Testing times

Negotiations between telecom giant Reliance Communications and its lenders on a resolution plan to tackle its unserviceable debt pile of ₹45,000 crore took a curious turn last week after the largest overseas lender — China Development Bank (CDB) — moved a petition under the Insolvency and Bankruptcy Code to initiate liquidation proceedings against the company. Shortly after, 30 other lenders including leading Indian banks, were considering a legal challenge to block CDB’s petition. With lenders now split down the middle, the National Company Law Tribunal (NCLT) is faced with the unenviable task of taking a call on whether or not this is a fit case for resolution under the Bankruptcy Code. In light of the size of this loan exposure and the divergent interests that are at stake (domestic versus foreign lenders, operational versus financial creditors), this will prove to be a test case on the efficacy of the new Code.

Given that Reliance Communications’ debt had already been downgraded to ‘default’ grade by rating agencies back in May and that financial markets have been pricing in the stress, it isn’t clear why the 30 lenders are so opposed to the CDB action. True, in June, domestic banks had decided to invoke RBI’s Strategic Debt Restructuring (SDR) scheme to allow Reliance Communications further grace time. But then, that deal had envisaged banks converting loans into shares in return for the company promising to sell its assets to immediately pay down half its debt. That plan has since fallen through after the company’s attempts to monetise assets — merging its wireless business with Aircel and selling its tower assets to the Brookfield group — failed. Bankers are now keen to explore a new ‘zero loan write-off plan’ proposed by the company to avoid immediate haircuts. However, such obfuscation may only kick the can down the road. As CDB’s exposure (over ₹7500 crore) is significant, it appears far more pragmatic for the lenders to hammer out a compromise solution instead of facing off each other at the NCLT. After all, unifying the disparate claims of creditors and bringing them to a common negotiating table for a quick solution was one of the primary objectives of the Bankruptcy Code.

From a macro perspective, this saga is a reminder that it is not just domestic banks who are at the receiving end of India Inc’s debt problems and seek urgent policy intervention; foreign lenders may be in the same boat. While the Centre has sharply pruned its external debt in the last five years, India Inc has, perversely, amassed foreign currency loans. As of March 2017, foreign currency dues for India’s commercial enterprises stood at $376 billion, over four times the Government’s overseas borrowings. Defaults on any of those loans can materially impact India’s credit standing in the global markets, no matter that the Government is earning rating upgrades by cleaning up its act on the fisc.

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