The Reserve Bank of India (RBI) has identified 12 stressed accounts across sectors, including steel, power and infrastructure, for immediate resolution under the Insolvency and Bankruptcy Code (IBC) . The country's new bankruptcy code ensures a time-bound exercise, which will take these 12 stressed accounts to a logical conclusion. But there will be a larger impact post this first-of-its-kind decision. Let us take a look at six key areas.
Higher provisioning: Banks have to make higher provisioning for these 12 stressed accounts. These assets, identified by the RBI, have been selected based on the 60 per cent cut-off of non-performing assets (NPAs) in the books of the banks. The banks concerned have to provide a minimum of 16 per cent when an asset is still considered a standard asset. The current act of referring an asset to bankruptcy code will also attract higher provisioning over and above the minimum 16 per cent as there is a possibility that the asset will eventually go into liquidation. As of now, the provisioning requirement is 40 per cent if the asset is not paying interest or principal for 1-3 years. Regarding priority of debt, when there is liquidation (or the waterfall mechanism), the secured debt is placed in the second position, and the unsecured debt comes at fourth for settlement of dues. Banks have to evaluate their provisioning, keeping in view the worst-case scenario.
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Trigger for merger and acquisition: The RBI move also opens up the space for merger and acquisition of stressed assets. Earlier, the reluctance of existing promoter/s used to be the biggest concern for a new promoter buying into the company. But now this process has the central bank's stamp of approval as well as the court's nod. Defaulting promoters will have little say as insolvency professionals will take over to dispose of the assets. The possibility of a complete buyout is also there. For instance, Sajjan Jindal of JSW Group was keen to buy Bhushan Steel but was advised against it as might have led to litigation. Moreover, central PSUs (public sector undertakings) may also enter the fray to buy good assets in steel or power sector.
Entry of strategic or financial partner: The move also opens up the space for the entry of private equity (PE) and other financial or strategic partners who may take a 15-20 per cent stake in the stressed company. To begin with, the insolvency professional will take over the company and look for a resolution with the help of the creditors. There will be a faster turnaround plan and sell-off of non-core assets or part of the assets. It will bring the company out of the bankruptcy proceedings.
Faster restructuring: It is also a do-or-die situation for the banks concerned and a faster restructuring will happen in case the banks feels that the asset still has value and can come back to life with some loan restructuring. Earlier, lenders were also reluctant to take such steps and delayed the process of final resolution. But the banks are now aware of the urgency as there will be just 180 days to act under the new bankruptcy code. This period can be extended to 270 days in certain cases.
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Liquidation, eventually: There is every chance that a company will go into liquidation if the lenders' insolvency professionals fail to restructure or sell it to a new promoter or strategic partner. The liquidation decision will be painful for the banks as well as the economy. While the banks will have to provide much higher provisioning, it will be a great loss to the economy as liquidation means loss of employment and assets. Imagine rebuilding a large steel plant or power plant and the capex required for the same.
Litigation possibility: The possibility of litigation looks remote under the current bankruptcy code, but one never knows how the promoters, with all the resources at their disposal, will react to bankruptcy proceedings. According to many small promoters, this could be the biggest test of the new bankruptcy code.
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