Insolvency and Bankruptcy Code has a long way to go

It has been an eventful year for the ever-evolving Insolvency and Bankruptcy Code, though it has delivered very little to the purpose for which it was formed — to find a solution to the burgeoning stressed assets of banks.

The three-year-old code itself has undergone many twists and turns with defaulted promoters challenging, in the Supreme Court, the validity of Section 29A, which bars them from bidding for their own stressed assets.

Not to mention the creaking infrastructure at the IBC adjudicating authority, the National Company Law Tribunal courts. The success of IBC can be gauged from the fact that only four of the first set of 12 companies referred for resolution under the IBC in June 2017 have found suitors.

Among the top 12 defaulters, banks have managed to recover only Rs 43,270 crore from the sale of four assets against their overall dues of Rs 80,950 crore.

The recovery numbers would have cut a sorry figure if not for the aggressive bidding for stressed Bhushan Steel by Tata Steel, which itself is saddled with a debt of about Rs 1 lakh crore.

Given the response for the other three assets, banks may have to forego 59 per cent of loans worth ₹2.65 lakh crore extended to these 12 companies. Alok Industries’ lenders are now staring at a haircut of 77 per cent as Reliance Industries, the highest bidder for the asset, has offered to pay only Rs 5,000 crore in lieu of the defaulted dues of Rs 22,000 crore. Of the 12 cases related to five sick companies — Lanco, Era Engineering, Jaypee Infratech, ABG Shipyard, and Jyoti Structures — are still awaiting resolution due to the lack of good offers.

So far this year, of the 382 insolvency cases that have been closed, only 13 per cent assets attracted buyers, with an average haircut of 45 per cent and overshooting the deadline substantially.

With every extension beyond the 270-day deadline, loss for the lenders will intensify as interest calculation on dues comes to a halt after the NCLT accepts an insolvency case, said a banker.

Hurdles all the way

While finding buyers for stressed assets is a difficult task, winning bidders such as Liberty House and JSW Steel are facing fresh challenges.

After taking over Amtek Auto, London-headquartered Liberty House has now filed an application in the NCLT, Chandigarh, seeking clarity on the demand for performance bank guarantee and some commercial points that were not part of the information memorandum. The case will be taken up for hearing on January 9.

Similarly, JSW Steel had moved the NCLT, seeking clarification on certain operational directions on implementation of its approved resolution plan for stressed Vardhman Industries.

The direction amounts to amendment of the Resolution Plan without seeking its consent, and further implementation of the plan would depend on the NCLT clarification, JSW Steel had said.

The endless litigation has kept foreign investors away from bidding for stressed assets, leaving domestic companies to hold sway. Frequent amendments to the IBC further complicated matters for all stakeholders, including bidders, promoters and lenders.

The Rs 42,000-crore bid for Essar Steel by a foreign company with an Indian connection, ArcelorMittal, and its partner Nippon Steel, and Sumitomo Metal, is facing an uncertain future. Interestingly, Essar Steel’s promoters Ruias have made a compelling offer to pay the company’s entire debt of Rs 49,000 crore.

In order to make itself eligible for the bidding of Essar Steel, ArcelorMittal paid the Rs 7,470-crore default of UttamGalva Steel and KSS Petron, even after divesting its stake in these companies.

However, it would be very difficult for the lenders to reject Ruias’ offer, given the recent judgment of the Supreme Court, stressing on maximisation of stressed assets’ value under IBC proceedings.

Govt paints a rosy picture

Though the IBC has faced severe challenges and bankers’ hair-raising experiences, the government, as expected, feels otherwise. Injeti Srinivas, Secretary, Corporate Affairs, recently said the IBC has managed to facilitate recovery of about Rs 3 lakh crore since its inception in 2016.

In 2018, the overall recovery was to the tune of Rs 80,000 crore, with a major contribution from Bhushan Steel Rs 35,400 crore against dues of Rs 44,480 crore), Electrosteels Steel (Rs 5,320 crore against dues of Rs 10,270 crore), Monnet Ispat (Rs 2,870 crore against dues of Rs 12,270 crore) and Binani Cement (Rs 7,950 crore against dues of Rs 6,950 crore) being the major assets exchanging hands.

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