The resolution of bad loans or non-performing assets (NPAs) in the banking sector reached a decisive stage when the Reserve Bank of India (RBI), last month, told banks to take 12 defaulting borrowers such as Bhushan Steel, Essar Steel, Lanco Infratech, etc. to the bankruptcy court.
All the remaining NPAs of over Rs 5,000 crore as of March 2016 are getting six more months to seek a resolution failing which they also will have to be taken to the bankruptcy court.
So while courts may debate if these 12 were unfairly singled out, there is no doubt that anyways in a couple of quarters, a bunch of troubled borrowers are going to land in the bankruptcy court.
Now the process under the bankruptcy court requires the court to suspend the board of the borrowing company and appoint an insolvency professional who will take charge of the company for about six months during which time, the creditors have to come up with a new plan for the company.
While about 700 odd individuals and about 7 corporate entities including big names like Deloitte and KPMG have registered themselves as insolvency professionals, the question that India Inc and experts are worrying about is can these companies run any of these very complex defaulting companies?
Companies as large and complex as Bhushan Steel and Power, Essar Steel which has links to power, Lanco, etc. Can these run at all by outside consultants and what is the equation between the promoter, the management, the board and the insolvency professional (IP)?
An eminent panel of experts -- Bahram Vakil, Founder & Partner at AZB & Partners, and one of the authors of the bankruptcy code itself, Nikhil Shah, MD at Alvarez and Marsal, Sanjay Doshi, Partner at KPMG and Rashesh Shah, Chairman & CEO of Edelweiss Group – answer all these questions.
Below is the verbatim transcript of the interview.
Q: Exactly what is the responsibility of the insolvency professional or corporate entity? Literally, every activity is theirs or do they just behave like the board and the management and the company run itself?
Vakil: The way I like to put it is that they are the de facto CEO because it is an individual and the board becomes the committee of creditors (COC). So just like a COO would be running the day to day operations for that 180-270 days, they would be in-charge of the operations. Now, you are not expected to be a superwoman or superman. You have your team, you have management, you hire whichever consultants and experts you need, but yes, you are in charge and management reports to you.
Q: Since yours is one company which has run such defaulting or troubled companies elsewhere in the world, what exactly is the responsibility? A CEO is liable for everything that happens in the company. So, do you normally remove the entire top management? How does it work?
Nikhil Shah: I would like to step back for a second and add to what Bahram Vakil was saying that the insolvency professional has two primary professionals. The first objective is to try and drive a resolution plan where 75 percent of the financial creditors by value have to agree. So it is putting together a viable business plan for the entity, looking at the capital structure, looking at the industry, the business and its competitive advantages and putting all of that together in a package that would be acceptable and voted on by the financial creditors. That is the first one.
Q: But that is the second stage, is it not?
Nikhil Shah: The timeframe is short, right? There is 6-9 months to get to this. So actually there is some superhuman capabilities that are required in order to perform. That role as well is actually managing the affairs and operations of the company and yes, you are right, Alvarez and Marsal is actually the global leader in restructuring and turnaround cases and we have been doing this for 35 years around the world. Handling cases like Lehman Brothers, Washington Mutual, pretty much every large bankruptcy in the last 20 years.
So, in India as well we have been providing this service of interim management services to distressed companies for the last 9-10 years. So interim CEO, CFO, chief restructuring officer in distressed cases. And there is a lot of responsibility that comes with doing this. You have to have an understanding on the sector, you have to understand the business in what it is trying to do and you have to be able to manage cash flow and be compliant with all the laws and regulations that exist in India during that timeframe.
The main objective in that is to make sure that there is no deterioration in value in the underlying asset during the period of the resolution process.
Q: Then there could be a deterioration of value because nobody bought your power. The distribution companies (discom) were not buying or there was a disruption in supply because of probably a strike. Probably employees do not like the new CEO or the interim CEO. What happens then?
Nikhil Shah: That is why you require people who have experience of actually going into this situation to be able to clearly communicate with all of the stakeholders including the employees, suppliers and customers to actually let them know that there is a clear plan that the company is operating under in which the insolvency professional is actually running on behalf of the creditors committee and that they need to be patient for a period of 180-270 days.
Q: That is communication, but legally what is your liability? Say for instance, an employee is retiring and the provident fund money is not there or some tax liability has not yet been paid. What is the personal liability of the corporate entity or the person who is the CEO?
Nikhil Shah: Theoretically at this moment in time, he would liable for those issues and they need to be compliant as per what the court states.
Q: The even more crucial issue is in the interregnum, are you sure that the insolvency professional will be able to take on the might of the promoters? It is not small, Essar and Ravi Ruia or for that matter, the Singal brothers or any of them, these are large companies, these are big promoters, how will this one CEO, one chartered accountant be able to even take on their might?
Doshi: You are right. In terms of the way the process is that the board gets temporarily suspended, but at the same time, the management is there. What the code has done is that they have taken away the powers of the board and the promoters, but we are not saying that anyone who is going to get into any of the situations is going to go in – so even today, the process is on.
Q: No, but the promoters are out, right? Promoters and board cannot enter the premises?
Doshi: Let us take a step back. What is going to happen and what is the objective and just to add to what Nikhil said, it is very critical in terms of communication because what is the general sense? One is, we professionals who know what is happening, but in terms of the normal public, what do they understand? Insolvency, the first thing which goes is liquidation. It is not. You are getting in as an administrator to work out a resolution for six months and in those six months the powers have been taken away from the promoter and the board, so you are effectively trying to be independent in terms of whatever resolution comes in. The management is still there. Company operations will still run and that messaging going to the employees, to the general public helps. That is the first part.
Q: Oh yes, to suppliers, otherwise, they may stop supplying or stop payments for supplies that you have made.
Doshi: So, if they believe that the company is going to go down and close down, what is going to happen? Immediate supplies stop.
Q: It will be an implosion. Even a company that is about to work will not work. How do you ring-fence? Do you say physically, promoters and board cannot enter? What are the physical limits to the current management and what are the responsibilities of the new management?
Vakil: Two misnomers which I would like to clarify. One is that the main goal is restructuring, and making the company healthier and survive. So the idea is not liquidation. Liquidation is the worst case scenario. So, often, courts or promoters or companies do not understand this because maybe the title of the code, as you were saying is also insolvency. So maybe we should have thought of a more positive title. That is the first misnomer.
And the second one is, in the vast majority of cases, the promoters and management will remain. So the IP will work with them. That is why I said it is team work. In any company, it is not just the CEO. He is working with his management and his team that make the company a success. So, it is not the case where they will not be allowed into the door or that they will not work with them, but they are the experts, so they will give you a better flavour of the day to day.
Liability, they have a lot of authority so is there liability? There is liability, but one point for past mistakes do not come you, but in those 6-9 months, even though we try to get some exemptions company law, Securities and Exchange Board of India (SEBI), etc. we have not been able to convince them so far. The only one is that takeover code exemption. But the others we do not have, so you will have to comply with all those conditions and you better get chartered accountants, lawyers, etc. to help you to comply.
Q: You heard in detail, the problems and the responsibilities of the insolvency professional, what is your sense, do you think the IPs in the current Indian context will be able to function and run companies as complex as Bhushan Steel or Essar Steel?
Rashesh Shah: There are two-three issues but there is one key issue which a lot of people have not yet spoke about and that is when a company is admitted in National Company Law Tribunal (NCLT), a lot of your suppliers will stop giving you credit because you move on to what is called cash and carry basis and there could be some kind of a liquidity crunch.
In a lot of cases that we are handling, we have gone to NCLT, we also made a contingency plan of having some liquidity on hands so that the suppliers will continue to supply.
I think the insolvency professional will have to take a lot of this into account and a large part of the job will end up managing the cash flow and just ensuring that all critical payments are made and at the same time, the business goes on. But also remember that the insolvency professional is not going to be alone. He or she will report into the creditors committee effectively as earlier Bahram Vakil said, the creditors committee becomes the board of directors of the company and the insolvency professional becomes the CEO of the company. So he can take guidance from the creditors committee on whether the promoter should be involved, what role the promoter should pay and the creditors will take a view on what is the most likely end game for these assets and accordingly they will direct the insolvency professional on the involvement of the promoters and the current management and also remember that if there are claims by taxmen and others, there is also the court out there. Because now this is under the auspices of the court. So the court can always intervene and say, don’t disrupt the operation to the taxmen or any other statutory authority. So I think in these 180 days, there is enough protection that is there, there is enough fall-back that is there but in the cases where the companies are operational, there are growing concerns, the job of the insolvency professional is going to be fairly -- the stakes are going to be fairly high.
One other important thing that the creditors committee should do which we are insisting in all the cases where we are involved is to define the deliverables by the insolvency professional very clearly because currently it is very open-ended but it is like you are asking a CEO, what you are going to do in the next 180 days and make sure that capacity utilisation, cash flow, all of those critical items also have clear deliverables by the insolvency professional.
Q: You said before we went to the break that you are expected to work with the promoters and the managements etc. I am just picturing, I am not taking Essar because you will say it is subjudice, let me take the example of Bhushan. They are intricately bound the steel and the power units, there is a lot of give and take between them and they will be powerful promoters, you expect this one guy who goes as the CEO even if he is backed by Alvarez and Marsal behind him or KPMG accounting infrastructure behind him to be even heard, conversations will go on between promoter and management, do you see Sanjay being able to get his voice heard?
Vakil: No, I do see. I think the practical reality especially as you say we are so many strong promoters, that it will not be antagonistic, in most cases, the IP and the IP firm will work with the management and the promoter. So I don’t see this as a so confrontational, the confrontational maybe rare, vast majority will be working together and again to reiterate the point of no superwoman, superman, they will reinforce that in these big cases, they have teams of 30-40 people dedicated to doing this job. So it is not at all an individual that is doing this.
Q: Who pays them? The company pays them?
Vakil: That has to be cleared by COC. So just like the board, all major costs have to be cleared by the COC.
One quick line that NCLT has met most of the timelines, as I have previously told you, they have got the point that time and recovery are directly correlated and the courts also I am hoping, you will have to rush -- your electricity shuts off because past dues are not paid. This is a live case, we are doing it today. You rush to the court and the court very quickly is ordering, you have to turn the lights on. Same with the tax guys, usually they are not used to this but the law is very clear so they will have to get the picture. Past dues, different story, current dues, they will have to start writing checks and going to Rashesh Shah to get interim financing that gets priority.
Q: How confident are you that this is likely to work in most of the cases? But largely will it work? And then your big caveat that you posed that you expect the COC to come up with an alternative resolution plan in six months? You are doubting that, they have 270 days, so nine months.
Nikhil Shah: Just to add to what Bahram Vakil is saying, our strategy at Alvarez and Marsal is very much to work cooperatively with the management and the promoters given the short timeframe that is involved, I think it is foolish to assume that you can throw people out and not manage to deteriorate value in the underlying asset.
So it is very important to work cooperatively. There obviously may be disagreements that may be there, but we are all human beings, we can have a discussion about what those are and if there is a disagreement, it can go to the creditors committee for a decision. So I do not think there is any reason, unless somebody is not cooperating with the process that they cannot be worked with in order to achieve the objectives.
Q: How many will succeed?
Nikhil Shah: Success is different. The measurement if you ask me is what is the recovery that the creditors will achieve through this exercise? If they are able to achieve a 50-70 percent recovery on their exposure that could be viewed as a success for them. It would be difficult to assume that 100 percent will be recovered in these cases.
Q: I am not even looking at that. I am only saying that how many cases do you think this process will go smoothly? Do you see a couple of cases getting resolved before the year is out?
Nikhil Shah: I can give you the experience we have had in India over the last 9-10 years of doing exactly this type of work where we step in as an interim CEO or Chief Restructuring Officer of the business and in 95 percent of the cases, it works out successfully in that sense that there is some uncertainty. Obviously, there is a new team that is coming in and it is up to us and the management that exists over there to work together to get the objective.
Q: Your estimate of whether this process will be successful or whether we are going to be back to square one?
Rashesh Shah: It is also important to remember why the insolvency professional is being appointed, why did we draft the law in such a way that we have what is called creditors in possession because the fear was that when it is in NCLT, the promoters, the existing promoters should not start hollowing out the asset, should not start stripping the asset and crippling the company.
So a large part of the job of the insolvency professional is to make sure that status quo is maintained and things do not get worse and in most of the cases, the creditors committee will decide how much the promoters will be involved because I do expect that in two out of three cases, this process will be used for restructuring, for the existing management to continue by restructuring the debt, by giving equity to the bankers and all and there were a lot of these cases which were waiting for restructuring but they did not fit into Scheme for Sustainable Structuring of Stressed Assets (S4A) or corporate debt restructuring (CDR) or there was no oversight committee. For that the NCLT process is the best process because this will have all the sanctions of a court driven transparent process and the main job of the insolvency professional is to make sure things do not get worse, the critical payments are maintained and the business goes on while the promoters and the banks, the creditors committee arrive at a restructuring.
I am hopeful that in two out of three cases, there will be a restructuring which could involve a strategic partner, which could involve some equity raising which can involve converting debt into equity, priority funding, like for example, priority funding is going to be an important one, but until now, the rules were not clear. Under NCLT priority funding becomes very easy to do because the rules are clear in terms of who gets first dibs on the cash flow.
So it is a great process. It will have to get tested out, but in most cases, I think there will not be as much acrimony as you are apprehending. In a lot of these cases, it will work out fairly smoothly because restructuring under NCLT is an ideal process.
Q: We know that many of the cases are in several stages, some of them very advanced stages of restructuring, so you think that in a matter of three months or so, after the IP takes over, at least in many of the advanced cases of restructuring, things will go on smoothly?
Doshi: It is going to be a mixed bag especially even in those advanced cases where if there is an alternative plan which is put in by various stakeholders, it is not only the promoter or the lenders. There can be any other stakeholders who might want to pitch in and put another resolution plan. So if that happens, then of course, three months probably can get extended. But you are right, in majority of the cases where the lenders are in agreement with the resolution plan, at the end, it again scores back to the COC of what they are looking. At the end, a resolution needs to be worked out.
Q: Nikhil says that in 95 percent of the cases, even in India, they have been able to successfully tide over the case. Rashesh kept saying two out of three cases, it will succeed. What is your sense? I know you are an interested party since you were involved in the code, but success rate?
Vakil: As I have said earlier, it is certainly not my expertise area, but Rashesh put it very well and going by global experience as well, I would like to go in between, so between two-thirds and Nikhil's very strong 95 percent, but in most cases, I truly believe because a lot of work has been done. In many of these companies, months of restructuring exercise has taken place under all the RBI schemes. So I am definitely optimistic.
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