Insolvency and Bankruptcy Code missing timelines

Insolvency and Bankruptcy Code, the new instrument brought in to address mounting bad loans, has so far seen mixed outcomes, with many ailing companies passing into able hands. The lenders have had to take massive haircuts in resolution in some cases while in some they have recovered the entire debt. However, infrastructure constraints and delays are creating hurdles for the process that is still evolving.

The Insolvency and Bankruptcy Code (IBC) 2016, set up to cure the malaise of bad loans and defaulting promoters, has had a bumpy ride. While a few cases have been resolved, the large businesses run by high-profile promoters are still stuck in litigations. But overall, the IBC is a relief in many cases, turning companies to stronger promoters. BIFR (Board for Industrial and Financial Restructuring or the SICA (Sick Industrial Companies Act) have failed to rehabilitate companies, and the recovery was a paltry 26%.

Nobody had expected that these bankrupt and debt-laden companies would get lifted out of muddy waters in quick time. The IBC had, in fact, given a time period of 270 days for a settlement that would imply ownership changing hands to new bidders and a repayment schedule agreed to by the bankers.

Rajnish Kumar, chairman, State Bank of India, said, "There may be delays in some cases but India never had an option to change defaulting borrowers. For the first time, we are effecting change in management control in large companies with large non-performing assets (NPAs). It cannot be compared to earlier restructuring schemes like the SICA or the BIFR where cases once referred got into a cold storage. This is an evolving legislation which is working as an important tool for the bankers."

In case of high-value corporate NPAs, which are a running concern with a state-of-the-art plant, the recoveries are as high as 125%, but the average recovery in the 60 resolved cases is around 47% as against 26% under the earlier BIFR. But bankers warn that as the high-value cases get resolved, the average recovery under the IBC will also come around 26% for the smaller cases.

Among 12 high-value NPAs that Reserve Bank of India (RBI) had picked in February 2017 (now called the dirty dozen) with a total debt of Rs 3.45 lakh crore and a liquidation value of Rs 73,220.23 crore, only in two cases money has come back to the banks with a haircut. Electrosteel Steel, which had a debt of Rs 13,175.14 crore, was resolved with a 40.38% haircut with Vedanta's Anil Aggarwal paying Rs 5,320 crore to take over the debt of the company. Bhushan Steel was taken over by the Tatas with the banks taking a 63.49% haircut and receiving Rs 35,571 crore. The unpaid debt of the company was Rs 56,022 crore. With regard to Lanco Infratech Ltd and ABG Shipyard, liquidation order has been passed. Other accounts are at different stages of the process.

Since it is a court-mandated resolution process, bankers say that when it comes to taking a haircut, they prefer decision-making through National Company Law Tribunal (NCLT) rather than sticking out their neck to endorse a resolution plan outside court process.

"Pre-NCLT solutions may clearly work out better in terms of overall recovery, but for settlement, NCLT is a good avenue. But cases are going out of the NCLT to the higher courts like the Supreme Court which is delaying the process. But that is inevitable. One has to give a promoter a right of appeal," said a banker.

Siby Antony, chairman, Edelweiss Asset Reconstruction Company, said, "IBC is a successful legislation to resolve the high-value debt. Under BIFR and SICA, the cases used to languish with the existing promoters doing little to salvage the company. In some cases like Binani Cement, the recovery for us is close to 140%; for the secured lenders also it will be over 100%."

"The Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (also known as the Sarfaesi Act) is good for low-value accounts but for the high-value accounts, the IBC 2016 is working to resolve many cases," added Antony.

But even the IBC is not able to give time bound verdicts.

Essar Steel, the flagship steel plant of the Ruias and the one of the largest NPAs with a debt of close to Rs 40,000 crore, has been in the NCLT for the last 600 days and still counting. Ruias took the case right up to the Supreme Court after Arcelor Mittal consortium was selected as the highest bidder. The case also went to the National Company Law Appellate Tribunal (NCLAT).

Losing patience, SBI chairman Rajnish Kumar decided to put the bank's Rs 14,000 crore exposure to the steel major on sale so that money comes in the fourth quarter and spruces up its balance-sheet for the financial year. SBI later changed its mind on selling the asset with a hope of a resolution by the end of March. It is estimated that every day of delay, in this case, is costing the banking sector Rs 25 crore as the loan is locked up with no interest. Now the NCLT has been asked to dispose of the case by March 7.

Even in certain cases where the plant is state-of-the-art, banks have had to take a deep haircut due to lack of bidders. When there are no bidders and it is a going concern, the court does not allow liquidation to protect jobs. Reliance Industries-JM Financial took over textile firm Alok Industries for Rs 5,050 crore at a deep discount of 83%. The resolution was facilitated after the government amended the IBC 2016; it now requires the approval of only a minimum of 66% of lenders as against 75% earlier. But even this money is yet to flow back to the bank as it is caught up in court procedures.

It is an open and transparent process but bidders are few except in the cases backed by top-notch underlying assets. In many cases, the debt is too high and the new promoter does not want to take up the liabilities. Foreign distressed funds that are keen to pick up assets in India do not want to go through the IBC process. "They are preferring a negotiation outside the court-led process for a speedier settlement. In the court-led process, the promoters are delaying the process. The courts with poor infrastructure set up are unable to dispose of cases on time, which is procrastinating the settlement time. There are cases where the orders are passed but due to delays in the court, the money is yet to flow back to the banks," said the head of an asset reconstruction company.

But it is not as if the new legislation has no teeth. Binani Cement was a stellar example of the IBC process working at its best when the plant is in excellent with great potential for growth. In this case, the secured lenders' debt was Rs 2,200 crore; they got back Rs 3,000 crore, which is a 125% recovery. The plant had competitors Dalmia Cement and UltraTech of the Aditya Birla group fiercely bidding, helping lenders to get back the entire debt of Rs 6,469.36 crore along with interest payments. For UltraTech, which was desperate to strengthen its footprint in northern India, Binani Cement was the best bet. So it hiked its bid and took over the company after Dalmia Cement was voted as the highest bidder.

However, the crumbling infrastructure of the NCLT courts is another issue that bankers have to deal with to snip the losses that arise from delays.

Nearly 9,000 petitions have been filed under IBC at NCLT until now but only 1,500 cases are admitted with a debt of over Rs 5 lakh crore. Currently, India has one NCLAT and 11 NCLT benches. All the NCLT courts together have 22 members – 16 judicial and six technical. Experts say that considering the work, each NCLT should have at least four members. The government may set up three more NCLT benches as the number of companies referred to bankruptcy court rises.

"It takes weeks to file a petition because the courts are packed. Many matters relating to companies are now being referred to the NCLT from the high courts, which is increasing the burden of the NCLT," said an advocate who is fighting several cases in the NCLT.

Moreover, it is giving a shield to borrowers to not pay back. A recent case is that of Anil Ambani's Reliance Communications, which filed for bankruptcy after spending nearly two years convincing the banks that they were repaying a chunk of their Rs 45,000 crore debt by developing real estate in Navi Mumbai. The legislation has a provision under 66A to conduct a forensic audit but no provision to take punitive action.

The competence of the resolution professional, who according to IBC 2016 takes control of the company is also crucial. Often, these professionals are not trained to run the company. The management or promoters, in some instances, do not co-operate, creating issues for the smooth running of the unit. "This problem is getting addressed to some extent as they get attached to big consulting firms like Deloitte and others. But even the consulting firms have no domain expertise to look at the day-to-day operations of the company," said an official from an ARC. Resolution professionals were also charging high fees, which was curbed after the IBBI (Insolvency Bankruptcy Board of India) came out with a circular on June 12, 2018, where the fees and other expenses have to be approved by the committee of creditors (CoC).

Since implementation, IBC has been continuously evolving with four amendments already enacted to fine-tune it for effective action. One of the key amendments include voting threshold required by the CoC reduced from 75% to 66% in the larger interest of achieving timely resolution. Also, homebuyers have been included under creditors to make the process fairer to all the stakeholders, like in the Jaiprakash Associates case where the flat owners who invested in the residential project are also considered as creditors. These are encouraging signs of an evolving regulation. We need to see to it that the amendments in future make it stronger so that some of the anomalies are addressed.

Numbers to be put on the page:

• Nearly 9,000 – Petitions have been filed under IBC at NCLT
   
• Only 1,500 – Cases admitted with a debt of over Rs 5 lakh crore
   
• 1 – Appellate tribunal in the country
   
• 11 – NCLT benches
   
• 22 – Members all the NCLT courts put together have
   
• At least 4 – Members each NCLT should have, say experts
   
• 3 – More NCLT benches the government may set up as the number of companies referred to bankruptcy court rises