Siva group-IDBI Bank deal divides bankers, triggers debate on weakening bankruptcy law

The one-time settlement deal between Siva Industries and Holdings Ltd (SIHL) and its lenders has sparked a debate on whether it sets a bad precedent for defaulting promoters to regain control of their companies by undermining the Insolvency and Bankruptcy Code.

SIHL, the holding company of the Siva group, owed around Rs 5,000 crore to lenders. It was dragged to NCLT in July 2019 and with no successful suitors yet, the company was heading to liquidation. In April this year, its promoter C Sivasankaran managed to convince majority of the lenders to withdraw the company from the corporate insolvency resolution process and go in for a one-time settlement of Rs 500 crore. In effect, banks sacrificed 90 percent of their outstanding loans—about Rs 4,500 crore—to SIHCL.

“This is completely defeating the purpose of the much trumpeted IBC system,” said C H Venkatachalam, general secretary of All India Bank Employees Association (AIBEA), a trade union. “This is devoid of transparency. Besides, this will encourage more wilful corporate defaulters to pressurise banks to retain their ownership by repaying a small portion of the loan taken.”

Dealing with powerful and influential corporate defaulters is always a tough game for bankers. When IBC was legislated in 2016, it was touted to be a game changer since, unlike previous legislation, it put creditors in control of a defaulting company until a resolution was achieved. Thus, it would help banks in making time-bound and meaningful recoveries from big corporate defaulters.

However, as this case indicates, big defaulters could now find a way of using out-of-court settlements to wrest back management control of their company before it goes into liquidation, paying a fraction of what they actually owed to banks.

SIHL’s promoter Sivasankaran is a well- known Chennai-based businessman with investments spanning real estate, hospitality, shipping, minerals and agro exports. At one time, he also controlled companies such as Aircel and Barista, and had a stake in Tamilnad Mercantile Bank.

To be clear, this deal does not violate any law. Section 12 A of the IBC allows insolvency cases to be withdrawn with the approval of the members of  the committee of creditors (CoC) with 90 percent voting share. In SIHL’s case too, creditors voted in favour of the settlement in the first week of April and National Company Law Tribunal (NCLT) approval is awaited, IDBI Bank, the lead lender said on Twitter.

Setting a bad precedent

But some experts believe the deal still violates the spirit of the code and prompt banks to keep pushing for more OTS deals outside the IBC court, thus undermining the law.

“This is a significant digression or dilution from the principles of IBC, the judicial pronouncements, the amendments in the last four years, although this may make commercial sense to banks,” said Prem Rajani, Managing Partner of Rajani Associates. “While this may be good for the honest promoters, on the flip side this could set a precedent for crony promoters to use the same method, which could very well defeat the purpose of Section 29A.”

According to the Section 29A of IBC, an insolvent, a wilful defaulter or a person who was a promoter or was in the management of the corporate debtor, among other conditions would not be allowed to bid for the insolvent company concerned. A recent Supreme Court judgement also made it clear that promoters cannot even participate in the liquidation of a company under IBC.

Now, other promoters could potentially take the same path path to retain control of their bankrupt companies as buyers typically stay away from companies embroiled in investigations. In the absence of a buyer, the company will be pushed to liquidation, giving way to the old promoter make a counter offer. Already, the IDBI-SIHL deal has sparked a rush among promoters to their lenders seeking general bail outs, reported the Business Standard on May 16.

What has also added fuel to the controversy is the allegation by Royal Partners, a bidder for SIHL, that IDBI had derailed the sale of Siva Industries by vetoing its bid despite not having the requisite voting share in the consortium.

An email sent to Royal Partners on this issue didn’t elicit any response till the time of filing this story. SIHL could not be reached for comments. IDBI did not respond to a detailed questionnaire seeking comment.

Banks want to maximise recoveries

In its Twitter note, IDBI Bank, which itself was bailed out by the Life Insurance Corporation of India two years ago, said that the OTS made sense for the lenders as they would have got an even lower amount had SIHL gone into liquidation considering the valuation of the assets available as security.

“The idea of NCLT itself is to get maximum financial recoveries possible. When the company is heading for liquidation, accepting the offer made sense to lenders,” said a banker who didn’t want to be named. Even with Rs 500 crore, banks would be happy since they would be able to write back some part of earlier provisions (money set aside against loss) and show as profit.

Apart from IDBI which has an exposure of Rs 876.07 crore, SIHL owed money to Union Bank of India, State Bank of India, Yes Bank and Bank of India, and International Asset Reconstruction Company (IARC), among others.

It’s a commercial call

On the other hand, there are industry experts who don't find anything wrong with such deals. They are of the view that banks took the right decision by accepting the offer as there was no scope to recover money through liquidation.

“Banks would take commercial decisions based on realisable value of available rights and securities post defaults.  Usually, in terms of profitability, if the loans are fully written off, any inflows would be booked as profits,” said Sanjay Agarwal, head BFSI, CARE.

“Banks could have lost all money if they didn't accept this and wait for liquidation. I think similar approach can be done in other NCLT cases also where there is no scope for recovery through resolution,” Agarwal said.

Indeed, it isn’t as if banks have gone along with all such offers by promoters. There have been a few prominent cases in the past where banks have refused to entertain the offers of defaulted promoters for OTS or similar settlements. The most recent example is Kapil Wadhawan’s bid for Dewan Housing Finance Corporation (DHFL). Wadhawan had repeated his offer to pay off the dues to all creditors over a period of seven to eight years. But banks didn’t accept the offer. Eventually, the company went to Piramal Group. Wadhawan owed around Rs 90,000 crore to lenders.

Though not an NCLT case, a similar thing happened in the Kingfisher-Vijay Mallya case as well. Mallya who has defaulted around Rs 9,000 crore to an SBI-led consortium and escaped to UK in March, 2016, has made offers several times to settle principal amount to lenders. But banks rejected the offer in this case too.

Veteran banking industry expert Ashvin Parekh too believes that banks have made a smart move in this case.

“Banks would have considered the present value of the assets. Banks do have a right to take the case back from the NCLT if they choose to,” said Ashvin Parekh of Ashvin Parekh Advisory services.

Still, people like Venkatachalam of AIBEA would have none of this argument. They say that apart from undermining the IBC, the written off amount is public money as banks are guardians of public deposits

“The fact is Rs 4,500 crore is a loss. It is people’s money. Who will bear this Rs 4,500 crore loss?” asked Venkatachalam.