Yoga guru Ramdev’s younger brother Ram Bharat and confidant Acharya Balkrishna, along with some Patanjali group companies, furnished personal guarantees to Ruchi Soya lenders for loans worth Rs 3,375.25 crore, the draft red herring prospectus (DRHP) filed by the company for a follow-on public offer (FPO) shows.
The loans were drawn to pay for the acquisition of the edible oil firm in 2019, the DRHP filed on June 14 says.
In a recent judgment, the Supreme Court said lenders can initiate insolvency proceedings against promoters if they have signed personal guarantees on corporate loans in case of a default. This order empowers lenders.
The Ruchi Soya FPO, which seeks to raise Rs 4,300 crore, is aimed at meeting the 25 percent minimum public shareholding norm mandated by the Securities and Exchange Board of India (Sebi) and also to repay some of the loans.
The promoters who hold a 98.9 percent stake have three years to pare it down to 75 percent to comply with the market regulator’s guidelines. Balkrishna, who holds a 98.54 percent stake in Patanjali Ayurved, Ram Bharat and Snehlata Bharat are the individual promoters of Ruchi Soya.
Crisis-ridden Ruchi Soya was acquired by Patanjali in December 2019 for Rs 4,350 crore.
Who are the lenders?
Besides the personal guarantees, Ruchi Soya promoters, Patanjali Ayurved Limited, Patanjali Parivahan Private Limited, Divya Yog Mandir Trust and Patanjali Gramudyog Nayas issued letters of comfort in favour of the company’s lenders, DRHP says.
The lenders include State Bank of India, Punjab National Bank, Union Bank of India, Canara Bank (erstwhile Syndicate Bank) and Indian Bank (erstwhile Allahabad Bank) for term loan and working capital loan aggregating Rs 3,29,5.25 crore and a COVID-19 loan of Rs 80 crore.
According to DRHP, the company proposes to use an estimated Rs 2,66,3.82 crore from the net proceeds to prepay loans.
What does a personal guarantee mean?
If Ruchi Soya fails to repay the loan, lenders can invoke the personal guarantees and letters of credit issued by Patanjali promoters, including Balkrishna.
According to the term-loan repayment schedule, Ruchi Soya has to pay back around Rs 824 crore by the financial year 2025 and another Rs 1,553 crore by 2029.
“If these individuals have given a personal guarantee, they are liable to pay back the loan amount if the original borrowers fail to pay," said Naresh Malhotra, a Mumbai-based banking consultant.
"Even in the case of NCLT, the IBC law says that when a case is admitted in NCLT, all other cases against the corporate debtors stop. But there is an exclusion that personal guarantors can be still be proceeded against,” Malhotra said.
If the FPO succeeds and the company pays back at least a part of the loan, the liability of personal guarantors will come down.
When a loan is drawn by a company, certain assets are marked as collateral against the loan, so that banks can recover the money by selling those assets in case of default. A loan is considered default if there is no payment of the interest amount in 90 days.
Banks need to set aside more money (provisions) to cover such loans. Personal guarantees are beyond the normal collaterals.
How did Patanjali acquire Ruchi Soya?
Ruchi Soya plunged into a financial crisis and was taken to the National Company Law Tribunal (NCLT) in December 2017 on the application of creditors Standard Chartered and DBS Bank.
Ruchi Soya owed more than Rs 9,000 crore to banks, including State Bank of India (around Rs 1,800 crore then).
On September 4, 2019, the NCLT approved the resolution plan submitted by a consortium led by Patanjali Ayurved Limited. The accounting for the fresh borrowings was carried under the terms of the resolution plan. Patanjali acquired Ruchi Soya for Rs 4,350 crore, of which Rs 3,250 crore was funded largely by the same set of lenders through fresh loans to Patanjali.
Banks also sought personal guarantees from the promoters, DRHP says. The term loan agreement includes a provision to convert the outstanding amounts into equity shares of the company in the event of default.
Ruchi Soya was acquired by floating a special purpose vehicle Patanjali Consortium Adhigrahan Pvt Ltd, which will be later amalgamated with Ruchi Soya.
Did Ruchi Soya banks lend to the same failed business again?
One question that arose out of the acquisition was whether the banks were lending to Ruchi Soya again after taking a big haircut.
This argument is not technically correct because banks didn’t lend to the same promoters but the new promoters.
It isn’t uncommon for banks to seek personal guarantees from corporate promoters. In most large corporate loan deals, banks secure personal guarantees.
Despite having this provision, bankers were earlier hesitant to use personal guarantees for recovery as it would mean spoiling corporate business relations with powerful promoters.
But, with a spike in corporate NPAs and following the government notification in 2019, more banks are now invoking personal guarantees to recover money.
A recent Supreme Court judgment as come as a boost for beleaguered lenders. The court on May 21 dismissed pleas by various promoter guarantors against lenders launching insolvency proceedings.
The court reaffirmed the government’s November 2019 notification issued under the Insolvency and Bankruptcy Code that permits lenders to launch personal insolvency proceedings against promoter guarantors of companies facing the corporate insolvency resolution process.The court dismissed 75 petitions that had challenged the notification, empowering lenders to invoke personal guarantees for recovery. Banks have already invoked guarantees in several cases, including the Vijay Mallya-Kingfisher case and RCom-Anil Ambani saga.