The dangerous dozen
India's biggest loan defaulters are under the hammer of the seven month old Insolvency and Bankruptcy Code (IBC) for quick resolution or eventual liquidation. The next 180 days promise to be high drama as promoters and bankers slug it out in the open. State Bank of India and ICICI Bank have already kick started bankruptcy proceedings against Monnet Ispat, Alok Industries and Jyoti Structures at the National Company Law Tribunal (NCLT), the adjudicating authority for bankruptcy.
Welcome to the first of its kind bankruptcy legislation designed to fast track resolution of bad loans in a time bound manner--something unheard of in India. In the past, banks used to happily evergreen loans and litigious promoters had their way whenever banks turned hostile. But, not any more, as resolving bad loans is the top priority of the present government and the Reserve Bank of India or RBI.
Out of the Rs 70 lakh crore outstanding bank lending in the system, the backlog of NPAs hit Rs 7.28 lakh crore by end-March this year. The 12 cases account for 25 per cent of the bad loans in the system. There are five steelmakers and an equal number of construction and infrastructure companies, two sectors hardest hit by coal block cancellations, land delays and environment clearances. The other two - Amtek Auto and textile major Alok Industries - are odd men out. "Wherever promoters cooperate, the resolution should be smooth," says Rajkiran Rai G, Managing Director & CEO of Union Bank of India, while giving a subtle warning, "if promoters are not cooperating, there is a well laid out mechanism under the bankruptcy code." Bankers are all set to take rogue promoters to the cleaners. Apart from leading lawyers, they have lined up the best brains in the consultancy world to manage stressed companies as insolvency professionals. The Ruias, Bhushans or the Gaurs have to sit outside bankruptcy proceedings as insolvency professional take over the management of the company with the board getting suspended immediately. The insolvency professional also constitutes a committee of creditors, which discuss and decides the revival proposal to be submitted for approval by NCLT.
A Bumpy Road Ahead
Bankruptcy proceedings are going to be challenged at every stage."There will be challenges as the new code has to mature. Many precedents have to be established," observes Abizer Diwanji, Financial Services Head at EY India. The Gujarat High Court recently turned down Essar Steel's plea against the RBI directed bankruptcy. By doing so, the High Court has practically shut the doors on those who might be considering challenging RBI's powers.
The scope for challenges within the bankruptcy code or NCLT framework remains. The Ruias are readying to raise issues at the NCLT. The final orders of NCLT can be challenged at the National Company Law Appellate Tribunal (NCLAT). Also, companies can approach the Supreme Court to question the appellate authority's order.
Promoters fear operations may deteriorate as insolvency professionals will not have the bandwidth to manage operations. There are fears on the independence of bank recommended insolvency professionals too. "They would be acting as a tool in the hands of bankers," charged a promoter. NCLT appoints insolvency professionals though the recommendation comes from the lending banks.
There are other grey areas. Under the bankruptcy committee, the committee of creditors' has to approve revival plans with a 75 per cent majority. That could lead to a fight among creditors for a seat at the creditors' committee. There are over 100 lending banks in the 12 accounts, with some cases having 20-22 lending banks. The bankruptcy code also allows non bank financial creditors and even lenders where promoters have given their personal guarantees to be part of the creditors committee. "It is no longer a bankers' club," grins a consultant.
There is every possibility that outside bidders could emerge with better restructuring plans than the bank. Sajjan Jindal is interested in the steel assets like Bhushan, Essar and Monnet Ispat. The biggest confidence booster for new buyers or private equity is the liabilities getting crystallized in a court driven process. In a situation outside NCLT, the acquirer is never sure of liabilities arising in future. Another twist in the bankruptcy tale could be the unpredictable nature of Indian promoters. "The code also provides promoters an opportunity to present a resolution plan for consideration by creditors," says Cyril Shroff, Managing Partner at Cyril Amarchand Mangaldas.
There could also be challenges on the role and conduct of insolvency professionals. "The breaches and bad faith actions of insolvency professionals can lead to consequences which will act as a deterrent," says Shroff. Under the code, insolvency professionals enjoy extraordinary powers. They have to be truly independent like independent directors on the board.
Maximum Burden on Banks
Public sector banks are going to shoulder the maximum burden. Currently, banks have made 40-50 per cent provisioning in these 12 accounts. Bankers admit that haircuts on loans are imminent. The haircuts could be more than Rs 20,000-25,000 crore depending upon the equity intake and additional funds from promoters. "The haircut taken by banks will directly translate into losses due to increase in credit cost," says Amit Kumar, Partner & Director, BCG.
These 12 accounts are just the tip of the iceberg. There is close to Rs 14 lakh crore locked in stressed accounts (not all NPAs). Bankers are preparing for the worst case scenario - liquidation - which not only means loss of capital, assets and shareholders' value, but also employment. Is the Indian economy prepared? That is a bigger issue. Over to NCLT. ~
