The unpredictable position of cash flow of the investee company, the risk of default by the stressed company
Stressed assets for public sector banks are at 17% of total assets, 7% for private banks while for foreign lenders they are about 6%.
The unhealthy financial position of defaulters is generating investment opportunities for the competitor companies to acquire such defaulting companies at distressed value.
There are many challenges in investing in insolvent companies under Insolvency and Bankruptcy Code, 2016 (IBC) faced by the investor at every stage; we have enlisted a few of them:
The promoter/ shareholders may be non-cooperative by not providing complete and/or accurate information about assets and liabilities.
In quite a few cases, it is getting difficult for the Interim Resolution Professional/Resolution Professional to take complete control of the day-to-day affairs of the corporate debtor.
Further, to run the business of such debtor as a going concern, IRP/RP needs immediate working capital, which is again an uphill task.
Also, there is no clarity with respect to the payment of minimum alternate tax (MAT) which may also pose as a challenge and delay the entire process.
In a recent amendment to the regulations pertaining to IBC, the Committee of Creditors will need to analyse the credibility of a resolution applicant (including, investor) before approving any resolution plan submitted by such resolution applicant.
Also the resolution professional shall have to ensure that the resolution plan submitted by such a resolution applicant shall contain such details, relating to any convictions, disqualifications, criminal proceedings, categorisation as willful defaulter, etc, in order to evaluate the credibility of such an applicant and other connected persons.
Unsecured/operational creditors are excluded from the committee of creditors.
There are chances that a third party, which may be affected by the insolvency proceedings may challenge the same as seen in the case of Jaypee Infratech where affected buyers called upon the Supreme Court to stay the proceeding.
Insolvency petitions have already been admitted against the a few defaulters’ in the steel industry viz. Bhushan Power, Bhushan Steel, Electrosteel Steel, Essar Steel and Monnet Ispat.
Other sectors, where the amount of stressed assets have been on a high, inter-alia, such as in infrastructure, utilities, metals, power and telecom sector where consolidation may be anticipated due to the increase in large NPAs.
It is evident that there are enormous opportunities available to the cash-rich companies to acquire the stressed assets at distressed value, however, these opportunities are not unqualified and certainly involve some amount of risk/challenges.
However, it will be interesting to see the results of the ongoing resolution process along with challenges in regards to the approval as well as implementation of resolution plans.
THE CHALLENGES
- The unpredictable position of cash flow of the investee company, the risk of default by the stressed company
- The promoter/ shareholders may not provide complete and/or accurate information about assets and liabilities
Parwani is partner and Makhija is associate with Rajani Associates
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 "Stressed assets")
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