Power sector stressed asset resolution will be tougher, but there is good appetite for good assets: Bahram Vakil

A year since RBI named the big 12, but only a couple have been resolved?

I think that assessment is a bit unfair. 12 June 2017 was the RBI circular. I don't remember the exact dates, but most of them (the filing of cases) happened in mid- third week of July. The trigger date is admission. I think, some of them are complex.

These assets have massive sizes even by world standards. You are talking about 5-8 billion dollars. And complex. Section 29 (a) (which bans defaulters and errant promoters and those connected with them from bidding for distressed assets) has taken one of the key bidders out of the room and created a lot of its own complexity.

So, I think the court was right, for example, in Essar Steel where they stopped the clock. So, those kind of delays –of course, I don’t think that you should have a situation where every time you go to the court, the clock stops. That would be a disaster because then it would be used as a trick for delaying.

So, we should leave it to the courts to decide if they feel it is a bonafide, complex case and it is not fair for the clock to keep ticking. Broadly, if you look at it, if had not been for this litigation, then six out of the big 12 cases would have been done. In so many of them, the committee of creditors certainly has decided. And we know all the names. But they have all gone into litigation. Do you expect them to challenge a new law? Of course, we do.

An important statistic here is that all erstwhile RBI recovery schemes have recovered just Rs 2000 crore in total. And even today, it’s not just the big 12, but many, many, more outside the 12, and we are looking at several times that (recovery) number within the last 18 months. Look at Essar Steel, the recovery. About Rs 32,000-33,000 crore is on the table. So, 75 paise to the rupee, did anyone expect, did banks expect? So, I think the glass is more full than empty.

Many of the recoveries have been in steel. But what about the power sector, which is equally in distress and where a recent Allahabad court judgement prevents creditors from triggering the code on power companies unless they are willful defaulters.

We have been fortunate. Fortune favours the brave. Power (sector) is the tougher one. But I think the principle stands. We are seeing a lot of clients coming specifically for power assets. So, good assets (get) good appetite. People are willing to work on a good asset, bad balance sheet. We have known the issues with the power sector for at least a decade. How long can there be forbearance? It can’t go on forever. One of the issues is political – the creditworthiness of the power buyer and whether you want people to pay for the power. How long can you kick the can down the road? The numbers are insanely large. Are you going to write it off? No. Just buying time or saying that this is crazy what RBI has done – I don’t believe in that. And the minute you make one exception – didn’t the steel cycle go down – there will be ten guys waiting outside the door saying I also have a force majeure situation.

Does last week’s ordinance to amend the Code solve issues?

Yes, I certainly hope so. I think the learnings from the last 18 months, - it has taken care of many of those. I believe it will certainly help in speeding up the process. Majority of issues have been sorted out. But there will be learnings. We (the Insolvency Law Committee) finished, I think, at the end of February, but tons has happened since then. So, I think it will be a continuous process for at least two to three years. If you look at US, UK, any of the countries, it is extremely similar.

What was the thinking behind classifying home buyers as financial creditors?

The architecture of the code has just two classes – operational and financial creditors. There were differing judgments on whether home buyers were operational or financial creditors, or neither, and it fell within the cracks. Clearly, it was something that had to be dealt with, which needed clarity. The (Insolvency Law) committee also looked at other areas where there were differing judgments. For example, the Limitation Act (the legislation that governs the period within which suits are to be filed). Many said it didn’t apply.

Similarly in this case too, clarity was needed. Again, it is a very emotive issue, a political issue, the Supreme Court has taken such a tough stand. So, it had to be dealt with. If you are a financial creditor, you sit on the table. Operational creditors don’t sit on the table (the committee of creditors), that’s why the safeguard of getting minimum liquidation value. So, the feeling was that in many cases it is more akin (to a financial creditor). (As a home buyer), I am not giving a good or service, I am giving a cash advance. Under RERA (Real Estate [Regulation and Development] Act) also, some of the provisions make it very clear that you have to pay interest etc. So, the definition in the Code is if you have time value of money, then it is a financial creditor.

What about practicalities?

It will be like a debenture trustee. The trustee will represent the interests of the entire body. But it won’t be a collective vote. Each homebuyer will retain her vote.

What do you think of the recent Mumbai NCLT ruling which said that Section 29 (A) can’t be applied retrospectively?

I think, with all due respect, it was a bit surprising. As we know, there is so much litigation on this very issue. Many of these cases (were admitted before) 29 (A) coming into play. And there is a proviso in section 29 (A) itself which says that if you have a submitted a resolution plan which doesn’t comply with this, there are 30 days to rectify. So, clearly it was contemplated that it’s applicable.

IBC is clearly a work in progress. What more needs to be done?

The nice thing is that all the important arms of the government and regulators are united in wanting to make this a success. I think there are two areas where everyone is looking at: At the beginning, where you need interim finance to run the show – there again the ordinance has bought further clarity, so I hope that gets done. Very importantly, once the process gets completed, there is a time period to hand over, get all the clearances, licenses, regulatory approvals – there again some beefing up is needed. For instance, do you need the resolution professional to continue for a further term? At the beginning and end of the process, we need to keep learning.