The IBBI chief said as per the Insolvency and Bankruptcy Code (IBC), resolution is left with the imagination of the market participants and they are free to take any call in regards to an entity, which is down with indebtedness.
Resolution of indebtedness of a firm will be the top priority of all constituents of the insolvency and bankruptcy mechanism in the interest of the stakeholders, and it will think about liquidation only if it finds that the resolution is hard to come by, Insolvency & Bankruptcy Board of India (IBBI) chairperson MS Sahoo said on Wednesday.
“In such a process, the first endeavour is resolution. If it is not resoluble then they think about liquidation. The endeavour of the law, insolvency professionals and committee of creditors is to first find out a resolution plan,” Sahoo said while speaking at a conference organised by PHD Chamber of Commerce and Industry.
The IBBI chief said as per the Insolvency and Bankruptcy Code (IBC), resolution is left with the imagination of the market participants and they are free to take any call in regards to an entity, which is down with indebtedness. The government is just trying to create an enabling environment.
The government’s effort is also to empower the market participants in every field and that is what has been the focus of the insolvency code where one gets not just the freedom to enter into a business, but also enjoys the freedom to exit the business.
“In our scheme of things, we have segregated the role of the state and the role of the market. We have also segregated commercial aspects from judicial aspects. Bankruptcy code says that insolvency professionals will run the company; but for a resolution, the decision of resolution will be taken by the market, that is the committee of creditors,” he said.
Sahoo also pitched for a market driven institutional mechanism to facilitate and enable mergers and acquisitions with minimum regulations that can conveniently safeguard the legitimate interests of concerned stakeholders. “Why can’t we have that kind of framework where approvals of the authorities are minimised, institutions work and everything is delivered by the market?” he asked.
Tough stance taken by govt, RBI makes borrowers cautious
Indian banks are beginning to spot a welcome change in their customers’ behaviour: borrowers who have seen their accounts classified as stressed or non-performing are approaching the lenders with proposals to resolve such accounts in a time-bound manner.
The tough stance taken by the central government and the Reserve Bank of India to end the festering bad loan crisis in the Indian banking sector has caught many borrowers by surprise and they are scrambling to put together resolution plans to avoid harsher penalties including insolvency proceedings, bankers said. Even a couple of months ago, it was difficult to get these clients to the negotiation table.
“I can definitely say that we are in a much better position than even six months ago. We are seeing traction from a section of our borrowers to come up with proposals for resolution of stressed accounts,” said Rajkiran Rai G, managing director and CEO, Union Bank of India. “However, it is too early to say if this is the end of the problem. We will have to see how the discussions shape up,” he added.
Borrowers with outstanding amounts between Rs 500-1,500 crore are the most active in trying to resolve their stressed accounts, and they are looking at various options including scouting for investors and sale of non-core assets, two senior bankers with state-run banks said on conditions of anonymity. A large number of these borrowers are from the steel, power and telecom sectors. Some of the larger corporates with outstanding amounts between Rs 1,500-5,000 crore have also taken initiative to resolve their stressed accounts. On an average, these account for about 50% of the current gross non-performing assets of the banking system, the bankers said.
In June, the RBI’s Internal Advisory Committee (IAC) had said 12 accounts totaling about 25% of the current gross NPA of the banking system would qualify for immediate reference under the Insolvency and Bankruptcy Code (IBC). At present, proceedings against all the 12 accounts are on in various benches of the National Company Law Tribunal across the country. For accounts that do not qualify under the above criterion, IAC had recommended that banks should finalise a resolution plan within six months. “In cases where a viable resolution is not agreed upon within six months, banks should be required to file for insolvency proceedings under IBC,” the RBI had said.
Union Minister for Finance, Arun Jaitley administering the oath to Madhusudan Sahoo as the Chairperson of the Insolvency and Bankruptcy Board of India (IBBI), in New Delhi.
The Insolvency and Bankruptcy Board of India (IBBI) has powers to start probe against service providers registered with it without intimating them, according to new regulations.
IBBI, which is implementing the Insolvency and Bankruptcy Code (IBC), has notified the regulations for inspection and investigation of service providers registered with it.
Insolvency professional agencies, professionals, entities and information utility are considered as service providers under the Code.
The Code, which provides for a market-determined and time-bound resolution of insolvency proceedings, became operational in December 2016.
As per the regulations, the investigation authority has to serve a notice intimating the entity concerned about the probe at least ten days in advance.
However, the requirement could be done away with on grounds such as apprehensions that the records of the particular service provider might be destroyed before the probe starts.
The fate of three near-bankrupt steel companies — Essar Steel, Bhushan Steel and Electrosteel Steels — which together owe lenders nearly Rs.1 lakh crore will now be decided by the National Company Law Tribunal (NCLT).
The fate of three near-bankrupt steel companies — Essar Steel, Bhushan Steel and Electrosteel Steels — which together owe lenders nearly `1 lakh crore will now be decided by the National Company Law Tribunal (NCLT). Having failed to recover their dues or rope in either strategic or financial investors, lenders to these companies finally agreed on Thursday to resort to the Insolvency and Bankruptcy Code (IBC), bankers familiar with the development said. The decision follows a directive by Reserve Bank of India (RBI) on June 13 to banks asking them to refer a dozen troubled companies — with a combined debt of close to Rs.2.4 lakh crore — to the tribunal.
Corporate watchers said a new chapter was unfolding for India Inc, traditionally unfamiliar with insolvencies and, more often than not, able to wrangle concessions and bailouts, often with the help of those in power. Both the RBI and the government are attempting a speedy resolution to the problem of non-performing assets (NPAs) that is paralysing banks and stymieing investments.
While it has been known for several years now that many of the country’s top corporates are financially fragile, it was former RBI governor Raghuram Rajan who first forced banks to accept the reality and classify assets correctly in December 2015.
Bankers have been given a fortnight within which to move the tribunal. Among the other companies that have been refereed to the NCLT are Jyoti Structures, Lanco Infratech, Monnet Ispat and JP Infratech. The 12 accounts identified by the central bank are those to which banks have an exposure of more than Rs 5,000 crore, more than 60% of which has been recognised as NPAs. Once these cases are with the NCLT, the lenders need to set up a committee of creditors that will come up with a plan on how the asset will be tackled. If the committee is unable to find a solution within 180 days — this can be extended to 270 days — the borrowing entity will go into liquidation.
The three steelcos — Essar, Bhushan and Electrosteel — together have a manufacturing capacity of close to 18 million tonnes per annum. The total debt of the Essar Group is estimated at Rs.1.17 lakh crore. Most private banks have sold off their Essar Steel exposure to asset reconstruction companies, taking a haircut of more than 50%; most PSU banks have declared Essar Steel an NPA.
Essar Steel, promoted by the Ruias, had at a meeting last year requested banks to convert Rs.12,200 crore of loans into preference capital and equity shares.
While Rs.9,000 crore was sought to be converted into preference shares, to be redeemed after 12-18 years, the company had requested the remaining Rs 3,200 crore be converted into common equity. For the balance Rs 31,800 crore, the company had sought a prolonged repayment period. Senior bankers had told FE such a deep restructuring proposal, if approved by the consortium, would amount to taking a haircut of nearly 30%.
Bhushan Steel, promoted by the Singals, has been unable to service its loans for several years now thanks to the stress on cash flows, partly the result of large steel imports into the country which drove down prices. While banks had been monitoring the company’s operations and financials, they were unable to come up with a solution. In August 2014, a senior company executive was arrested around the time the former chairman and managing director of Syndicate Bank SK Jain was arrested in an alleged case of bribery.
In the case of Electrosteel Steels, banks decided to initiate a strategic debt restructuring, with a view to roping in a new investor and beefing the equity capital of the company. However, despite many attempts, banks were unable to find a buyer within the stipulated 18 months, and were compelled to classify the account as an NPA.
State Bank of India seeks applications for empanelment, sets stiff conditions
The Reserve Bank of India’s (RBI’s) move to push 12 large non-performing assets (NPAs) of the banking system into the insolvency process has created a massive business opportunity of up to Rs.2,500 crore for insolvency professionals.
To put the numbers in perspective, the RBI list comprises four companies with dues of over Rs.35,000 crore each. Even if one puts together all the few hundred cases handled by the six-month old framework, it would be a struggle to cross Rs.20,000 crore.
While the huge influx is likely to test the capacity of most players who are literally months old in the profession and present a steep learning curve, it will be a great stimulus for entry of stronger hands and investment in the segment.
According to the insolvency law, the entire process of corporate insolvency needs to be managed by a resolution professional appointed by a committee of creditors. The resolution professional, who will effectively become the chief executive officer of the business during the process period of 180 days, can charge a fee for his services. Besides, banks are also looking to appoint insolvency professionals to populate committees of creditors, which need to be formed for each of these companies.
With over Rs. 2.5 lakh crore debt coming in the top 12 companies in the first list, a one per cent charge works out to Rs. 2,500 crore. While this would be a ballpark figure, regulations do not prescribe a limit or range of fees, leaving a free hand for market forces. Globally, insolvency professionals work on various structures such as a fixed fee, time and effort-based charges, or a percentage of realisation. In some cases, a combination of these three methods could also be used. Banks would have pricing power, but good insolvency professionals would have their levers to charge a decent number, given the complexities involved and short supply.
Pavan K Vijay, managing director of Corporate Professionals, a Delhi-based firm that is looking at this opportunity, says the move gives a big boost to the nascent profession. “Even if the one per cent number does not work out, as there are bound to be negotiations, it could be around Rs.1,500 crore to Rs.2,000 crore. It is not small.”
The State Bank of India (SBI), the country’s largest lender, which also has the lion’s share of these 12 large accounts, has begun the process of empanelling insolvency professionals by issuing advertisements recently.
“The bank (SBI) seeks to empanel IRPs (insolvency resolution professionals) as resolution professionals in applications filed before the National Company Law Tribunal for resolution and/or liquidation proceedings, including for representing the bank in the committee of creditors as per the provisions of the code/and the regulations,” said the advertisements issued early last week.
Other banks are likely to follow similar processes in selecting insolvency professionals, as the public sector is generally process driven, regulatory officials say.
According to the Insolvency and Bankruptcy Board of India (IBBI) website, there were some 977 registered insolvency professionals in the inaugural limited period criteria and another 350 in the regular category, which requires passing the national insolvency examination. Lawyers, chartered accountants, and company secretaries form a majority. However, not all of them might be able to handle the large mandates. Given the large accounts it handles, the SBI has set stiff eligibility criteria for the applicants. It wants people with experience in debt restructuring, who are also experts in company law, etc. The application window closes early next week. Since the big accounts bring with them a lot of complexities, individual professionals might not be able to handle the entire task, Vijay said.
Several top lawyers such as Shardul Shroff and Pallavi Shroff of Shardul Amarchand Mangaldas, Alok Dhir of Dhir & Dhir, Bahram Vakil and Dushyant Dave are among the registered insolvency professionals. These would have established infrastructure and people to support their functions.
Also, the insolvency law provides for Insolvency Professional Entities (IPEs), which are corporate structures where two or more professionals can come together as partners or directors. However, there are only seven such registered IPEs as of today, according to the IBBI website. These are IRR Insolvency Professionals, a firm floated by Delhi-based lawyer Alok Dhir, AAA Insolvency Professionals, Witworth Insolvency Professionals, Gyan Shree Insolvency Professionals, A2Z Insolvency Services, Turnaround Insolvency and Nangia Insolvency Professionals.
Sandeep Gupta of Witworth, which is already handling a few mandates, feels while the opportunity is big, capacity and capabilities also need to be built up. “It is the beyond the means of an individual to handle a book size of several thousand crores. A company of such a size would have numerous non-financial creditors as well. These need to be handled in a given time frame. The resolution professional would need adequate support in terms of people and infrastructure,” he said.
For instance, Gupta said, he might hire a few freelance chief financial officers to manage one of the big accounts. Considering all this, calculating fee on a percentage basis could be misleading. It should be calculated, based on time and effort put in by the insolvency professional, he argued.
The SBI advertisement asks applicants to provide “tentative fees proposed to be charged” for various roles such as interim resolution professional, resolution professional on behalf of the committee of creditors or for being appointed as an insolvency professional to represent the bank in the committee of creditors. The bank also wanted to know whether the applicant would be “willing to abide by the fees decided by the bank.”
The Reserve Bank of India (RBI) is looking into a request to extend the classification period for non-performing assets (NPAs) to help small and medium enterprises (SMEs).
“Some people have made representation to the finance ministry of raising the NPA classification period beyond existing 90 days. This issue is under consideration. It is being examined by the RBI,” Minister of State for Finance Arjun Ram Meghwal told newswire PTI.
Summary
RBI looking at request to raise the NPA classification period beyond the current level.
Currently, an account turns into NPA or bad loan if it is not serviced for 90 days.
In case of small businesses and SMEs, payments come usually late.
Currently, an account turns into a non-performing asset (NPA) or bad loan if it is not serviced for 90 days.In case of small businesses and SMEs, payments come usually late. Once they miss the 90-day period and fall in the NPA category, their credit line is cut.
In the absence of vibrant factoring or trade receivable market, small businesses and SMEs face the issue of timely credit availability. Meghwal also said that there is a need to strengthen loan restructuring mechanism in an effort to tackle inflation.
Loan restructuring is reviewed by the RBI from time to time as part of its effort to fight the mounting NPAs in the banking system.
Most recently, the minister said, the government brought in an ordinance giving wide-ranging legislative powers to the Reserve Bank to fight NPAs.
The ordinance authorises RBI to issue directions to any bank to initiate insolvency resolution process in the event of a default under the provisions of the Insolvency and Bankruptcy Code (IBC), 2016.
As per some estimates, banks are sitting on unrecognised stressed loans worth Rs 7.7 lakh crore in corporate and SME sectors and expect around 35 per cent of them to slip into the NPA category in the next 12-18 months.
There is a likelihood of Rs 2.6 lakh crore of corporate and SME loans, which are 3.2 per cent of total bank credit to be recognised as stressed loans by 2019.
Stressed loans include restructured assets that carry the risk of turning into NPAs.
