RP/CoC not being held accountable for destruction of value under IBC: Educomp promoter

Schools have never had an easy time after the enactment of the Right to Education Act in 2009 and the 6th and 7th Pay Commission followed by fee fixation committees across the country. They were left with no cash surplus to pay vendors such as Educomp, and Educomp paid the price for being innovative in a tightly regulated sector. The spillover effect led to the need for balance-sheet correction, which could have been enabled by the IBC.

When was ESL admitted under the Code and what were the outstanding dues to lenders at that time?

The IBC was not in force when the company went in for restructuring under the Corporate Debt Restructuring (CDR) process. It was progressively transferred into the Code when it came into effect in May 2017. This also caused some delays. The outstanding dues to lenders were around Rs 2,400 crore. However, much of this was accumulated interest since the company’s debt was restructured during the CDR in 2014. Further, around Rs 1,700 crore of this debt was imposed by the lenders themselves as they gave fresh loans to the company during the CDR period to buy out receivables from an affiliated company.

Essentially, almost all of it was in the nature of securitisation or cash flow discounting of receivables from thousands of schools across the country that bought SmartClasses. When the schools defaulted on their payments to Educomp, this set off a chain reaction, resulting in default on the securitised cash flows.

What are the contours of the resolution plan approved by the Committee of Creditors for ESL? How much of a haircut have lenders agreed to?

The resolution plan, approved in 2018, was valued at Rs 400 crore, out of which Rs 75 crore of new capital was to be invested in the company to revive it and make it competitive. Optically, the haircut for the lenders seems to be around 80%. However, given the upsurge in ed-tech valuations, there was no reason for the bankers to accept a plan with such a large haircut.

What are the reasons for the inordinate delay in ESL’s resolution? What is the role of Raffles Education Group in the insolvency?

The inordinate delay in the resolution can be attributed to a couple of factors. After the resolution plan was approved in 2018 by over 75 percent majority voting in the company, the International Finance Corporation and State Bank of India went to the NCLT, asking for the plan to be kept on hold so they could conduct a second audit. The NCLT rejected their plea, since the mandatory audit under the provisions of IBC had already given a clean chit to Educomp.

This pattern of delaying implementation of the approved resolution plan by various stakeholders continued on one pretext or the other. Due to these delays, EBIX — the successful resolution applicant — submitted before the NCLT in September 2019 that it wanted to withdraw or modify its plan. The NCLT allowed this. However, the CoC appealed against this before the NCLAT and the appeal was upheld, with the NCLAT saying a successful resolution applicant cannot withdraw its bid. EBIX appealed this decision in the Supreme Court, which held in a recent judgement that once approved, no resolution applicant can withdraw a plan.

The probes initiated on the basis of these false complaints have significantly derailed the resolution, led to value destruction for bankers, the loss of thousands of jobs in the company and delayed the revival of the company. This is possibly the most glaring advertisement for the way in which the IBC process can be subverted. Raffles is now itself under investigation in Singapore for a series of economic offences by the CAD, their equivalent of our EOW.

What is the status of multiple investigative probes into ESL? Why were these initiated and did they also contribute to the inordinate delay in resolution?
After protracted challenges in courts, one of which is still pending, all cases initiated against us have been quashed or complete clean chits have been provided to ESL. Since it was revealed that their basis was forged documents and falsified information, the probes have now turned against Raffles in India. It is already also under investigation in Singapore. The malafide actions by Raffles can only be attributed to a sour business relationship. But the extent of their mischief crossed boundaries of civility and slipped into criminality.

The probes were started due to circulation of forged and fabricated complaints against the company by Raffles group of Singapore/China and by certain ill-conceived actions by the bankers influenced by the Raffles group. It has certainly led not just to delayed resolution but value destruction for all shareholders, viz the company, bankers, employees and even the government. But most of all it has exposed the IBC process to be extremely vulnerable to specious and dubious complainants and competitor actions. It has also raised questions on the CoC’s ability to navigate the process in waters that can be muddied by suspicion and rumours through any anonymous letter or complaint.

The Supreme Court recently held that a buyer participating in the resolution of a stressed company under the IBC cannot withdraw from the process. So, is EBIX completing the buyout?

After the Supreme Court order, the CoC moved the NCLT to ensure that the Educomp plan is swiftly implemented by EBIX. Hopefully the resolution of the company, which has been so delayed because of sub-optimal decisions by the CoC — potentially hurting their own interests — will finally come through. But the cardinal question still remains: Should the buyer of a stressed company have to bear the erosion caused by the CoC’s decisions?

There have been reports about one of ESL’s acquisitions, The Learning Inc, being recently sold by SBI Singapore. Does this sale have any bearing on the ESL resolution?

The sale of shares of The Learning Internet Inc by SBI Singapore is a shocking example of how the IBC process is being misused. SBI Singapore is a member of the CoC of ESL and knew fully well that the shares of TLI held by it are worth conservatively at least $200 million-plus in the current euphoric post-covid edtech buzz. But SBI Singapore sold these shares at a throwaway price of just around $7.5 million, without following any due process. That this was done despite being called out for it shows that banks are acting against the spirit of IBC.

It is clear that the government has almost no mechanism for checking this sort of short-changing the IBC process. Usually bankers give themselves clean chits while routinely selling assets below fair value and then crying hoarse that they had to take a haircut. The value of these shares of TLI was potentially enough to repay the entire loan of the bankers in ESL but the entire CoC is silent, because they rarely go against their own. And unfortunately, in the IBC, the erstwhile promoters have almost no say or power to compel banks to follow due process to maximise value.

In many cases, shareholders of the companies that went into IBC have had to take haircuts because of the negligence of the CoC and its inability to maximise value. But no one is talking about that. Educomp is a classic case of a company being run to the ground under the management and oversight of the CoC. It had over 5,700 live contracts with schools at the time of its admission into IBC and a revenue run rate of over Rs 150 crore.

What, according to you, are the drawbacks in the IBC provisions and what tweaks in the Code will make it a smoother process? What are the Code's strong points?

There are several key drawbacks in the IBC process. It is fundamentally against public interest in so far as the public shareholders of the corporate debtor are concerned. Firstly, there is no mechanism to ensure that the CoC preserves or enhances the value of the company that has been entrusted to it. Assuming that the key premise is to keep the erstwhile promoter out of the resolution process via sec 29A as he did not run the company properly, what checks and balances are in place to ensure that the new management — which means the resolution professional or the CoC — is running the company well? In case after case, the complete value of the company is destroyed by the time the resolution process is completed yet the IBC has no provision for holding the RP/CoC accountable for value enhancement or even value preservation.

Secondly, the CoC and RP and the various advisors appointed by the RP are all in the nature of a complicit club. Exorbitant fees are being charged by auditors (multiple audits in most cases) and their advisors and being approved by CoCs. In most cases, RPs are riddled with conflicts of interest. In the case of one of ESL’s subsidiaries, EISML, which has also gone through the IBC process, the RP was the partner of a company that was brought in as his advisor and paid over Rs 25 lakh a month. He then appointed an auditor, which was a subsidiary of the same company, and authorised paying them over Rs 55 lakh. This RP also appointed lawyers at a remuneration of crores of rupees, with valuers, accountants et al. For every task the RP had to do, he appointed third-party vendors, essentially looting a company that was already limping. Finally, after several complaints to the IBBI, the CoC and RP were compelled to refund over Rs 1.2 crore wrongly charged to the company.

The IBC, which has a noble objective in reviving and rehabilitating companies, has, in fact, become a tool for harassment of promoters instead of resolving the problems of companies. In the Educomp case, despite giving a clean chit to the company in 2014 at the time of CDR and in 2016 at the time of a forensic audit by Grant Thornton, as well as in 2018 at the time of the transaction audit by the BDO, the bankers still mechanically made a complaint to CBI.

What role have various stakeholders in the IBC process — the CoC, the Resolution Professional (RP) and others — played in the ESL case?
The ESL case is a classic case in which the CoC has played a strangely flip-flop role. Initially after approving the plan the lead bankers in the CoC went to the NCLT to delay the resolution; when the NCLT allowed EBIX to withdraw the plan, they went to the NCLAT to oppose the same. When it seemed after the Supreme Court judgement that a resolution was imminent, one of the lead bankers (SBI) sold the most valuable assets of the company at a grossly undervalued price. The complete business of the company was ruined under the watch of the CoC, yet no action has been contemplated, to my knowledge, against the conduct of the CoC by the IBBI or the RBI or any other body.