Why RBI's strategic debt restructuring scheme has turned out to be a damp squib

A year ago, lenders to engineering and construction major Gammon India Ltd invoked the Strategic Debt Restructuring (SDR) mechanism. A total of 16 banks, led by ICICI Bank, decided to convert a part of their loan into 63.07 per cent equity. The SDR Scheme, an improved version of the erstwhile Corporate Debt Restructuring, or CDR, mechanism, gives lenders sweeping powers to throw out managements of companies whose assets have turned bad. The bankers, however, could not find a buyer for the entire Gammon India and instead decided to restructure it into three parts - power transmission & distribution (T&D), engineering, procurement & construction (EPC), and the residual business. The Thailand-based GP Group has shown interest in the EPC assets while Ajanma Holdings is keen to buy a stake in the T&D business. The banks are fine with these offers. After all, their 80 per cent exposure is getting transferred to these two companies. Gammon India, too, is relieved, as most of its debt is going away with the EPC business.

Gammon India is among close to two dozen companies where bankers have invoked the SDR Scheme, launched 18 months ago to make the process of debt recovery faster and smoother. The list includes Alok Industries, Usher Agro, Diamond Power, Monnet Ispat, Jaiprakash Power and IVRCL. However, the scheme, like its earlier avatars, has found little success due to its rigid framework, and Gammon India is probably the only case where banks are hopeful of a turn in fortunes. At stake is Rs 1,00,000 crore debt where banks have invoked SDR. So, what went wrong? Several things, say experts.

One, the bankers triggered SDR in a hurry, without proper documentation or forensic audit. "They did not prepare themselves," says a private banker. This is evident in case of Jyoti Structures, a mid-sized company where banks, led by State Bank of India, or SBI, invoked SDR but decided to approach buyers without converting their debt into equity. They thought the buyer would just lap up the company. They were wrong. The deal didn't go ahead due to pricing and other issues. The 18-month SDR period will lapse in February. In the last one year, Jyoti Structures' losses have risen to 40 times its equity.

Experts say the problem starts at the loan documentation stage itself, which is why in many cases where there is no provision for conversion of loan into equity, the bankers are in the process of creating fresh documentation. "We cannot enforce (the change) if the company doesn't agree with the new terms," says K. Wadhwa , General Manager (Stressed Assets), Dena Bank.

Also, banks get 210 days to convert debt into equity. Here, too, the companies obstruct the process of increasing authorised capital, getting board approval, etc. In the ABG Shipyard case, for instance, shareholders rejected the conversion of debt into equity. ABG has now given the task of finding a strategic investor to investment banker Rothschild. The promoters' resistance to taking new investors on board is also a hurdle. In some cases, unsecured creditors try to thwart the process. In the Usher Agro case, two parties bombarded the company with winding-up petitions for recovery of dues. "These winding-up petitions run concurrently with the SDR process. There may be examples where bankers have to resolve these cases before the sale," says a lawyer.

Another issue is confusion due to the lack of a unified law/framework to deal with the problem. Alok Textile, for instance, is precariously placed for recommendation to the Board for Industrial & Financial Reconstruction, or BIFR, as a sick company. If it is admitted into BIFR, the SDR process could be stopped, though a banker in know of the developments says the company's entire net worth has not been eroded, a prerequisite for being admitted as a BIFR case. "They have not sought BIFR protection so far," he says.

The CDR Way?

Expert says the SDR Scheme could go the way of the CDR Scheme and fail to resolve the problem of stressed assets. Under CDR, banks used to accept a moratorium on interest payments and longer period for payment of the principal. Investment banking firm RBSA Advisors said in a recent report that the CDR of 44 firms with a debt of Rs 27,015 crore failed in 2014/15. "Only five firms with a total debt of Rs 1,399 crore managed to exit the CDR successfully," says the report.

Another issue is bankers' limitations as managers of diverse companies. "Do banks have time, energy and experience to turn around a stressed company?" asks a consultant. "Banks have converted debt into equity without any realistic assessment of how sustainable is the debt," says Abizer Diwanji, Head, Financial Services, EY India. The sustainability of debt, in fact, is a major roadblock, as many stressed asset funds want the leverage issue to be sorted out before they go ahead with the deal. SBI Chairperson Arundhati Bhattacharya says not many buyers are showing interest. "We have seen people back out at the last minute. Some buyers believe there could be hidden liabilities," she says.

In companies under SDR, bankers are actually retaining promoters and appointing concurrent auditors. "The change of management is not very easy in the Indian context," says Saurabh Tripathi, Senior Partner and Director at Boston Consulting India.

Some bankers complain that the RBI's one-size-fits-all approach doesn't work in the real world. "The RBI has given strong frameworks that few companies fit in. As a result, we are not able to do much," says Bhattacharya. Bankers are also reluctant to stray away from the regulations due to fear over inquiries by the Vigilance Department. "The real problem with SDR is that you have to cut a deal and a deal is fundamentally a judgment call. And a judgment call cannot be rule-based, and if it not rule-based, the public sector banks cannot feel safe," says Tripathi of Boston Consulting.

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A former colleague of Bhattacharya who handled stressed assets at SBI says every company's problem is different. "If it was easy, the problem would have been solved earlier," says M.G. Vaidyan, a former Deputy Managing Director at SBI.

In many cases, the companies are facing temporary problems due to issues such as weak demand, cheap imports and overcapacity. In such a case, changing the management won't yield results. In many power companies, for example, the plant is ready but electricity boards are not signing power purchase agreements as electricity is available at lower prices on exchanges. "Nobody is thinking about innovative financial structures in terms of how to deal with business cycles," says Diwanji of EY India.

So, what's the solution? "The only way out is to take out all the bad debt from banks and park it in a separate vehicle in which all bank are stakeholders," says Boston Consulting's Tripathi. Arun Tiwari , Chairman and Managing Director, Union Bank of India, is optimistic. "The environment is challenging but I'm sure things will improve once the economy picks up," he says.

However, for the time being, banks are staring at losses. They get 18 months to exit the SDR Scheme. For the earliest cases, the period will start ending in the next six months and banks will have to make mark-to-market provisions for any diminution in the value of equity acquired under the SDR Scheme.

Maybe things will worsen before they improve.~

@anandadhikari