The Cabinet has given the green signal for amendments to the Insolvency and Bankruptcy Code via an ordinance. The ordinance has been sent to the President for his assent and the details of the ordinance will be available after that.
However, so far, sources say that wilful defaulters and those convicted of fraud and siphoning off funds will be barred from participating in the resolution process. These are just some of the changes to the IBC.
How will this move impact the lenders, promoters and buyers? What else can we expect from this ordinance?
To discuss this in detail, CNBC-TV18's Latha Venkatesh spoke to VG Kannan, Chief Executive, Indian Banks Association, Bahram Vakil, Founding Partner, AZB and Partners and Seshagiri Rao, Joint MD and Group CFO, JSW Steel.
Below is the verbatim transcript of the interview.
Q: I want to directly draw your attention to this statement which we have. This is source based, but we have reason to believe that this is unimpeachable. I am just reading it in detail. Insertion of a new section 29 A. To make a person ineligible to be a resolution applicant, if he is an undischarged insolvent or has been declared wilful defaulter, whose account is classified as NPA by RBI for a period of one year or more or who has indulged in preferential transaction, undervalue transaction or fraudulent transaction or disqualified to the be director under the Company's Act, 2013. Does this mean that it is a wilful defaulter whose account is classified as non-performing asset (NPA) or is it a separate category? Whose account is classified as NPA? How are you reading this?
Kannan: I would say all the accounts which are NPAs and only the ones which are likely to be made into wilful defaulter. So by default, a wilful defaulter will be an account which is already an NPA. So, it is actually a combination which is what my interpretation is that it will be a wilful defaulter whose account has already been NPA and declared by the RBI either acknowledged or declared and advised to the banks to take up the necessary action.
Q: But should we read it at all as all those who are classified as NPA cannot be applicants?
Kannan: I would actually say it must be together because otherwise, it would almost mean that no other person can actually do it, in which case, most of the accounts which go to National Company Law Tribunal (NCLT) would be ones which would be in NPA for one year. And in which case, none of the promoters will be eligible to buy and which may not be very fair.
Q: I have tried to type out what we found. If it is indeed the way I read it, do you also agree with Mr Kannan that it does not mean that everybody who is an NPA for one year, cannot come back and buy their assets or is it a wilful defaulter who is declared as an NPA? How should we understand it?
Vakil: I completely agree that you have to read that together. From the text that I have seen and I guess as the finance Minister said, we need to wait for the final version, but the comma should be read as an 'and'. So it would be wilful defaulter 'and' has been declared NPA by the RBI for more than one year.
Q: With these qualifications, we have the amendment saying that those who have been declared wilful defaulter, found guilty of having a history of siphoning funds, convicted of offence related to fraud, any breach of duty while submitting a resolution plan. Now given all this, what is your sense? Do promoters still stand a chance?
Kannan: It is very clear that they are only identifying the people who have either committed a fraud or a wilful defaulter or who has siphoned off funds or appear to have siphoned off funds on the basis of the transaction or a forensic audit. So in case there is very clear evidence that no such thing has happened, existing promoters can also be eligible to do it.
However, how the Committee of Creditors (COC) values the proposal from the various promoters has to be seen as to what kind of weightage they are going to give to this because a total blanket ban on existing promoters who may have defaulted for reasons beyond their control may not be the right thing. And I think the particular ordinance is providing for genuine defaulters to also maybe come back. So let us see how it pans out.
Q: So your reading is that only fraudulent siphoning or in a sense, people are in a way, having a criminal activity involved.
Kannan: Mala fide intentions.
Q: Mala fide intentions are only disallowed?
Kannan: Could be.
Q: I know you do not have the advantage of having this paper in front of us, it is just soured information, but unimpeachable sources. From the adjectives that I have read out, what is the sense you are getting? Is just the dice loaded against promoters or is it completely denying promoters a chance?
Rao: I have not seen the ordinance, but initial comments based on what you have described, all the promoters should be barred in participating in the resolution plan, I do not think that is the spirit because as Mr Kannan rightly pointed out, if the financial distress is on account of external reasons, I do not think it should be too harsh against all the promoters that they cannot participate. But it is right that the promoters who have defaulted wilfully or who are non-cooperative borrowers or who have some fraud or forensic audit is against them, those definitely should not be allowed to come and participate in the resolution plan.
Q: Would you say that once you put these kinds of adjectives it is quite possible that other buyers may also find promoters or some other rival buyers getting some case against them that in some obscure case, you were found guilty of probably siphoning funds, people could rake up cases and even a deserving candidate could be pulling out of the case? You think this could be misused?
Vakil: I guess it is possible, but I think it is not too likely. I mean the criteria that I have read so far is quite straightforward and explicit. So, I think it is a small chance but not a really high probability.
Q: Do you think these are checkboxes? After all banks declare who are wilful defaulters. It is very clear who the RBI calls non-cooperative and the forensic audit will clearly put out whether there is a siphoning of funds. So there is no discretion involved. Are the clauses which are in this document fairly clear, no room for discretion?
Vakil: I believe so. I think that it is very clear and as you said, most of them are well defined, but it is a little premature because we are reading a draft after all.
Q: Now let me come to how it feels when you are part of the COC. How does life change after this amendment ordinance?
Kannan: In the existing Insolvency and Bankruptcy Code (IBC), there is no clear cut indication that such people will be barred. Insolvency and Bankruptcy Board of India (IBBI) had earlier said that you should conduct a forensic audit and ensure this but it did not specifically bar the people. It is an understanding that these people will be prohibited from doing it, but this sort of gives you sanctity and gives you a law that you do not need to encourage such proposals from such people.
So in a way, it is more or less, putting the official stamp on the thinking of the COC saying that anyone who has committed a fraud, etc. should not be involved. I think it is actually more an enabler and it will certainly ensure that no cases can come against the banks for not having encouraged that because it is not specifically prohibited. Now, that it is being specifically prohibited ensures that this is happening.
Q: Now let me tell you what sources have told us about the intent of the government. The intent of the government is that promoters who they see as guilty of not paying back the banks for such a long time and creating such a big hole should not be preferred by the bankers. The fear on the part of the government is that if the promoter asked for a haircut of say, 45 percent and an external buyer asked for a 55 percent haircut, as a commercial banker, you will like to prefer the one who is asking for a lower haircut. Does this amendment change your discretion in any way?
Kannan: Thinking always will be as a commercial banker, the least haircut. But having said so, the COCs will look into the way the money is actually coming, whether substantial is coming by upfront payment, earlier payment, all those things will be factored in and then they will take a call as to whether a 45 percent haircut or a 55 percent haircut.
Q: But there are further clauses which I did not read out. It says the ordinance also explicitly provides for the COC to consider viability of a resolution plan and provide for further requirements to be specified by the IBBI in the regard. And we know that the IBBI has said that the COC should consider the viability of the plan and they do not want to asset to come back to the NCLT as a stressed asset again. So does this cast an onerous responsibility on the creditor to rather give someone who does not have a record of NPA even if he is asking for a higher haircut?
Kannan: It is very easy to say that even if a person is asking for a higher haircut, should be given to him mainly because he does not have a track record. Because we will also have to understand that the existing promoter who possibly is asking for a lower haircut also has full knowledge about it and why should he be barred? In case there is a huge difference between it, then I will take a call. But in case, the difference is marginal, probably the COC will look into the aspect that in the past he has not met his obligations. And that could be taken.
Q: So if it is a narrow difference in haircut, you will prefer the outsider, but if the promoter gives you a much better deal, even with this ordinance, you will prefer the guy who is giving you a much lower haircut?
Kannan: Much lower haircut, one. Second thing it is not only a question of haircut. It is a question of what is the term period. If someone says I will give you a lesser haircut, but payment over 15 years, another person says I will give you a slightly higher haircut, but payment over 10 years, the discounting factor extra will come because anything beyond five years, there is a lot of uncertainty. If someone postpones his repayment in such a way that it is going to come much later, that discounting factor will play and ensure that this will also be looked into.
Q: Do you think if the existing promoter is given back with a haircut, a right to recompense should be inserted?
Kannan: In case the existing promoter had to have the same right to recompense to the bankers, I think there is no need for having NCLT because it is almost like saying that whatever shortfall, I will pay at a later date. The very fact that the particular project is not in a position to go ahead with the existing level of debt and that haircut is required is acceptable to everyone. So I think this concept of right of recompense would actually ensure that he is in no way going to change from the existing SDR, S4A, etc. where this right of recompense is already there into IBC, where it is going to be a clean break from the past.
Q: As a buyer, how would you like the IBC to be amended, not just in terms of weighting pro and against a promoter, but other amendments that you would like to see in the act?
Rao: There are three things I think which are required to be done as regards to IBC. One is who will be the resolution applicant. That clarification has already been issued, an amendment has already been done, November 7, 2017. And also, now this ordinance together, resolution applicant will put to rest.
Then how these bids which will come, they are credible, realistic and viable, somebody has to establish, then a COC, what is the uniform bidding criteria or evaluation criteria, I think has to be done. In some cases, we have seen that this criteria has been stipulated at the time of submission of the bid. In other cases, it is not there. Hopefully, if the valuation criteria is specified in the beginning itself, reducing the discretion that is given, one person will get priority or anything, for any reason whatsoever, which will be subjective can be again contested in the court which could delay the process.
So, evaluation criteria, before the bidding is specified uniformly in all the cases, it will be very helpful. The third is the objective of IBC which will lead to resolution instead of liquidation is to maximise the value for the creditors. If it is the objective, then there are certain amendments which are required to be done where the value getting eroded because of lack of amendments to the other acts like income tax or in the case of SEBI listing requirements or in the case of competition law or in the case of stamp act. So these require to be relooked to ensure that value to the creditors is maximised. There will not be any additional cost to the prospective investor or prospective bidder.
Q: Let me just clarify, you mean the Income Tax Act needs to be amended or waived to the extent that the haircut is not treated as a profit and it is not taxed, you want the delisting rules of SEBI not to apply if the incoming buyer gets because of debt conversion to equity more than 75 percent of the stressed asset and you do not want stamp duty to be paid in these cases, right? These are the three amendments you want?
Rao: No just to elaborate here. Prior to IBC, there was Sick Industrial Companies (Special Provisions) Repeal Act (SICA) and there is an authority like Board for Industrial and Financial Reconstruction (BIFR). So any scheme approved by BIFR under SICA used to enjoy certain specific advantages. Section 32 of the SICA stipulates that whatever scheme says that has overriding powers under SICA on the other acts even if it is inconsistent with the respective laws. We thought when IBC was introduced, similar section was there under 238, therefore there will not be any problem at all.
Even the scheme of IBC can have certain provisions which can override the other provisions. Thereby, it will not be a limiting factor to comply with those conditions whether it is Income Tax Act or under SEBI or any other acts. Whereas Section 30 of the IBC which contradicts Section 238, that is why a clarification has been sought from Minister of Corporate Affairs which they have clarified correctly that there is no problem getting shareholders' approvals for other resolutions in the IBC as a process. So similar clarifications if they are issued, IBC also, whatever the schemes is approved by NCLT it has overriding powers and there will not be any extra burden on the prospective bidder or the target company.
Q: The IBC itself prevails over all other laws, but the resolution under IBC does not prevail over all other laws at this point in time. Do you think that this kind of security can be guaranteed to those who are buying stressed assets that delisting rules do not apply to them or this tax on write offs does not apply to them, do you think this is feasible?
Vakil: Yes, I think some clarity on these aspects will definitely help the process a lot and as you know, last week, they set up a committee for considering amendments to the act and I think I read somewhere that they even said that these amendments will be carried out ASAP, within a few months knowing how fast we are moving now. So, no question that all these will be helpful and along the way, I am sure, further issues may come up as well and they will be tweaked to make sure that the process is as efficient as possible.
Q: So your sense is that the requirements which Mr Rao is raising as a potential buyer, most of these are likely to be sorted out when the committee appointed by the government makes its recommendations? These are not insurmountable problems? Is that your position?
Vakil: Yes that is my position because all these issues are well known now and have been very well articulated. In fact the government also is aware of them. And as I said, that is why these are the things that had to be decided and the amendments need to be done ASAP.
Q: With this kind of an ordinance amending the IBC and possibly of course other amendments coming in, do you think bankers will have the comfort to go for the viability of the plan and not their immediate benefit in terms of a haircut?
Kannan: Even in the past also, it is always going to be the viability. For various reasons, I think the viability failed. So I do not think the bankers are going to compromise on the viability there. But in these amendments like what Mr Bahram and Mr Rao have been suggesting, many of them have also been articulated by the bankers also. This is a learning process so you cannot expect that IBC or the IBBI regulations are absolutely cast in iron and cannot be changed.
Always, as Mr Sahu always used to put it, the practices come first and then come the regulations and the rules. I think over a period of time, once we know what are the hurdles we are facing, these things can be tackled. I feel that this is a good step forward and so many other things will also happen and the viability is going to be the prime question because many of the bankers are going to be under fire in case they find that the entire thing fails down the line and there will be questions asked. Therefore it will be a lot of questions.
Q: But by then that set of bankers may have retired.
Kannan: That can always happen in any situation. It is not a question of only this.
Q: Do you think that at the end of this ordinance and the thinking that has gone into it, the promoter probably stands a lesser chance and a more viable, well proven track record buyer has a slightly better chance?
Kannan: Under these cases, yes.
Q: The haircuts notwithstanding?
Kannan: The outside buyer probably will have a very good chance. But having said this, one of the fallouts or the benefits is going to be new promoters and new projects which come in, people will know this is going to be a scenario some time down the line. Therefore, the cases of default also will come down. I only wish a scenario where IBC is invoked by anyone.
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