva, which was in another default list. Numetal was disqualified because the minority shareholder in Numetal was a gentleman called Revant Ruia, said to be related to the Ruias and part of the Ruia family. The Essar Steel case has now been referred to the NCL Appellate Tribunal, Delhi.

Another landmark case has been that of Binani Cement, which was not one of the original 12 cases referred by the RBI, but changed the contours of the bidding process because it seeks to address the question of whether one can revise a bid.

In the Binani Cement case, Ultratech and the Dalmia Bharat group bid for the assets. Subsequently, Ultratech came up with a revised bid of Rs 7,900 crore, which gives much better price to lenders. Ultratech also said it would infuse Rs 360 crore as working capital. In fact, this is much higher than Binani Cement’s outstanding Rs 7,000 crore. Dalmia Bharat-controlled Rajputana Properties is also in the race for the assets.

CHALLENGES OF NCLT
* The National Company Law Tribunal (NCLT), constituted on June 1, 2016 under Section 408 of the Company’s Act, 2013 is now the single adjudicating authority for all corporate default cases under Indian Bankruptcy Code.
* NCLT has a mammoth task of resolving thousands of bankruptcy cases, including other corporate cases.
* The erstwhile Company Law Board has been dissolved u/s 466(1) of the Company’s Act, 2013.
* The erstwhile BIFR has also been dissolved as per the Sick Industrial Companies (Special Provisions) (SICA) Repeal Act. All cases will move to NCLT
* NCLT will also handle some cases under the Debt Recovery Tribunal and appeals under the SARFAESI Act



Experts raised the question: can someone really raise a bid after having seen a competing bid? One of the rules of the resolution process is not only to look at the amount of the bid, but also other issues in the revival process such as speed of recovery, ability of new promoters to run the business, employee retention, and other issues, subjective in nature and left to the discretion of the resolution professionals.

Dalmia Bharat has challenged the revised bid and Ultratech Cement’s offer at the time of going to press, and the matter is pending in the NCLAT.

In a similar case, Liberty House missed the deadline for bidding in Bhushan Power and Steel, but went ahead and challenged the Tatas’ bid. In this case, NCLT allowed the Liberty House’s deal. Reports say that Liberty House has offered to pay upfront Rs 18,500 crore to lenders of Bhushan Power and Steel against an upfront offer of Rs 17,000 crore by Tata Steel. Now, of course, the Committee of Creditors is evaluating both the bids.

The amendments that changed the game
Since the act has been in force, the IBC has seen two major amendments, both of which have been done through Ordinances signed by the President. Experts say that this signals that the government is not shying away from tweaking the law after learning from practical difficulties about certain aspects of the law have been revealed. Others, however, believe that, in the short run, some of the changes are being seen as reactionary and looking only at short-term issues.
While the first Ordinance passed in November 2017 dealt with the issue of who could bid, excluding existing promoters and willful defaulters among others, the second looked at how the guarantees given by promoters or various entities should be addressed.

The jury is, however, out on some of the aspects. Experts reckon that promoters should be allowed to bid as they know what is best for their companies, and it increases the efficiency of the bids, allowing for a more competitive bidding process.

In a pre-November ordinance case, NCLT’s orders came as a lifeline to the promoters of Shirdi Industries, a plywood and particle board manufacturer. The company had taken up aggressive expansion before 2010, and racked up debts of Rs 650 crore, including interest. However, when similar new capacities came up, and the industry faced a slump, Shirdi Industries faced issues servicing the debt and repaying interest. The company had taken up aggressive expansion before 2010, however, when similar new capacities came up, Shirdi Industries started to face working capital issues. The company filed an application under the IBC to NCLT in April 2017, and received a reprieve. Nearly, the entire committee of creditors approved the financial restructuring plan of the company.

Against a claim of Rs 650 crore, which included interest accrued since 2014, NCLT accepted a claim of Rs 380 crore and the liquidation value was fixed at Rs 110 crore. Shirdi Industries will pay Rs 176 crore till March 2022. Further, Shirdi will also pay an additional Rs 55 crore if the performance is good. Lenders further took a 20 percent equity in the company, and have a pledge of a further 51 percent in the company.

In fact, the company successfully paid Rs 25 crore to promoters post the resolution process. Shirdi Industries has also taken up modernisation and restructuring of its plants. It has upped its plywood manufacturing capacity with investments of Rs 15 crore, and seems set for recovery with the plywood industry beginning to do well. After it applied under IBC, the company got a reprieve and almost all the committee of creditors approved the financial restructuring plan of the company.

Shirdi Industries lenders took a Rs 200-crore haircut and allowed the company to repay remaining outstanding loans of Rs 470 crore till about 2020. In fact, the company successfully paid Rs 25 crore to promoters after coming out of the resolution process. Shirdi Industries has also taken up modernisation and restructuring of its plants.

‘Bankruptcy code is not a solution for bad lending’
How will you evaluate the IBC Code?
The Bankruptcy Code is a good attempt to provide quick restructuring. But, over the years, by having multiple laws to deal with bad loans (such as SARFESI, DRT, etc.), the problem is not going to go away. The problem is, banks have lent money without doing a rigorous analysis, which we can see happening now as every bank is being charged with wrongful lending.  Second, unless there are good assets, there will not be good buyers. Just because the code puts your asset on sale, doesn’t mean that people are going to buy the assets at a price. Bankruptcy code is not a solution for bad lending.

But aren’t bankers able to recover some losses?
If the lending had been for good assets, it would not have come as an NPA.  When assets become NPAs for genuine reasons such as economic downturns, etc., and if the assets are good, there will be buyers, and in some cases, we seen buyers interest. You will not find buyers for bad assets because ultimately it must make commercial sense for the acquirers.

Won’t errant promoters lose their companies?
Have you heard any promoter saying that IBC is bad because it has taken away his company? IBC has put the onus on the bankers to sell.  The banks are suffering as they have to take haircuts.  The Code, as such, is good.  But the disease and medicine are different.  The disease is bad lending.

So what can be done?
Errant promoters and bankers who lent irrationally should not be allowed to go scot-free.



“We remained a sick unit under BIFR for three years till November 2016 without any certainty on revival despite 80 per cent of the loans having been restructured. Once we applied under the IBC, the whole resolution process was completed in six months,” says Rakeshkumar Agarwal, MD, Shirdi Industries. “The IBC helped us get the company back on track. Now, we are on course to repay the revised outstanding loan the outstanding amounts.”

Winning the teething issues
While the IBC has been a boon to many past promoters, some teething problems persist. For instance, there is a shortage of resolution professionals capable of the dealing with complex bankruptcy issues. “We need to have a higher capacity on the judicial side. We need bankers who understand the whole concept. The system will catch up, but the law has been very well implemented in record time,” says Diwanji.

With more cases likely to be referred to the NCLT in coming days, the lack of resolution professionals could once again clog up the process, leading to delays and thereby thwarting the process of speedy resolution of the bankruptcy proceedings, which has been the salient feature of this new code.

Still, there are positives. Lenders are getting a part of their dues that would have been hitherto completely written off. In some cases, banks have still to make additional provisions for such loans. Global analytical firm Crisil estimates that banks may have to make additional provisions of Rs 40,000 crore in the first 12 cases referred to the NCLT by the RBI.

Nevertheless, while banks are taking a huge hair-cut in loan amounts in some cases, the question is banks are beginning to have a big say in the financial resolution process, and even dictating the terms of a settlement. While this might not resolve the Rs 11 lakh crore NPA problems of banks, it’s giving the recovery process a big filip. Not many banks have managed to win the fight against bad loans; the NCLT’s recent rulings are a good start.

Anthony explains the IBC process to the Hindu gods who dispose justice Shani and Yama. “During the period of Shani, businesses have to make sacrifices and manage it well and come out of the process. If one doesn’t then, Yama takes over, which is liquidation.” In a nutshell, IBC spurs the revival of companies that are going under at an incredible pace. Just like the gods want to dispense justice.


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