Political Economy

A Year Later, the Insolvency and Bankruptcy Code is Still Work-in-Progress

While the BJP has declared victory, actual recovery has been low. Bankruptcy proceedings continue to drag on in several cases, with borrowers and unsuccessful bidders legally challenging the process.

New Delhi: The Insolvency and Bankruptcy Code (IBC) introduced by the Narendra Modi government in December 2016 to fix the banking sector’s bad loans problem has over the last 16 months been a mixed bag, with borrowers and disgruntled bidders increasingly exploiting vagueness in some key provisions of the code to stall bankruptcy proceedings.

The financial bidding process was expected to be wrapped up by the end of January 2018 for 12 large corporate loan accounts referred by the lenders to the National Company Law Tribunal (NCLT) following the Reserve Bank’s of India’s (RBI) directive last year. These companies together account for Rs 1.75 lakh crore of bad loans.

However, bankruptcy proceedings continue to drag on in several cases beyond the expected time-frame, with borrowers and unsuccessful bidders challenging the process in civil courts.

While the BJP and the Modi government have claimed that the IBC has resulted in a recovery of “Rs 4 lakh crore” out of Rs 9 lakh crore of NPAs (non-performing assets) or bad loans allegedly given to corporates under the previous UPA government, RBI data shows that public sector banks actually only recovered a total of Rs 15,786 crore in 2016-17 and 2017-18 till December 31, through all recovery channels, including IBC.

What is stalling things and what is the status of the 12 major accounts that were referred to the NCLT? The Wire breaks it down.

Take the case of bidding held for the sale of Essar Steel assets. Bids were submitted by Numetal, a special purpose vehicle floated by Russian lender VTB Bank and Rewant Ruia, the youngest scion of the Ruia family, and ArcelorMittal for the assets.

However, both the bids were later declared ineligible by the committee of creditors (CoC) on March 21 as they violated Article 29 A that was inserted in the IBC last November to bar wilful defaulters from regaining control of their assets through proxies.

Numetal challenged the disqualification of its bid in the Ahmedabad court of the NCLT and sought a stay or an order to defer the second round of bidding for Essar Steel assets.

“My contention is only that if I am wrongly, or rightly disqualified, then I should be given a hearing and after the decision of the court, the bidding should be proceeded,”  Mukul Rohatgi, a former attorney general who appeared on behalf of Numetal, told the court.

He asked why the rebid cannot postponed by two more days.

ArcelorMittal failed the eligibility test as records with stock exchanges and market watchdog Sebi (Securities and Exchange Board of India) showed that the company had a 29% stake in the bankrupt company, Uttam Galva.

“I, unlike him (Numetal), though I am/was rightly or wrongly disqualified, don’t want to spoil the process and I am ready for the rebid,” said Abhishek Singhvi, counsel for ArcelorMittal. Its disqualification was a technical error which has been rectified, he said.

The bankruptcy proceedings for Binani Cement took a more dramatic turn recently when the unsuccessful bidder, UltraTech  Cement, reached an out-of-court settlement with Binani Industries, the promoters of Binani Cement, raising questions about the sanctity of the insolvency proceedings.

Binani Industries later moved the Supreme Court, seeking permission for out-of-court settlement with lenders. However, the apex court has declined to interfere in the bankruptcy process and has referred the case back to the NCLT for hearing.

Meanwhile, a consortium of JSW Steel and AION Capital has successfully bid for assets of bankrupted Monnet Ispat and Energy. Significantly, JSW promoter Sajjan Jindal is related to the promoter of Monnet Ispat and Energy, Sandeep Jajodia.

Jindal was the one who lobbied hard to persuade the government to amend the IBC to bar wilful defaulters from bidding for assets of their bankrupted firms.

ArcelorMittal, which lost the bidding race for assets of Monnet Ispat, found an easy target in JSW.

“Interesting what decision is being taken on Monnet today given it’s clear JSW runs afoul of 29A as they are related to the existing promoter….who is making the mockery here?” said a post by ArcelorMittal on Twitter, taking a direct jibe at the JSW group chairman Sajjan Jindal who was also tagged in the post.

Jindal had used the word “mockery” while indirectly referring to ArcelorMittal’s exit from bankrupted Uttam Galva last month to make its bid for Essar Steel assets eligible.

“If a defaulting promoter tries to cure himself by selling his shares then that is a mockery of the law,” Jindal had said then.

Bhushan Steel, Bhushan Power and Steel, Lanco Infratech, Alok Industries, Amtek Auto, Era Infra, Jaypee Infratech, ABG Shipyard and Jyoti Structures and Electrosteel are the other borrowers referred to by the RBI for insolvency proceedings last June.

UK-based Liberty House had moved the NCLT to seek redressal of its grievance after creditors did not open its bid submitted for Bhushan Power and Steel after the expiry of bidding deadline on February 20.

Liberty House claimed that its bid was valid as it was submitted within the 270-day time-frame stipulated by the IBC.

And what of the bankruptcy proceedings against remaining of 12 companies identified by the RBI?

Jyoti Structure

Jyoti Structure, an engineering, procurement and construction company (EPC),  was the first among 12 firms identified by the RBI to face insolvency proceedings. But the deadline of 180 days and  the 90-day extension granted subsequently by the NCLT expired on April 2.

Nearly 81% of the lenders in terms of value of the loan have given consent to award the company to a clutch of high net worth individuals (HNIs) led by Sharad Sanghi, the chief of Netmagic Solutions. The HNIs were the sole bidders for the company.

Vandana Garg, the resolution professional informed the NCLT that the total votes in favour have risen to 81%.

Under the IBC, at least 75% of the lenders (in terms of value of the loan) have to give positive consent for a resolution plan to be accepted for the company.

Amtek Auto

Creditors have approved the resolution plan submitted by Liberty House. This was announced by ALL to the stock exchanges on April 5.

Alok Industries

A joint resolution plan submitted by JM Financial Asset Reconstruction Company and RIL for Alok Industries has been rejected by creditors. The 270-day deadline for the corporate insolvency resolution programme ended on April 14, for Alok Industries. Now the company could face liquidation if NCLT does not allow further extension.

Bhushan Steel

Tata Steel has emerged as the highest bidder for Bhushan Steel. It has offered to pay Rs 35,200 crore in cash and convert balance debt of Rs 27,000 crore to take over Bhushan Steel.

But, meanwhile, Larsen & Toubro Ltd (L&T), an operational creditor to Bhushan Steel Ltd, has challenged the resolution plan for Bhushan Steel in the NCLT, terming it as “discriminatory” and “arbitrary”.  L&T has argued that its outstanding due of Rs 900 crore has not been given due priority by the creditors.

ABG Shipyard

The resolution of ABG Shipyard has to be completed by April 30, according to the timeline set by the NCLT. Creditors have sought more information, clarification on the business plan submitted by Liberty House.

Liberty House, led by Indian-born businessman Sanjeev Gupta, has offered Rs 5,200 crore on a deferred payment basis, stretching over 5 to 10 years, for the yard. The bid also includes an upfront amount of Rs 400 crore and issue of debentures.

The lenders have set a liquidation value of Rs 2,200 crore for the yard, which owes some Rs 18,245 crore  to a clutch of banks led by ICICI Bank.

Era Infra Engineering

The principal bench of NCLT in New Delhi has reserved its order in the insolvency proceedings against Era Infra Engineering filed by Union Bank of India in the latest hearing. The bench said it will decide on “jurisdictional issues” of the case given several winding-up petitions against Era were pending before the Delhi High Court. Union Bank of India for recovery of Rs 681.04 crore, along with an overdue external commercial borrowing of $11.97 million, as at the end of May last year.

Jaypee Infratech

Lakshadweep Pvt Ltd, a joint venture between Suraksha Asset Reconstruction Company and Mumbai-based Dosti Reality, is all set to take over the insolvency-hit developer that has to deliver about 25,000 apartments in Noida and is the operator of the Taj Expressway.

Electrosteel Steels

Billionaire Anil Agarwal-promoted Vedanta has won the bid to acquire debt-laden Electrosteel Steels. Vedanta was declared as the successful resolution applicant by the lenders.  The company was issued a letter of intent by the Electrosteel creditors which it accepted.

Lanco Infratech

Four little-known companies — OPG Group, Prem Energy, Goyal Group and Diva Group — have shown interest in acquiring Lanco Infratech, fuelling concerns among lenders that they might have to accept a steep haircut to resolve their loans of more than Rs 45,000 crore to the Hyderabad-based company.

Frequent changes to the IBC

The IBC mandates conclusion of bankruptcy proceedings within 180 days. Another 90 days’ time may be given by the NCLT, depending upon the merit of the case. Failing that, the bankrupt company will have to go into liquidation.

There have been several rounds of amendments in the IBC. Meanwhile, a high-level panel has recommended more changes to the bankruptcy law, including those designed to make it flexible for resolution professionals to raise interim finance.

As part of the recommendation, the panel has said that interest should be calculated till one year after the liquidation date or repayment whichever is earlier. Currently, the interest is calculated only till the liquidation date.

Experts said recommended changes will help banks, asset reconstruction companies (ARCs) to extend interim finance to companies undergoing bankruptcy process without the fear of losing out on interest.

The panel also suggested reducing the threshold for CoC vote to 66% from the current 75% for extending the resolution period. Authorised representatives of financial creditors have been allowed to join the CoC for voting and attending meetings.

The panel has also recommended 90% threshold for CoC to decide on withdrawal of IBC process after admission by the NCLT.

The panel has suggested that in case of listed companies, trading of shares during insolvency proceedings should not be suspended as it leads to better price discovery.

The committee also suggested that time-bound approval from regulatory bodies should be put in place after the approval from NCLT in case of successful bids. For the Competition Commission of India (CCI) approval, specific guidelines should be put in place.

The committee has also recommended that the NCLT should have the power to direct Insolvency and Bankruptcy Board of India (IBBI) to replace the resolution professional, the panel has recommended.

However, experts cautioned against entertaining hope that legal loopholes in the IBC would be plugged after the recommended changes are incorporated.

BJP’s inflated claims on recovery of bad loans

The BJP claimed on its Twitter account on Saturday that the IBC  has resulted in recovery of Rs 4 lakh crore out of staggering Rs 9 lakh crore of NPAs.

The RBI's statement in April on NPA divergence has jolted the Indian banking system. Credit: Reuters

RBI data show that the public sector banks recovered just Rs 15,786 crore in 2016-17 and 2017-18 till December 31, through all recovery channels, including IBC. Credit: Reuters

However,  RBI data show that the public sector banks recovered just Rs 15,786 crore in  2016-17 and 2017-18 till December 31, through all recovery channels, including IBC. Banks started referring bad loans cases for resolution under the IBC in January 2017.

In fact, in the last four fiscal years — 2014-15, 2015-16, 2016-17 and 2017-18 till December 31 — all 21 public sector banks together recovered only Rs 29,343 crore out of Rs 2.72 lakh crore of bad loans that were written off by the PSBs, as per the RBI data.

During this four year period, public sector banks recorded a recovery rate of 10.77%. More than 89% of NPAs written off by state-owned banks could not be recovered during the period, as per RBI data presented by Minister of State for Finance Shiv Pratap Shukla in response to a query in Rajya Sabha on March 27.