Insolvency and Bankruptcy Code: What has been done and what lies ahead?

More than a year after the Insolvency and Bankruptcy Code (IBC), 2016, was put in place, here is a look at the emerging trends of the cases in the courts so far.

With 470 cases admitted by the National Company Law Tribunal (NCLT) under the IBC, most experts are keenly watching the outcome of the first set of 12 big corporate defaulters that lenders have sought to resolve under the RBI’s directive in June this year.

In a judicial boost to companies, as on November 2017, over 4300 applications under CIRP (corporate insolvency resolution process) were filed in the various benches of NCLTs, as per RBI data.

However, the success of the NCLT judgments would be on the resolution of the 12 accounts, constituting 25 percent or one-fourth of the system’s bad loans. The resolution would essentially mean finding buyers to extract the best out of the assets.

In India, the total outstanding amount for top 50 stressed borrowers, funded by scheduled commercial banks, stood at Rs 372,379 crore as on September 30, 2017, according to the RBI.

At present, concerns remain over the pricing of assets by potential buyers, number of bidders, especially after the new amendments that weed out existing promoters from bidding, leaving less competition in the buyers’ fray and buyers demanding a huge haircut given the urgency of the lenders.

Experts suggest there is still uncertainty on the pricing and loose ends with unknown liabilities in the entire resolution process.

Dipak Gupta, Joint Managing Director, Kotak Mahindra Bank, said, “Before NCLT, bankers and promoters have to come together. At that stage, promoter is desperate to resolve as it is in his interest otherwise he or she loses control of the company. But resolution beforehand requires bankers to A. sacrifice reasonably and unconditionally and B. there are lot of unknown liabilities. There is an apprehension that if I resolve before NCLT, there will be lot of loose ends.”

Loose ends, or what he calls, the unknown liabilities which are not necessarily in promoters’ control – service tax dues, labour dues, operational creditors, electricity, etc… “I don’t even know if I will get the entire leftover price after the resolution as there could be lot of hidden dues... Hence, why settle for less?”

So far, interested buyers including foreign funds such as London-based Arcelor Mittal, Brookfields, Korea’s POSCO, Blackstone, TPG Capital and domestic biggies like the Tata Group, Kotak Group, Mumbai-based Shapoorji Pallonji Group, Ajay Piramal-controlled Piramal Enterprises and Sajjan Jindal’s JSW Group, among a few have shown interest to buy the stressed assets currently battling the insolvency process at various NCLTs.

The Dirty Dozen

Of these, the 12 accounts in the first list include -- Essar Steel, Bhushan Steel, Bhushan Power and Steel, Monnet Ispat and Energy, Electrosteel Steels, Lanco Infratech, Alok Industries, Amtek Auto, Jyoti Structures, Era Infra Engineering, Jaypee Infratech and ABG Shipyard.

As per a Motilal Oswal report the haircut at 70 percent of net stressed loans can impact net worth of lenders by 37-100 percent. Private banks are better placed than PSU banks in terms of capital availability to absorb such potential losses. However, the government’s recapitalisation plan will enable PSU banks to make necessary provisions towards such assets.

Given the substantially high debt-to-market cap levels and the first round of NCLT resolutions to be completed within 180 days (extendable up to 270 days) is due between January and March, the buyers are reluctant to enter the bids in good numbers so far.

Therefore, despite having good operating assets, even if the buyers come forward to bid, the end results may see hair-cuts up to 50-70 percent for most of the 12 large accounts (11 have been referred to the NCLT).

Further, in case an account goes into liquidation, the recovery rate is usually just 10-20 paise in a rupee. Hence, the lenders or investors may not get paid anything if the company goes into liquidation.

Additionally, lenders are also set to file the RBI’s second list with nearly 28-30 accounts to the NCLTs with the December deadline. This also requires banks to make higher provisioning towards these accounts further hitting their balance sheets and profitability.

Experts suggest the second and following rounds will start seeing more trouble coming through as they would be non-performing assets. The only way to resolve is to sell-off. In the second and third rounds, the fear is the hits will be higher, a senior banker said.

What is in it for banks?

Therefore, in the current scenario banks seem to have landed in a Catch 22 situation. If they manage to get a buyer, the haircut could be enormous. If they don’t, then the company goes into liquidation, which leaves them with virtually nothing on the table.

The crux of the resolution is what is in it for the shareholders?

Currently, the stocks of the companies are already trading at very low prices. According to experts, if the resolution goes through, the hair-cuts may leave hardly anything in hand for the creditors followed by the shareholders. If the resolution fails, and the company goes into liquidation, in most likelihood, shareholders will get nothing.

However, if optimism is the way to go, the empirical progress so far indicates the IBC is likely to have a structural change in the behaviour of the borrowers, lenders and at the same time give a platform of redressal for the smallest stakeholder including employees and operational creditors against crony capitalistic corporates.