Driving Improved Outcomes In IBC Through Better Engagement

IBC – Rising Liquidation is Area of Concern
As India’s insolvency law completes five years in existence, the IBC has been increasingly in the news.  While there has been extensive analysis on the success of the law (with arguments equally vehement on both sides), there has been limited discussion on the buyer pool involved in the process.  There have been 4,376 companies in CIRP since the law was enacted – of which only 348 companies have achieved closure though approval of resolution plans.  At the same time 617 cases have been settled whereas in 411 cases promoters plan under section 12A have been accepted.  However, the disturbing part is that 1723 companies – just over 40% - are yet resolved, whereas 1277 closures have been via liquidation.

Another aspect is time.  Companies in the IBC are melting ice cubes – even as their operations are impacted due to lack of confidence of customers, suppliers or employees, the onslaught of litigation between various parties (creditors, borrower, operational creditors, government agencies) delays the timeline.  Logically therefore, it should not be surprising that number of liquidations would increase.  In some cases, of course, there is the additional dimension of fraud that contributes to the liquidation numbers increasing as in such cases, of the corporate debtors are beyond repair. In many cases, the multitude of proceedings mounted by enforcement agencies also prevents potential buyers in attaining confidence that they are buying recoverable assets and not liabilities.

Buyers Beware – For How Long
With so many companies in IBC, one would imagine there would be significant interest in buying them especially given that building greenfield assets in India remains a challenge to most.  And there is a steady stream of supply - which would only be expected to increase as banks and corporates wean off COVID protection and support. However, the reality seems different on the ground. While some large marquee assets have seen more than handful of competing offers, medium size resolutions have not seen more than two bids.  More importantly, there seems to be very low participation from funds – both domestic or foreign – in the process.  

There are some obvious reasons for the same – lack of defined timelines, abrupt change of process by lenders due to their inherent nature, post-closing challenges despite the law providing for reliefs and very limited financing available for such bids.

Funds Own and Run Companies – Not So Much in India
Nevertheless, globally, funds owning and running companies is not unusual.  All major buyout funds such as Blackstone, Carlyle, Bain Capital, KKR and Apollo – have a long history of owing, running, managing and selling companies in variety of sectors.  In recent years, a number of them have exited their investment by selling their portfolio companies to competitor funds rather than listing them on the markets.  

In India, however, this is just evolving.  This has  been seen in the Information Technology sector initially (Hexaware, Mphasis, NIIT, et al) and then extending into industrial companies (Essel Propack, Piramal Glass). Subsequently it has seen some success in the Financial Services sector (Aptus Housing, Aavas Housing, Indostar, Xander) as well as Healthcare.  In IBC though, the phenomenon has been muted.  In fact, other than the handful names, funds have remained on side-lines in the IBC process.

Funds have Grown AUM – But Invest in Structured Deals Mostly
Even as on one hand, there has been evolving interest, on the other hand, almost all these funds have increased their AUM over the past few years.  So, where are they investing their capital?  It seems most of their investments have been in structured lending, listed equity or distress debt purchase.

Source: Company Reports/Press Releases

Structured debt seems obvious choice given the de-emphasis on corporate lending by banks and NBFCs in India.  Funds have tended to go for pre-IBC financing such as Varde’s investment in RattanIndia and Ares SSG consortium in Jaiswal Neco.  Altico acquisition by Ares SSG was a good example of prepack outside IBC.  However, in IBC, the engagement has been low.

Way Forward – Funds Can Play a Meaningful Role
With more companies on offer, an improved tax regime, and consistent policies, funds should view IBC as an opportunity to showcase their experience and expertise of owning and running companies.  With time, these investments should deliver substantive returns on their initial outlay – compensating them for the risk undertaken.  However, creditor banks should also provide a clear path to resolution aside from supporting the resolution applicant through the process.  This could include mechanisms such as  accepting equity in the resolution process which gives confidence to the incoming investor and upside to lenders, accepting deferred payments which makes indirect financing package available to investor funds which may not have direct banking lines in India, hiring operational managers while the IBC process is underway to ensure the business value is preserved and providing post-petition working capital support to the companies in IBC.  All these are obvious things to do, but not easy to implement.  However, if we want more resolution applicants for the stack of corporate debtors in IBC, we need to cast a wider net - and encouraging funds to participate in the process could be one of the lowest hanging fruits.